Foreign colloboration in Indian Industry an economic analysis

Abstract

Based on the findings of the study, an evaluation of the current foreign collaboration policy of the Indian government and recommendations for optimisation of results from such policies is attempted in this chapter. (i) Efficacy of Collaboration Foreign collaboration as a channel for the flow of capital and technology from developed to developing countries is looked upon to bridge the gaps in savings, investment, technology and trade and act as a catalyst for development. However, due to a number of reasons notably, market imperfections, lack of information and supporting R&D facilities, the foreign collaborations have not been as effective a tool as they were expected to be in transforming the Indian economy. On the contrary, they have resulted in transfer of inappropriate and even obsolete technology, the stifling of indigenous R&D efforts and increased outflow of foreign exchange through their remittance policies. If foreign investment has to accelerate the growth process in the direction specified by the national objectives, then policy measures have to be instituted to regulate and direct the flow and operations of these collaborations into the desired channels of activity. Further, to achieve any positive effects, the policy measures should not only be pragmatic and adaptable but also be strictly enforced. (ii) Relative Performance of Units With and Without Collaboration The quantitative comparison of the performance of industries with and without collaboration has provided valuable insight into several economically relevant aspects of foreign collaboration. The various parameters-defined and computed-to evaluate the relative performance in terms of productivity, profitability, financial structure and operational efficiency, indicate that industries in both the groups, namely, with and without collaboration show very little difference. This implies that there has been no significant economic impact deriving purely as a result of foreign collaboration. (iii) Enforcement of Policy As per the guidelines of the government, foreign investment is welcome in areas where it can contribute in the form of advanced technical know-how and not in fields like commerce, plantations and several other industries which have already made considerable progress. They are also not sought in consumer goods industries, where with the high profitability rates, outgo in the form of dividends and royalties are often likely to offset the initial foreign investment. Although the policy has been laid out, due to lack of proper enforcement even of late several agreements enabling manufacture of luxury items like cosmetics have been approved. In this country, with 50% of the urban and 55% of the rural classes living in poverty and in many instances at subsistence levels, there is no adequate basis for paying royalties and dividends to the foreign companies merely to satisfy a small percentage of the population. It is necessary to strictly curb future inflows in these areas and where already operative bring down the level of foreign control. (iv) Desirable Types of Collaborations The analysis of selected collaboration agreements and the interviews conducted during the course of this study tend to indicate that foreign equity participation vests a great deal of control in the hands of the foreign company and implies a long?term drain on foreign exchange. As a regulatory measure, the government has imposed a ceiling of 40% on foreign financial participation relaxable up to 74% in case of export?oriented and sophisticated technology?based industries. Although companies with majority foreign shareholdings have been asked to reduce their foreign equity, many have not as yet made the necessary changes as indicated by the analytical study of selected collaboration arrangements. In case of export?oriented industries, the ceiling of 74% is rather a high figure. India has already built up a reputation as an exporter and it is no longer necessary for the manufacturers to approach foreign collaborators merely to obtain export venues. Further, as the findings of the analysis of agreements reveal, very often the foreign collaborator imposes restrictive clauses on exports and refutes the theory that foreign collaboration opens up channels for export trading activities. Even in cases where export markets are obtained, it is quite likely that the revenues from exports could be evened out by the direct and indirect costs involved in foreign financial collaborations. A better alternative would be to go in for pure technical collaborations or, if possible, outright purchase of technology. The case of Japan is a clear example. As a principle, the Japanese government has allowed no foreign equity participation and much of their industrial know?how was acquired through technical collaborations and outright purchases. Today, she has become one of the major world exporters of a wide variety of manufactured products. One of the main reasons cited by the industry executives during the course of the interviews for inviting foreign equity was that a financial stake is a long?term commitment and would ensure a flow of efforts from abroad. However, experience as indicated by the findings of an in?depth study of the workings of collaboration agreements highlights that financial participation does not automatically ensure such a flow. (v) Technical Fee Payments Technical collaborations encompass several elements of transfer such as know?how, supply of machinery and equipment, blueprints, patents and at times combinations of these. As is evident in the study, the entire process of technology transfer need not necessarily be carried out fully by the foreign collaborator. It is possible for an Indian consultancy firm to undertake construction and erection of plants, with the help of technical information, with the foreign collaborators actively participating in initial supervision and training of personnel. Through this method, it is not only possible to curtail technical fee payments but also provide an opportunity for the local technicians to learn and gain experience. (vi) Training Personnel Training programmes form an important element in technical collaboration arrangements. As far as their effectiveness is concerned, in many instances the programmes are of dubious quality. This has been corroborated by the interviews conducted: most industrialists were of the opinion that the collaborators have not kept up their commitment in this regard. (vii) Royalty Payments Payments for pure technical collaborations can either be in the form of royalty or lump?sum payment or even a combination of the two. As the findings of the study indicate, it is quite possible that even equity would be offered in lieu of technical fees. Royalty payments are normally calculated as a percentage of the ex?factory selling price of the product net of excise duties minus the landed cost of imported components. Since on a long?term basis, this method of calculation would work out to be expensive, a better alternative would be to arrive at a fixed amount of royalty per unit of production. In addition to linking royalty rates to the value of production, certain foreign collaborators adopt the policy of differential rates, slab rates and in instances even fix minimum royalty payments, as this study indicates. (viii) Restrictive Clauses Dividends, technical fees and royalties form only a part of the total servicing cost. The analysis of agreements reveals that there are several other indirect costs involved. In many cases, the collaborator forces the Indian counterpart to buy machinery and raw materials either from them or from the sources they specify. This they enforce through guarantee stipulations and financial participation in lieu of technical fees. The net result is that the Indian collaborator is denied the opportunity to shop for competitive prices. Further, due to this oligopolistic market, it is quite likely that the foreign collaborator can reap high profits by resorting to price markups for the equipment and raw materials supplied. As per the study, this was a very common practice prior to the government's resolution banning such repressive clauses. In addition to the clauses pertaining to services and payments thereof, the study reveals that there are certain other clauses which, viewed from the point of view of national interests, could be deemed as restrictive. They range from restrictions on sources of supply of machinery and equipment, maintenance of secrecy during and after the duration of the agreement through returning of documents to the collaborators on expiry, and banning of sub?licensing to third parties, to conditional clauses relating to exports, pattern of production and mode of distribution. An in?depth study of these regulatory clauses reveals the strong influence the foreign collaborators have on the overall policy of the joint venture. These clauses are basically safeguards for the foreign collaborators to protect their interests, but from the point of view of a developing economy they restrict growth. The government, in view of these adverse effects, has set out in its guidelines that agreements should not contain any such restrictive clauses. Since this policy has been strictly enforced only lately, there are a few agreements containing these clauses still in force. (ix) Duration of Agreements Another important element of technical collaboration arrangement is the duration of the agreement. The official policy has set the period to be five years from the date of commencement of production with three years grace in cases of any initial production delays. The issue of extensions is settled on merits with emphasis given to the question of technology assimilation and export orientation. Prior to this policy resolution, the period, as per the study, varied from five to ten years and extensions were sought on grounds of trademark usage. Presently, a number of joint ventures apply for extensions on the grounds that the transfer of technology has either not been completed or that it has not as yet been properly assimilated in the industry and they need a continued flow of R&D from abroad if the transfer has to be a success. Surely, if the industries have R&D facilities to adapt, assimilate and even develop further the technology obtained, the problem of continued dependence through extensions would be solved. Not only should the ventures have in?house R&D facilities but they should devote their efforts to assimilate and suitably adapt the foreign technology in the initial stages, rather than concentrate on other product lines. In the sample studied only 21% devoted facilities for technology assimilation and adaptations, whereas a majority devoted their R&D centres for conducting quality control tests and to an extent in developing unrelated new products and processes. However, as far as the question of extensions is concerned, the government’s insistence of in?house R&D facilities in industries has contained the growing requests for extensions, as is evident in the study. (x) Research and Development Efforts The results of the study corroborate the view that foreign collaboration has an adverse effect on local R&D efforts. The discussions with Indian entrepreneurs and local scientific research institution personnel revealed that the indigenous efforts have been hampered on two counts. Firstly, the Indian industrialists are unwilling to buy and test indigenously developed technology and prefer the safe and tested technology of the foreign companies. Secondly, industrial R&D efforts in foreign?collaborated companies have not progressed due to both disinterest on the part of the local collaborators and lack of encouragement and at times even positive discouragement from the foreign collaborators. To counter this lack of willingness to test indigenous technology, the government has provided tax incentives to the industries. However, this method has not proved to be effective. A possible remedy would be for the government to give financial aid to the research centres to test and prove the commercial viability of their techniques and products. Unless the indigenous technology is proved competitive, dependence on foreign imports of technology through collaborations would continue. If the local research centres desire to make any impact on the industrial growth process in the economy, it is necessary that they maintain a close tie with the industrial units. Research and development is an expensive activity and time as well as money considerations dictate that these centres should orient their activities towards the needs of the industries. Apart from being suppliers of technology, these centres should cater to the effective operations of the industries by undertaking troubleshooting projects. As regards in?house R&D efforts, as per the study, most of the industries find it much more convenient to rely on the flows from foreign collaborators. Prior to the 1973 foreign investment policy, there was a clear lack of encouragement even extending to total prohibition in certain cases, on the part of the foreign collaborators towards indigenous R&D efforts. The present guideline clearly points out that the foreign collaborators should help set up and support local R&D efforts. To ensure that industrial units conduct in?house R&D, the government is even thinking in lines of an R&D cess on industries. The extent to which the guidelines laid out by the government can be implemented depends on the relative bargaining power of the Indian party vis?à?vis the foreign collaborator. The terms of transfer of technology are not arbitrarily settled but in fact a result of mutual bargaining. The market for technology is highly imperfect with a few corporations in command of the much?needed technology and a large number of buyers competing for this limited supply. To add to these imperfections, the buyers are often not conversant with the various techniques and many a time are ignorant of what to buy. The interviews with the industrialists have revealed that this problem of ignorance is a major handicap in bargaining. The government should aid the industrialists by providing them with a country?wise classification of the various techniques so that they would be in a better position to select the most appropriate and advantageous technique. The extent of collaboration-be it financial, technical or in general a combination of the two-to be permitted in Indian industries has been and continues to be a complex and controversial issue. Certainly at this point in the development process, having permitted extensive collaboration in several sectors of the economy, it is the degree of control the government can exercise to regulate existing and future agreements that is important. The present study has touched upon several areas where change in policy is essential on purely economic and operational considerations. With the growing number of collaborations and the increased accumulation of performance data, of the type generated in this study, a valuable guideline for future policy may be developed.