Foreign Direct Investment and Innovation: A Draft Report

Dinesh Abrol, NISTADSInternational Seminar on Innovation & Development

under Globalization: BRICS ExperienceTrivandrum, 19-21, August, 2009

Innovation, FDI and the Indian academic discourse

• Nexus of FDI & technology debated, sharp differences amongst the advocates & opponents of liberalization

• But due to a heroic and non-systemic view of innovation large firms treated as potentially more “innovative

• Consensus on internal liberalization with a view to facilitate the introduction of major innovations in Indian economy

• Nexus of FDI & technology left to the market forces; drop of resistance to the deregulation of technology acquisition, control of foreign firms & relaxation of monopoly regulation

• Development impact of FDI inducted innovation, coordination required between technology development and demand management for the achievement of structural change / socio-technical transitions –all these concerns were put on the backburner by even the academics.

• This draft report reviews the development impact of innovation inducted in the presence of unregulated FDI during liberalization period.

Processes of learning, competence building & innovation and FDI: the report suggests

• Contrary to the expectations of advocates of liberalization development impact of FDI has not been positive

• New forms of FDI threaten to incorporate domestic capital / PSROs in the NIDL without associated spillovers

• New heuristics and policy needed w. r. t macro economic management of inward & outward FDI

• Development impact of FDI not to be measured just in terms of job additions / productive structure upgrading but also in terms of structural change / eco-friendly technology transition

The position & evolution of FDI

• Determined by interplay of global push as driver & little of domestic pull-liberalization in itself is not a key determinant

• Direction by the government to FDI inflows absent in the Indian case; FDI has grown in all directions.

• FDI was until recently small in magnitude & rate of growth of FDI increased only since 2003 / 04

Origin, destination & job additions

• USA accounted for the largest no of investment projects (1852)

• USA (39%), UK (10%) & Germany (8%)• 944 companies invested from USA (40% of all

companies); IBM, GE, LG; in total 2380 cos• Average no of jobs per project 511; Apache

highest no 40000, top 10 companies ---26% of all jobs from FDI

• Destination 50 % accounted by 5 cities

Sectoral composition,

• Manufacturing (40%), services (35%), Retail & real estate burgeoning

• In manufacturing, food & beverages, transport equipment, metal & metal products; concentration in relatively tech-intensive sectors upto 1990s);

• In services, software & IT services (21%), business services (8.5%), Financial Services (6.18%)

• Worldwide mfg 41.31 to 30.13 services 49.23 to 61.87 % global push

• China directed into mfg with export obligations

Mode of entry

• In the 1990s infrastructure was stated priority, FDI inflow into consumer goods & automotive; very little into capital goods mfg, in telecom market but not for equipment mfg

• FDI through subsidiary route • FDI inflows through acquisitions route (40%)

in India as compared to China (10%), not for capital formation, but more capital available for acquisitions

Place of FDI in the private corporate sector

• FDI cos control 28% of assets and 40 % of paid up capital (PUC), one third in numbers, 56% of assets in mfg and 33.3% of assets in services, relatively less use of fixed capital, engagement in assembly operations, more reliance on internal resources

• Share of newer ones incorporated 35 % assets & 63% in PUC

Impact of FDI on growth, domestic investment, exports &

employment • Relationship of FDI with growth, statistically

not significant effect- of FDI on domestic investment, FDI did not crowd in domestic investment in all cases, Acquisitions a cheaper route for FDI but have dampening effect on domestic investment

• 50% of capital goods are imported, included telecommunications equipment & electronic hardware

Intensities of Imports & Exports

• Industries in which foreign capital has a substantial share FDI cos tended to be more import intensive.

• Export intensity not increased for foreign cos. ; since net import intensity has increased, net export intensity has changed from surplus in 92-93 to deficit in 05-06.

• Net forex intensity has increased from minus 0.62 % to 7.4%, Foreign cos have done worse than domestic cos; communication equipment / computer hardware

• Top FDI exporters exporting in unrelated areas to meet their obligations

Overseas R&D & other knowledge services related activities

• R&D for domestic market from FDI cos is very small; FDI in technical support / testing / R&D design for parent firm needs in global market

• R&D mainly for (reuse of building blocks)----- gene cloning & expression, chip design

• US cos leading the project portf; Software & IT services rep 41% , design, dev & testing (27%)

• FDI in R&D from W. Europe too small, technical support centres/ design / dev / testing increased

• No monitoring, not listed / registered with DSIR in-house R&D reporting system

The local factors for innovation of TNCs & local cos in India

• Large and growing domestic market is still the main attraction for foreign firms; asset seeking FDI tendency picked up recently, global push factor; but what about local factors directing development

• What kind of role for domestic policies in directing the pull factor for assimilation / absorption / development

• Divided liberalization into two phases; internal / external• Breadth & depth of competence building ; tech absorption &

assimilation as the aspects to be looked into; financial & technical collaboration monitoring; technology interrelated ness / technological fragmentation / rent seeking activities through brandnames / IPRs

Internal liberalization & experience of corporate technological performance

• Policy of tech import allowed to become a vehicle for foreign firms to demand financial participation ; in 92, (736) 50% cases involving financial participation; double of 385 (70s); in 85-90 no 5203; 80 % more than previous period of 80-84

• Big business used deregulation for acquisition of brand names & import of CGs, granting financial participation

• Shallow tech packages, 85-86 to 90/91--- av tech import intensity as small as 0.21%; 1.1 % of sales on tech import, competition through brand names / distribution might; WIPRO Sun, HPL-HP, Hero-Honda, PSI-Bull

• Tech import policy as a facilitator of tech fragmentation, tractor, auto industry, electronics, service centres opened , components, spares, CG imports tied to respective parent

• Resulting in under utilisation of domestic mfg capacities in fertiliser / power equipment / machine building, design capacity undermined FPDIL / metals / engineering

External liberalization & corporate technological performance

• External lib started with TINA, impacted differently , privatization of public sector, increased foreign control of domestic cos, enhanced presence in domestic market / institutional space

• Decrease in no of independent TCs , 231 TCs out of 1248 in 2000, out of 2273 –1958 involved Fin part, TCs ---315 only

• In 91only 4% majority approvals, 16% in 97, 35% in 2005

• Presence in cement industry gained, presence maintained in consumer / food / specialty chem / CG, change in character of auto components/consumer appliances, soft drinks, paints & some CG industries

• However, it is also necessary to point out that Indian firms have also been able to hold & are still the key agents of corporate investment, the battle for consolidation is on; fears & apprehensions exist

• Domestic private capital still a borrower of tech, not in appropriate systemic connection, not able to undertake appropriate TC for development

The spillover of TNCs to local enterprises & performance of liberalization in respect of tech assimilation & development

• Spillovers from FDI not encouraging,

• Tech assimilation studied in selected industries; firms passive repeated tech imports, underutilization of local capacities

• No restriction on FDI in power, telecom, oil & coal & gas, but treatment meted out to the country by Enron / AES

• Renewable or more env friendly coal based power technology choices , role of domestic companies public sector

Liberalization, FDI & coordination of development of technology & exports

MNEs entrenched deep in the productive & R&D structure: consequences

Gains not due to liberalization but on account of selective protection achieving a better

coordination until 1990s• Automobile industry • Pharmaceutical Sector

FDI and failure of coordination of development of tech & markets

• Automobile OEM / Automotive components

FDI and failure of coordination of development of tech & markets

• Pharmaceutical Sector• FDI in post-TRIPS period magnitude &

direction and impact

Reflections & Conclusions

• Monitor & take into account global push based drivers of FDI

• FDI --market seeking and asset seeking , serious consequences of asset seeking / supply side factor seeking FDI need to be taken more seriously –new heuristics needed to measure development impact

• Acquisitions / control seeking investments to be monitored for import / export intensities

continued

• State & citizens need to be made aware of / convinced of where they have to play a role and how they can play it.

• Remaining agenda– Outward FDI– Appropriate forms of regulation– Development of social control through

participation in demand articulation & involvement in impact accounting