|What is needed for technology transfer from MNCs to developing countries is a carrot-and-stick policy in place.
By Dr. Bharat Jhunjhunwala
Prime Minister Narendra Modi has been pushing the ‘Make in India’ programme aggressively. And some results are indeed visible. At least five foreign smart phone manufacturers have expressed interest in making in India. These are Celkon, Foxconn, HTC, Lenovo and Sony. European airplane manufacturer Airbus has also shown interest.
Interest has not yet been expressed by large manufacturers of electronic and defense equipment, pharmaceuticals, chocolate and cosmetic manufacturers, steel and alloys, and the like.
Modi has made strenuous efforts to obtain advanced technologies during his foreign tours in the last year. He has persuaded Germany to help in strengthening the green energy corridor; and for transmission of green energy from wind and solar power into the grid system. The French will provide nuclear reactors for the Jaitapur project; and assist in building a high speed rail system between Delhi and Chandigarh. Canada will join hands with India to undertake development of Pressurised Heavy Water Reactor for nuclear power. These efforts of Modi to upgrade the technological status of India are wholly welcome. But these Government-to-Government initiatives are not likely to have large spillover effects in the private manufacturing space.
The more important aspect is that the FDI does not automatically lead to transfer of advanced technologies. A study by academicians from the University of Oxford concluded that entry of FDI indeed leads to spillover of technologies to the local economy but such spillovers are not automatic. Specific policies are required for such beneficial effect to happen. A study by United Nations concludes that most transfers of technology from MNCs happen within higher-income developing countries. Acquisition of technology by developing countries from MNCs is not automaticor easy. Another study by officials of the World Bank concludes that the beneficial impact of FDI can be improved by placing restrictions on FDI. There exist a large number of other studies that point in the same direction.
There is a consensus though that FDI leads to diffusion of some technologies through local purchases. MNCs do not transfer technologies related to their own production processes but they help their vendors to upgrade so that they can get good quality supplies at cheaper prices. For example, an MNC auto manufacturer in India may not help spread the high-end auto manufacturing technology. But it will need to procure certain parts, say, clutch plates, from vendors in India. It will help Indian suppliers of clutch plates to technologically upgrade so that they can supply these at a cheaper price. This beneficial impact of FDI, however, is limited to ancillary activities.
What is needed for technology transfer from MNCs to developing countries is a carrot-and-stick policy in place.
However, there is a flip side. There is a not-so-happy-ending side to the long term financial impact of the FDI. MNCs make huge remittances to their headquarters in the form of profit repatriations, royalty payments and purchase of raw materials. They often buy raw materials or sell finished goods to their principals. They transfer large amounts of monies from the developing countries by tweaking the price at which these transfers take place.
For example, Coca Cola India buys concentrate from Coca Cola USA. Say the actual price of the concentrate is Rs 100 per litre. It is possible that this purchase by Coca Cola India is undertaken at Rs 1,000 per litre instead. That would lead to transfer of huge amounts of monies to their principal, a reduction of profits of Coca Cola India and the Government of India would be deprived of the Corporate Income Tax that would have been collected from the profits made by Coca Cola India. As a result, the long term financial impact of FDI is negative.
Need for striking a balance with caution
Challenge before Modi is to strike a balance between these contradictory impacts of the FDI. The positive aspects of FDI are transfer of technology, if it takes place. The negative aspect is remittances—both legal and illegal. The strategy, therefore, should be to ensure technology transfer and reduce outward payments. And herein lies the catch.
Imposing restrictions or not, either which way, there are a lot of hurdles for actual technology transfer by the MNCs. (So) there is a need to make an assessment of the Chinese experience from this standpoint. China has attracted MNCs in manufacturing in a big way and succeeded in lifting large numbers of its people out of poverty. However, this has come alongside an exceptionally high domestic savings rate of around 45 %. Compare this with India’s savings rate of 25 to 30 %. Also China has aggressively destroyed her environment, the consequence of which will be seen over the next decades.
FDI has a positive impact on the host economy in the short run. Money comes in and factories are built creating demand for materials and labour. The tables turn in the long run, however. Now MNCs start remitting profits in a big way. More monies are sent in the form of royalty payments and transfer pricing. China seems to have entered this negative zone in the last few years. The present decline in the growth rates of China is mainly due to these consequences of its MNC based manufacturing strategy.
We must, therefore, make a dispassionate study of the long run consequences of the China strategy.
Here are a few things that need to be kept in mind while implementing a sustainable ‘Make in India’ policy. First, ban all FDI through the automatic route. Second, put in place a system of technological and social audit before his government grants approval to a FDI proposal. Third and more important, a Public Hearing must be conducted before any FDI proposal is cleared; as is done for granting environmental/forest clearance. Let the people who may be adversely affected by the entry of an MNC be given an opportunity to voice their concerns before approval of a FDI proposal. Public Hearing will make it possible for Modi’s officials to correctly assess the impact of any FDI proposal and take a decision that is truly beneficial for the country.