Foreign Direct Investment and Innovation: A Draft Report

1. Foreign Direct Investment and Innovation: A Draft Report DineshAbrol, NISTADS International Seminar on Innovation & Development under Globalization: BRICS Experience Trivandrum, 19-21, August, 2009

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Liberalization, FDI & coordination of development of technology & exports

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

18. Gains not due to liberalization but on account of selective protection achieving a better coordination until 1990s • Automobile industry • Pharmaceutical Sector

19. FDI and failure of coordination of development of tech & markets • Automobile OEM / Automotive components

20. FDI and failure of coordination of development of tech & markets • Pharmaceutical Sector • FDI in post-TRIPS period magnitude & direction and impact

21. 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

22. 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