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India's technological capability: an international comparison

Intercountry comparisons of technological capability are fraught with difficulties because of lack of a precise indicator. One broad classification divides countries into three basic categories:

- Technology leaders: The United States, Japan.

- Technology followers: Other OECD countries.

- Technology borrowers: Developing countries.³⁷ More detailed classifications are possible either on the basis of indicators of S&T potential or on those of performance.

A study by Konrad and Wahl classified countries into eight stages of S&T development on the basis of seven quantitative indicators of S&T potential, such as S&T personnel, R&D expenditure, proportion of productive R&D, etc., and five qualitative indicators of development of S&T infrastructure (table 22).³⁸ According to these criteria, India is classified in the sixth stage (of the eight successive stages), along with other newly industrializing countries (NlCs) such as Brazil, the Republic of Korea, Indonesia, and Argentina. The higher stages, i.e. seventh or eighth, include all developed countries, with the USA, Germany, Japan, and France in the eighth, and Italy, the Netherlands, and Canada in the seventh.³⁹

Another study analysing the technology exports of developing countries has rated India as "most diverse and 'deep' (in terms of going into basic design of products and capabilities among the NICs ... India is able to provide not just the operating knowledge to set up and run industries (the know-how), but also the design and manufacture of the plant and equipment, designed specifically for the client (the know-why)."⁴⁰ India's achievement is considered to be more notable because of the fact that "India seems to have the lowest relative reliance on foreign technology of all the NICs in the past fifteen years or so."⁴¹

Table 22. Stages in scientific and technological development

Source; Norbert Konrad and Dietrich Wahl, "Scientific and Technological Potentials in Developing Countries as National and International Economic Factors," Economic Quarterly 20 (1985); based on UNESCO, Statistics on Science and Technology, Pans. 1983.

V = highly integrated network, complex spectrum; IV = network, close contacts of elements. limited spectrum; III = developed institutions in key areas with contacts: II = several institutions with contacts; I = various institutions: 0 = no potential.

The inference that can be gained from the two studies cited above is that India, though far behind the developed countries, has one of the most advanced S&T capabilities among the developing countries.

Policy perspectives

Although India has made considerable progress towards the goal of building up an autonomous S&T capability, its achievements have still fallen short of expectations or potential. Thus the proportion of projects, particularly in large and modern industries, based entirely on indigenous technology continues to be small. In spite of the growing amounts spent, the national laboratories have failed to become important sources of industrial technology.⁴² Furthermore, a large proportion of the technologies developed by them are not utilized for commercial purposes.⁴³ Despite a number of fiscal incentives granted by the government, only about 900 recognized in-house R&D units existed in 1986. Those spending Rs.10 million or more per year numbered only 71.⁴⁴

The technology policy, therefore, in spite of considerable planning and effort, seems to have had only limited success in promoting industrial R&D and the utilization of local technology. Taking these considerations into account, we outlined below some proposals with regard to future technology policy, to make research in national laboratories more effective, to promote in-house R&D, and to facilitate the utilization of local technology.⁴⁵

Research in national laboratories

The impulse to innovate originates either in the production process (process simplifications/improvements, material/labour-saving devices, overall efficiency, etc.) or in the market (product improvement, changing demand/tastes/patterns, scope of import substitution, etc.). The national laboratories receive no feedback from either of these sources. They operate in an environment isolated from production units, do not sell innovations directly to the industry, draw their resources almost entirely from the government, and have mostly officials and scientists on their boards. They are not involved in the import of technology. Therefore the possibility of their contributing to the local absorption of imported technology does not arise.

The need for more intensive links with industry has been emphasized repeatedly, but such links have largely been limited to occasionally accepting industry-sponsored research. There are two possible ways of making their research more fruitful. First, they could work more closely with the public sector enterprises, as recommended by the Working Group on Organization of R&D within the Public Sector and Relationship with the National Laboratories.⁴⁶ Public sector enterprises account for nearly half the capital investment in the country and operate across a wide range of relatively high-technology, capital-intensive and process-based industries. Except for a few leading ones, such as BHEL, HMT, BEL, and consultancy and design organizations, their record in R&D is generally poor. National laboratories could help these public sector enterprises to assimilate and adapt imported know-how and to generate their own. Public ownership of both enterprises and laboratories should make it administratively easier to implement this proposal.

A second possibility is for national laboratories to be made to survive more and more on sponsored research from industry. This might exclude projects with high social externalities, such as those concerning rural industrialization, basic needs, etc. In addition, national laboratories could be involved in all major deals of selection, transfer, and adaptation of technology.

In-house R&D

Empirical studies of in-house R&D in industry have identified its two important determinants: (1) market structure and (2) mode of technology imports besides structural factors, such as technological opportunities in the sector and product market characteristics. In addition, a firm's decision to "make" (or develop) technology locally or "buy" (import) it from abroad would naturally be based upon the relative costs of these two options.

Market structure

In-house R&D activity has been related to market structures in the framework of the Schumpeter's theory of creative destruction.⁴⁷ The basic proposition of the Schumpeterian and neo-Schumpeterian paradigms is that oligopolistic market structures are more conducive to R&D than pure or perfectly competitive ones. R&D, along with advertising, is taken to be an entry barrier, raising the investment undertaken by the leading firms to protect their market shares. But if the threat of further entry is absent, then oligopolistic market structures may not lead to R&D activity. This is precisely what seems to have happened in a number of Indian industries.⁴⁸ The early industrial licensing policy did lead to oligopolistic market structures, but also eliminated the threat of further entry. With trade policies ruling out any import competition, the "policy entry barriers" which protected the industry's firms were almost invincible, except in very high growth industries. Hence firms did not feel any need to carry out R&D. The technology policy, therefore, ought to take note of appropriate market structures. It must be pointed out, however, that the market structure most appropriate for spurring technological change may be different for different industries, depending on factors such as economies of scale in production and innovation.⁴⁹

Technology import

The nature of the relationship between technology imports and local in-house R&D in the Indian context has been found to be dependent upon the mode of import, i.e. whether by licensing agreement or foreign direct investment (FDI). A number of empirical studies, at both firm and industry level, have confirmed that firms importing technology through FDI are much less concerned with absorption, adaptation, and in-house R&D than their counterparts with technology imported under licensing agreements.⁵⁰ Hence, from the point of view of promoting indigenous technological capability through faster absorption and innovation, the policy ought to restrict technology imports through FDI. The desirability of the current trend of liberalization of foreign collaboration approvals in favour of financial ones, therefore, needs to be reassessed from this point of view.

Cost-effectiveness of local generation

A rational firm's decision to "make" or to "buy" a technology abroad is expected to be based upon the cost-effectiveness of local generation. The cost of imported technology for the importer is likely to be lower than the cost of local development. This is because the transfer of already developed technology, which is a public good, does not entail many costs, while fresh generation certainly does. However, there are externalities involved in local generation: the benefits latent in generation, such as skill formation, instant absorption, overall technological capability-building, are all available to the country. With technology imports, on the other hand, there are certain costs to the society other than the direct cost. In other words, the market price of imported technology underplays its real cost, while that of local technology overstates its real cost.

The existence of these externalities in the technology market calls for state intervention. The state intervention that exists in the area of technology import is the entry regulation, which seeks to limit foreign collaboration in the areas where local alternatives are available. This "stop" and "go" protection accorded to local technology is deficient in many respects. For those technologies which manage to set themselves on the "stop" list, an almost total lack of foreign competition, or the threat of it, may take away any incentive to keep up to date. Hence, obsolescence may creep in. In the case of technologies that are on the "go" list, local generation would never be cost-effective, as we observed above. Hence, there would be no incentive to generate them locally. Thus, present policy does not protect the potential technology and hence retards innovative activity. It is, therefore, desirable to provide price protection to local technology, resembling the tariffs imposed on the import of goods. Operationally, it would mean imposing a tax or duty on the importers for any payments made to import technology. For instance, for every Rs.100,000 remitted abroad as a lumpsum fee, the technology importer would have to pay another Rs.100,000 (if it is 100 per cent protection) to the Exchequer. This would increase the effective cost of imported technology to the importers vis-à-vis the local technology, and might thus offset part of the price disadvantage the local technology faces without affecting the earnings of the technology supplier.

The Long-term Fiscal Policy (1985) has proposed a 5 per cent levy on payments for technology imports to augment resources for the Venture Capital Fund (VCF). But the objective of the proposal seems to be merely to raise resources for the VCF rather than to provide price protection to local technology, since a rate of 5 per cent would make only a marginal difference to the cost of imported technology. Like tariffs on goods, different rates of price protection may be set for different classes of technologies depending upon the potential of local development and the intensity of the need.

Utilization of local technology

Like the generation, of indigenous technology, its utilization also suffers from several disadvantages vis-à-vis imported technology on account of the following factors.

Time, capital cost and uncertainty

The "productionizing" of a standardized imported technology by experienced personnel may require a considerably shorter time than the commercialization of an indigenously developed technology from scratch. The former is also subject to less uncertainty and risk of failure because it has been proved and standardized. Furthermore, with imported technology it is possible to phase the project cost over a period of time. Normally, such projects begin with the assembly of imported kits, and the manufacturing process is indigenized gradually as markets are developed with the products assembled from the kits.

In contrast, an entrepreneur using indigenous technology has no such option. He must provide for the entire project cost at one go and develop markets from scratch. Once he enters the project, he cannot quit if the market does not pick up, while the one still selling the product assembled from imported kits can. The choice of local technology in preference to foreign alternatives, therefore, may prove to be time-consuming, more capital-requiring and subject to greater risk. Public policy should devise some instrument to offset these disadvantages to make utilization of local technology more attractive.

Finance - technology nexus

The ability of technology and equipment suppliers to provide financing (suppliers' credits) plays an important role in technology selection, particularly for large capital-requiring projects. Technology suppliers from industrialized countries are usually willing to provide or arrange financing on soft terms from their respective country's export-import banks or other institutions. Their bids are often backed up by their home government's bilateral aid agreements. The local technology or equipment suppliers with no matching ability to provide credits are, therefore, easily outmatched, even with comparable prices and capability. In the past few years, local engineering industry has, indeed, lost numerous orders to foreign firms in fertilizers, power, and steel projects because of lack of finance. It is, therefore, imperative that a fund be created to provide financing for projects using local technology and equipment to mitigate the problems of local suppliers in providing credits.

Market power of foreign technology

The prospect of using an internationally reputed brand- or trade-name gives a tremendous edge to foreign technology over the local ones, particularly in consumer goods. Though the guidelines for foreign collaboration stipulate that no foreign brand-names will be allowed to be used in domestic sales? they are very much in use. In fact, a number of foreign collaborations are just "cover-ups" for the procurement of the right to use foreign brand-names, and are being signed even in low-priority industries such as cigarettes. In order to make sure that only genuine technology is transferred to the country and the local technology does not face unfair competition from the market power of foreign technology, foreign brand-names have to be eliminated altogether. The present Trade Marks Act is seemingly vague on what constitutes a foreign brand and hence needs amending.

A useful way to define this would be to consider as foreign any brand-name that was in use abroad before its registration in India and any owned by foreign organizations, whether or not any royalty is paid for its use.

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