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Mainstream, VOL LVI No 25 New Delhi June 9, 2018

On FDI by Highly Industrialised Countries in Developing States: Some “Unconventional Thoughts”

Sunday 10 June 2018, by Ashok Parthasarathi

By the 1950s when the developing countries started what the great Swedish economist, Professor Gunnar Myrdal, called the “Great Ascent from Grinding Poverty to a Prosperous Life”, Western economists in general—with the notable exceptions like Myrdal, Nobel Laureate US economist John Kenneth Galbraith, and another US Noble Prize-winning economist Josef Stiglitz (the person who went from being the Chief Economist of the World Bank for 10 long years to trenchent repudiator of the entire IMF-World Bank strategy)—dinned into the minds of political leaders, professional economists and corporate leaders in the developing world the major advantages in regard to foreign investment by companies: firstly, FDI adds to the low domestic savings rates in the economies of the developing countries bringing such rates to appreciable levels; secondly, FDI leads to the transfer to the developing countries of something called the “state of the art technologies” which are so sophisticated and tightly held that the foreign owners of such technologies would never “part with those technologies to developing countries’ companies” on the basis of the so-called “arms length” technology transfer unless such transfer was accompanied by FDI, that is, part of not full ownership of the developing country‘s concerned company; and thirdly, that FDI leads to large-scale exports of both raw materials and manufactured products, not just to other developing countries but also to the industrialised countries as well—something foreign companies can do because of their having global marketing chains.

Led by the IMF, World Bank and main developed countries of the US, Japan, Canada and Western Europe, the 1950s, 1960s and even the 1970s saw the publication of numerous reports, studies and also whole books promoting FDI into developing countries. However, most of this documentation was in the nature of exhortation and “drum-beating” rather than empirically-based, well-reserched analysis. The data used was skimpy and anecdotal.

Then, a major development took place at the international level. The UN Conference on Trade and Development, headquartered at Geneva, set up—as mandated by its apex decision-making body, the Trade and Development Board (TDB)—a major division, called the Technology and Development Transfer Division, headed by an outstanding Indian economist called Surendra J. Patel. A Ph.D in Economics from the London School of Economics (LSE), Patel had been a Ph.D student of that noted Left-wing economist at LSE, Professor Harold Laski. He had then been the economic adviser to many developing country governments in Asia and Africa and to the Organisation of African Union (OAU). Joining UNCTAD in 1980, Patel quickly built up, with strong support from Gamini Correa, the then Secretary-General, a 25-member team of Third World professionals in the areas of Economics, Technology and Law. Over 1980-82, he and his team did a number of country-studies covering the actual and well-documented country-studies of the FDI and technology transfer, experience of a dozen countries in Asia, Africa, Latin America and the Caribbean—from large countries such as India, China, Indonesia, Brazil, Mexico and Argentina to small island-states such as in the Caribbean, Malta and Cyprus. They also did a number of sectoral studies, for example, in the steel sector, engineering, electronics. I myself did a major comparative study of India and South Korea in the electronics industry which was well received worldwide.

All these studies and some side-studies undertaken in parallel by the UN Industrial Development Organisation (UNIDO), head-quartered at Vienna, the UN Institute of Training and Research in New York and the UN Universty headquarted in Tokyo, cleared the many negative aspects of FDI and FDI-based technology trasnsfer in the developing countries.

An analysis of the technology transfer contracts contained numerous restrictive conditions/clauses, for example, that the Indian company on which the FDI was made was restricted on the proportion of its production which it could export in any given year and also the countries to which it could export. It was required to purchase any and all its components, parts and intermediates only from the foreign company which were found to be several times more than the fair “open-market price”. The local (developing country) company could not make any changes or modifications to the product that it was making even in its home market, to meet local conditions and requirements, even of a safety or statutory nature; if the product was covered by any Patent(s) the local (developing country) company was mandatorily required by the foreign company to register those Patent(s) in the home country at the cost (often substantial) of the local company; moreover, the local company was required to make, at its cost, the Annual Renewal Payment for those Patents (which could also be substantial).

Patel’s team took a sample of products covered by FDI and associated Technology Transfer and found that such restrictive provision in the Investment-cum-Technology Transfer contracts led to an increase in the cost of production of the product concerned by a proportion of the explicit technology payments made by the local company to the foreign company by anything between 30 per cent and 60 per cent!

I now come to two specific cases. The first relates to the operations in India of IBM over 1958 to 1978. Over this 20-year period, IBM imported from its “mother” company in the US and the “daughter” companies of some 80 other countries: (a) used/second-hand 200 IBM 1401 second generation computers (which were obsolete even when they came into the country); some 1000 IBM Electric Typewriters (likewise) and around 500 Unit Record Machines. All these machines were “reconditioned” at an IBM facility located at Mumbai. The process of “reconditioning” was distinctly different from and inferior to genuine manufacture. All that “reconditioning” involved was the removal of failed/non-functional components and parts, putting in new parts, and final testing and proving the complete system. Devastatingly, IBM then sold or leased the equipment to an Indian customer

at its full original price!

What is more, there was substantial outgo of foreign exchange on the whole process as follows: (a) on the import of the new components/parts referred to earlier and (b) on the profits of the “mother company” in the USA on the IBM here.

When the Electronics Commission (EC) and the Department of Electronics came into being (under the PM herself as the Cabinet Minister) in March 1971, one of the first things the Commission (as the policy-making body) considered and took decisions was the above-summarised activities of IBM. After studying the matter in depth the Commission noted with criticism and concern that:

(a) IBM’s activities were “hooking” our computer users to highly obsolete machines, for example, as of 1971, IBM’s

current

industrial operations in the USA consisted

entirely

of fourth generation computers as compared to the second generation —and what is more “reconditioned” machines at that.

(b) IBM had stopped the manufacture of Electrical Typewriters and Unit Record Machines worldwide as of 1965, while it continued to see them here.

(c) IBM was not conducting

any

R and D in India whatsoever in an industry which was involving very rapid technical advance.

(d) Even the “reconditioning” process dealt only with the hardware part of the 1401 computers.

None of the crucially important

software of the 1401 had been upgraded.

Presented with such a terribly dismal situation, the EC decided as follows:

(a) not a single additional “reconditioned” IBM 1401 computer should be shipped by IBM from its Mumbai facilities

with immediate effect.

(b) a Techno-Financial Committee should be set up immediately by the DOE, chaired by Professor R. Narasimhan, the Head of the Computer Group of the Tata Institute of Fundamental Research, Mumbai, the doyen of our computer community, with Dr N. Seshagiri, Director (Planning) in the DOE, Colonel R. Balasubramaniam, Director (Computers) of the Defence R&D Organisation (DRDO), Professor B. Nag, Head, Computer Group, Jadavpur University, Kolkata, the Financial Adviser of the DOE and the Chief Cost Accounts Officer, Ministry of Finance to go into the techno-financial history of the IBM’s operations in the country since it started its operations in our country way back in 1958, the principal objective being to work out the inflows and outflows of monies—both rupee and foreign exchange—and the total net gain/loss to the nation.

Accordingly and after six long months of intense work the Committee came to the following conclusion:

The operation of IBM had led over 1958-1970 to a net foreign exchange outflow to the nation of Rs 12.5 crores—all in foreign exchange!!

I now come to my second example which is in a totally different field and involves totally different companies—the Maruti-Suzuki motor vehicles case.

In 1982, at the instance of Prime Minister Indira Gandhi a new major public sector company, called the Maruti Udyog Limited (MUL), was set up basically to manufacture in large volume a small four-door “People’s Car”. Mr Russi Mody, the Chairman of the Tata Iron and Steel Company (TISCO), was appointed part-time Chairman of the Board of Directors, and the leading engineer-manager and former Chairman and Managing Director of our “golden” electrical and electronic engineering company, the Bharat Heavy Electricals, V. Krishnamurthy, was appointed Vice-Chairman and Managing Director.

VK, as he was popularly called, got to work by setting up quickly a small team (10 managers and engineers at the middle level, mostly from the BHEL). The first task was to define the specifications the car should have. After a careful market survey, it was decided that the car should have highest fuel efficiency, ruggedness to deal with not only urban but also rural roads, maximum comfort and the highest reliability. Easy repairability even in semi-urban conditions was also a consideration.

VK and his team then applied these considerations to all small cars that were being made in the world—Renault in France, the Fiat family in Italy and the smallest cars made by Honda, Toyota and Nissan in Japan. While on a visit to Japan, the team also had discussions with Mr O. Suzuki, Chairman and CEO of Suzuki Motors. Mr Suzuki informed VK and his team that as of the present his company only made motor-cycles, but they were prepared to design and develop, jointly with Maruti engineers, a car of the specifications which VK’s team had given. After careful consideration, VK and his team agreed to Suzuki’s offer and a Memorandum of Understanding was signed. Significantly that Memorandum specified that all Patent and other Intellectual Property Rights relating to the car and its technology would be

jointly owned

by both companies on a 50:50 basis.

Returning to Delhi, VK first got the approval of the Maruti Board and then of the Cabinet. The tentative project (pending the preparation of the Feasibility Report) was fixed at Rs 6000 crores. Work on the Design and Development started at the Suzuki Design Centre in Japan in March 1983. Maruti seconded 50 engineers to work on the proejct with an equal sized team from Suzuki.

By early 1984, the prototype was ready and then put through rigorous field trials, in both Japan and India. Those trials revealed the need for some adjustments to be made. These were done in Japan and the trials repeated. The car passed all test/performance considerations without a flaw.

Consequently, the production-line for the car which was being laid out in parallel with the Design and Development, Prototype and Field Trials was started in January 1984 and the first cars for commercial sale rolled out in mid-1984.

The car, brand-named “the 800” after its engine capacity, was a roaring success. By mid-1984 almost five lakh vehicles had been made. Indiraji was delighted.

However, a bottle-neck then came up, O. Suzuki refused to transfer to Maruti the technology for the manufacture of the Gear Box of the car at Maruti’s Manesar, Haryana plant. Intense negotiations failed to break the deadlock. At that juncture VK came to me for help. I promptly told him that a 14-position Automatic Transmission Gear Box had been successfully developed by the Combat Vehicles R & D Centre of the Defence R & D Organisation (DRDO) at its laboratories at Avadi for the Arjun Main Battle Tank and that it had been fitted in tanks and had worked perfectly. For the CVRDE engineers, who had developed such a super-sophisticated Gear Box, the Gear Box for the Maruti 800 would be child’s play. VK was delighted to hear of this. I spoke to the Director of the CVRDE and he readily agreed to provide all assistance. Thereupon VK sent six of the Maruti engineers, who were dealing with the Gear Box of the 800, down to Avadi. They took a Suzuki Gear Box with them. After thoroughly examining the 800’s Gear Box, the CVRDE engineers said they would be delighted to develop the 800 Gear Box alongwith the Maruti engineers and that, as Maruti was a public sector company, the CVRDE would not charge Maruti anything.

Confident of the internal strategy, VK called up O. Suzuki in Tokyo and told him that either Suzuki transfers the Gear Box technology for the 800 on reasonable technology licencing fees or Maruti would design and develop its Gear Box. As usual, having an indigenously developed automobile Gear in hand made the foreign company climb down. Suzuki licensed Gear Box to Maruti on reasonable terms.

Once again our strong indigenous technological capability had given the nation enormous power.

The author is a former S & T Adviser to the late Prime Minister, Indira Gandhi.

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