India's Search for New Technology

This spring, a group of American businessmen travelled to India as mission of a trade mission organized by the Overseas Private Investment Corporation (OPIC). In several days of high level discussions with Indian political and business leaders, the Americans received over 1,100 investment proposals from Indian industrialists. It was the first official American investment mission to India since 1964.

More was involved than seeking profits or easing the movement of goods and services. For American businesses, the OPIC mission was a unique opportunity to consider the ways that transfer of technology can be made profitable to business. Few could resist the challenge, nor could they pass up the potential rewards: India is an almost limitless market for modern technology and industrial production techniques.

"India doesn't need money," notes Douglas Burck, director of OPIC Investment Missions. "It needs technology. The amounts invested by American companies won't be as important as the factories that get tooled up. They've got to get high tech and generate exports." "The attitude of the Indian government," he adds, "is going to make this thing work."

The American companies on the mission ranged from large corporations like Control Data, Rockwell International, and Chemtex Inc., to small investors like Lezare Kaplan International, a New York diamond cutting firm, and 3CI International, a computer firm based in Fort Collins, Colorado. Of the 28 companies that made the trip, 26 are now negotiating joint ventures; 14 projects have been finalized.

If the investments come through, the OPIC mission will mark a shift in U.S.-India commercial relations. In the early 1970s, two American multinationals, IBM and Coca-Cola, left India after the government passed a law requiring all foreign investors to "Indianize" their holdings by selling their controlling shares to domestic investors.

Despite their often grating relationship, however, India and the U.S. never stopped dealing with each other. The U.S., in fact, is India's largest trading partner. And in the last two years, the Indian government of Indira Gandhi has initiated a number of changes in its foreign investment laws in order to bring more new technology into the country and en courage exports.

These changes in policy towards multinationals have been matched by closer diplomatic relations with the United States. In July 1982, Prime Minister Gandhi paid an official visit to Washington, and this summer U.S. Secretary of State George Schultz visited New Delhi. After his visit, the U.S. announced its interest in military cooperation with India, and lifted a ban on selling parts to India's Tarpur nuclear power plant.

As outlined by the Indian Investment Center, India's new policies are designed to attract investment from U.S. and overseas Indian investors, and to be a vehicle for technology transfer (see box, p.14). Foreign investment is welcome "where it is accompanied by the supply of advanced technology required by the country and in export-oriented ventures." Some industries actively encouraged are chemicals, fertilizers, drugs and pharmaceuticals, man-made fibers, glass and glass products, plastics, resins, electronic equipment and components (including computers), petrochemicals, and certain kinds of industrial machinery.

For investors in these fields the government is willing to waive the normal 40 percent ceiling on foreign holdings; for wholly export-oriented units, investors will be allowed 100 percent equity. Investors are also offered a number of other incentives, including tax breaks, special concessions, and depreciation allowances.

Using tax exemptions to attract investment from Indian expatriates, the government has allowed such investors to buy up to five percent of the equity of companies registered on the subcontinent. For western investors, India has set up two free trade zones to encourage industrial development and export trade.

The international business community has responded warmly, with the number of applications for investment in India shooting up from 429 in 1978 to over 90C last year, when many of the liberalized policies were put into effect. American companies successfully doing business in India under these conditions include Monsanto, American President Lines, Allied Tube, and B.F. Goodrich.

Overall, the changes do not represent a "huge shift in policy," says Margaret Herdeck, OPIC insurance officer for South Asia and one of the organizers of the spring trade mission. India has "always welcomed investment within certain rules."

The Indian government insists that the changes in policy are in India's national interest. During her visit to the U.S. last year, Prime Minister Gandhi told a group of American businessmen that India would not allow any investment that "would impinge on our independence. We can afford to liberalize as our industry is strong enough not to need many of the earlier regulations." And in a speech to the India-U.S. Business Council annual meeting in San Francisco this May, the Indian Ambassador to the U.S. said that "the present policies were an outcome of the rapid strides made by India in economic development rather than a tactical change in policy."

Contrasts of poverty and industrial might

There are certain political and economic risks for foreign companies who operate in India. Liberalization has not eliminated the red tape for which the Indian bureaucracy is notorious. The industrial infrastructure in many parts of the country is inadequate, and production delays caused by power failures and transportation bottlenecks are common. Violent separatist movements are found in the border provinces of Punjab, Kashmir, and Assam, as well as in the large southern state of Tamil Nadu.

But opportunities for investors - especially those with new technology - abound. Despite its reputation as one of the world's poorest countries, India is also one of the world's ten largest industrial nations, with a GNP in 1982 of $160 billion, and major textile, metallurgical, and petrochemical industries.

These industries are serviced by a welldeveloped communications and transportation grid (including the world's fourth largest rail network), and a sizeable skilled - and highly unionized - labor force. A growing middle class has created a consumer market of over 100 million people. Agriculturally, India is the world's second largest producer of rice, fourth largest of wheat, and a major producer of corn, sugar, and ground nuts.

India's economy is divided into three tiers: a large private sector economy, a powerful state sector, and the agricultural village economy in which most Indians work and live.

At the top, there is a highly developed market economy, centered on industrial complexes in Bombay, Bangalore, Calcutta, and Delhi. This sector is dominated by two family industrial groups: the Tata group, with $2 billion in assets and 205,000 employees, and the Birla group. These two conglomerates are worth more than the next eight biggest groups in the country combined.

The Tata group is based in steel, and pioneered India's modern aviation industry (now state-owned). The Birla group dominates India's rayon and aluminum industries. Other industrial groups have developed India's high technology, automotive, processed foods, and service industries.

Although large for India, Indian multinationals are no match for the giant American, Japanese, and European corporations. According to a 1980 report in the Far Eastern Economic Review, the combined total assets of the seven largest industrial groups in India are smaller than one multinational, Daimler-Benz of Germany, then the world's 50th largest company. The largest Indian company - Tata Steel - had assets of only 1.44 percent and sales of less than 1 percent of the largest American steel corporation, U.S. Steel.

In recent years, the family-controlled business groups in India have shifted toward more modern methods of management, with fewer family members exercising direct control over business operations. In addition, the shifting capital needs of the Indian economy - including the need to import technology - have made the family groups more dependent on banks, financial institutions, and the government, which has direct investments in a number of private companies, and makes up the second tier of the economy.

Since independence in 1947, the Indian government has played an active role in industrial development, enacting protectionist legislation, developing the infrastructure, and entering key industries such as steel, water, and electric power. Since 1956, private capital has been banned from a number of strategic industries, including atomic energy, defense equipment, and petroleum. The banking industry was nationalized in 1969.

The government has further restricted the concentration of economic power in private hands by placing controls on mergers and the growth of monopolies, and reserving the right to appoint company directors. The big business groups have often been critical of the government role in the economy, which they say limits economic growth. They have welcomed, however, government investments in social infrastructure, as well as the three years of emergency rule under Gandhi, when wages were frozen and strikes banned.

In 1982, the public sector (state-run) companies accounted for more than 20 percent of the GNP, with sales of $35 billion and a profit of $400 million. The central government alone ran 186 major economic development projects, representing a $20 billion investment and employing two million workers. According to the Statistical Outline of India (1982), the combined state and national government budgets totalled $35 billion last year, of which an impressive $22 billion was marked for development projects.

It is not only the national government that is attempting to induce more foreign investments. State governments, like the communist government of West Bengal, are hoping that multinationals will participate in their economic development plans. Both recognize that, without importing technology, India may be unable to raise the living standards of, or provide employment for, its poor.

The third tier of the economy is the India of small villages and big city slums. The new investment policies are meant to benefit this tier by creating jobs and improving agricultural productivity.

The foreign investment dilemma

During the colonial period, Indian entrepreneurs were hostile to foreign capital. But since India declared independence from England in 1947, the large industrial houses (who provided key support to the independence struggle) have been in the forefront of those sectors encouraging the entry of multinational corporations into the country.

After 1947, joint ventures with foreign companies were recognized by the government as "at par" with the national corporate sector. Investment was allowed only in certain industries, dependent on the technological, political, or security needs of the country. Foreign-owned companies, however, maintained political influence by appointing leading retired government officials to their Board of Directors.

The 1973 Foreign Exchange Regulation Act forced multinationals to reduce their foreign holdings to 40 percent and appoint Indian nationals as executives. Nearly all companies complied - with the exception of IBM and Coca Cola - and allowed their subsidiaries to be "Indianized." Currently, the stock exchange lists in Bombay and Calcutta include "Indian" companies like Colgate, General Electric, Hoechst, Ingersoll-Rand, Ponds, Siemens, and Union Carbide.

However, a number of companies, according to a study published by the Indian Institute of Public Administration, "succeeded in obtaining the government approval to enter into perpetual legal agreements with their respective parent companies, under which the management control, even when the parent company would hold only a minority in the total shares, would continue to rest in foreign hands." Two examples are Lipton (India) Ltd., a former subsidiary of the EnglishDutch multinational Unilever, and Colgate Palmolive. In both cases, the parent companies still maintain the right to appoint top management.

The largest number of foreign subsidiaries in India are from England and the Unites States. Japan and West Germany are also leading investors. In 1980, the five largest foreign companies were Hindustan Lever (Unilever), Dunlop, Brooke Bond, Union Carbide, and Indian Explosives.

The highest concentration of foreign capital is in the shoe, cosmetics, and pharmaceuticals industries, where foreign companies account for nearly 90 percent of investment. Multinationals also produce over 90 percent of the pesticides used in India.

As a result of recent changes in investment regulations, more multinationals are expected to move into sectors of the Indian economy previously closed to foreigners. One such sector is automobiles, where for years Indian companies have relied on outdated English technology. In February 1983, Suzuki Motors of Japan purchased 26 percent of the state-owned Maruti Udyong Auto Company. And in June, the government approved a proposal by Hindustan Motors Ltd., part of the Birla Group, to join with Isuzu Motors of Japan in a 5120 million modernization project. Hindustan is also cooperating with General Motors to manufacture engines and transmissions. Such agreements will undoubtedly lead to links between other multinational and domestic auto manufacturers, � ho will be forced to upgrade their technology to compete with Hindustan and Maruti.

To maintain India's traditional balance between the socialist and capitalist nations, the government has signed a trade protocol agreement for 1983 with the Soviet Union providing a total trade turnover of $3.7 billion. This represents an 11.2 percent increase over the 1982 trade plan. The Soviet Union is extending assistance to the Indian steel industry, which it helped set up in the 1950s, and is a major supplier of military hardware. The Indians clearly have no intention of becoming solely dependent on the U.S. for either trade or technology.

The outlook

Despite some problems mentioned earlier, business analysts believe investment conditions in India now look good. According to the Frost & Sullivan Political Risk Letter, Indira Gandhi's government is likely to remain in power for several years, and India itself is viewed as one of the least risky Third World investment areas. In a 1983 analysis, Institutional Investor ranks India 45 out of 107 countries. This makes India a more favorable country to invest in than Mexico, Jamaica, Israel, or Turkey.

The U.S. Commerce Department has taken a more reserved position: "We feel the atmosphere has improved as the result of recent Indian government actions," says Richard Harding, at the Office of South Asia, International Trade Administration. "We think the opportunities in selected areas have increased, but you have to examine each proposal, each project."

Within India, reactions are mixed. While eased investment rules for nonresident Indians have rocked the stock market, little new development capital has been released. Opposition parties have been critical of the Gandhi government's "softening" toward foreign capital, and its dismantling of the 30-year-old protectionist industrial policy that gave India its own automotive, steel, and petrochemical industries. Consumer complaints that multinationals have been using liberalized import rules to dump certain products in India led the government to re-impose duties on these items. And producers of textiles and chemicals have lodged protests with the government over lowered import barriers, which they allege are hurting domestic industries.

In addition, leftist critics say that the new foreign investment codes will benefit the large industrial houses, giving them an even greater advantage over small and medium business. The left has long been critical of the Gandhi administration's loosening of the government's regulatory role.

India's large domestic corporations and their foreign counterparts, however, welcome liberalization as a profitable experiment. The companies involved with the spring OPIC mission, says Margaret Herdeck, are so happy, that OPIC "may take another mission in the not too distant future."

But it will be several years before anyone can judge whether the new policy, and the capital-intensive technology it promotes, can yield long-term economic benefits for the Indian people.

Josh Martin is Multinational Monitor's United Nations correspondent. He visited India in 1982.

India First An interview with Indira Ghandi During his trip to India last year, Josh Martin interviewed Indian Prime Minister Indira Gandhi, Among other things, they discussed India's new foreign investment policy. Following are excerpts from that discussion: MM: You recently announced an economic liberalization policy, which, as I understand it, would enable more foreign companies and individuals to invest in India. Parts of it are specifically designed to encourage expatriate Indians to bring their money back here. What are the basic goals of the policy? Gandhi: We very much need investment. That's one of the main goals. But the new policies are slightly different for Indians than for others. For others, we are interested in such investment which will help either our exports or in our infrastructure. MM: There's been considerable skepticism in the business community (in India). They aren't sure how permanent this new policy will be. How long-term is it? . Gandhi: That depends on them, doesn't it? It depends on how they behave. `Whether they want to behave in the national interest or in a personal interest. Our experience has not always been good in the past. MM: To bring to mind one of those past experiences: Would you invite IBM back to India under this new policy? Gandhi: Multinationals? Well, with multinationals, we would have to look at each case separately. But as I said, if it helps our exports, or it does not endanger our self reliance, or come in the way of development of Indian industry, then we may allow multinationals in. But there are many "if's" as far as multinationals are concerned. MM: But as far as individuals? Gandhi: The question isn't about multinationals as such, but we can't afford to have somebody come in who's strong enough to throttle something here. This is how we look at it. MM: Would that mean foreign investments would need Indian management? Gandhi: The conditions have been outlined, and they have been told. In the U.S., by and large, I found that they were satisfied, and they're sending a business team [the OPIC mission) to have a look for themselves.

Technology Heads South In the past few years, technology transfer has become one of the most important issues in trade talks between rich and poor nations. The concept is nothing new: Phoenician traders transferred technology when they sold their alphabet to other Mediterranean people. But today, the availability of new technology is a crucial factor in the economic development of the Third World. Since in the long run it is cheaper to buy than rent, developing countries want to by (or "transfer") technology to develop their economic infrastructures with new agricultural and industrial production techniques. But developed countries - and the corporations that control the technology - want to retain the profitable rights that allow them to produce commodities such as computers or automobiles. In the last ten to fifteen years, a number of Third World countries have relaxed laws on capital ownership and provided other benefits to attract technology from multinational corporations. Even socialist countries like China, which for years followed a policy of self-reliance in industry, began to invite foreign participation in its coal, petroleum, steel and automobile industries during the last decade and has succeeded in raising foreign investment from $200 million in 1979 to over $2 billion today. And North Korea, which has elevated self-reliance into a national creed, began to import Japanese technology in the 1970s to modernize its consumer products industry. India's new investment codes are only the latest development in this trend. Purchasing modern technology allows a country to gain immediate access to technology that might take years of research to develop. And new technology can help a country produce high quality industrial and consumer products that were formally unavailable or too expensive to import. The purchase of American steel technology by Japanese firms in the early 1950s, for example, was instrumental in helping that country become the world's leading producer of steel, and provided low-cost steel to its now dominant auto industry. In their zeal to raise living standards, however, Third World government and political leaders often overlook some of the disadvantages to technology transfer. New technology is usually very expensive, and its purchase can soak up precious foreign exchange and resources that might otherwise be spent on health care and other social welfare projects. Second, multinational corporations - the primary vehicle for transferring technology - jealously guard technological secrets, and quickly move against any country they suspect of stealing or illegally acquiring their technology. A study published by the Indian Institute of Public Administration concluded that the advantages of technology transfer are "only available within the factory premises and project four walls... The native employees only work as laborers, junior technicians, and in administrative and sales promotion operations." The study quotes the following clause from an agreement between, Philips Electronics, a Dutch multinational, and its Indian subsidiary, to make its point: "The company undertakes both during continuance of this agreement and thereafter not to copy the machinery, tools, and instruments or any parts thereof supplied by Philips or any subsidiary to Philips to the company or to cause or permit the same to be copied and not to cause or permit the same to be prepared." Third, many Third World countries complain that multinationals often sell them technology that is no longer new. According to sources in Seoul, one of the reasons behind the dispute that led Dow Chemical Company to leave South Korea last year was that Dow had built a chemical plant with outdated technology. When the plant came online in 1980, it produced chemicals that were too expensive to sell on either the world or the Korean market. In the end, only Third World governments and political leaders can decide what is best for their own economies. But as the Indian study concludes, " It is often forgotten that international business is not run on considerations of charity; it is run to achieve maximum economic advantage. - Josh Martin and Tim Shorrock