JOIN USPrime Minister Narendra Modi has been seeking transfer of advanced defence technologies from the developed countries. India and Germany have signed a MoU for strengthening the green energy corridor. Collaboration will be undertaken for transmission of green energy from wind and solar power into the grid system. These energies have huge fluctuations in both timing and quantities.
Airbus, the French manufacturer of airplanes, has expressed willingness to Make in India though specifics are not made known at present. Modi has persuaded the French to expedite the procurement of nuclear reactors for Jaitapur project. Another pact was signed for French assistance for building a high speed rail system between Delhi and Chandigarh. An agreement was made with Canada for joint development of Pressurised Heavy Water Reactor for making nuclear power. These efforts of Modi to upgrade the technological status of India are wholly welcome.
The deal with French plane manufacturer Rafale to buy 36 fighter jets in flyaway condition should be seen in this backdrop. The deal does not include transfer of technology. Hence, it could be seen as being against the “Make in India” push by Modi. That would be a premature verdict though. India and Rafale have been undertaking inconclusive negotiations for the manufacture of these airplanes in India.
The purchase of planes in flyaway condition could mean either backing out of the transfer of technology; or, it could be a step towards the same. Only time will tell what has been negotiated. I would think that Modi intends to follow-up this purchase with manufacturing of the planes in India given his efforts to acquire advanced technologies.
The more important danger is that Modi may unwittingly promote entry of not-so-beneficial Multinational Companies (MNCs) in his quest for promoting “Make in India.” Overwhelming evidence is available that 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 spill over of technologies to the local economy but that such spill overs 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 automatic or 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. The 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, a 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. The major finding of large number of studies is that technology transfer from MNCs to developing countries is not automatic. The developing countries need to put in place a carrot-and-stick policy for technology transfers to take place.
Financial impact
The long term financial impact of FDI, on the other hand, is largely negative. The 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 1000 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.
Challenge before Modi is to strike a balance between these contradictory impacts of 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. Towards this end, Modi must ban all FDI through the automatic route. Secondly, he must put in place a system of technological and social audit before his government grants approval to a FDI proposal.
A public hearing must be conducted before a FDI proposal is cleared, as is done for granting environmental clearance. Let those who may be adversely affected by entry of MNCs 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 a FDI proposal and take a decision that is truly beneficial for the country.
(The writer is former Professor of Economics at IIM-Bangalore)