Policy Regimes and Industrial Competitiveness - Case Study Example

?Running Head: Multinational Enterprises & Development MULTINATIONAL ENTERPRISES AND TECHNOLOGICAL DEVELOPMENT: Role of Host Government Policies & Challenges in Limited Technological Spillovers [Writer’s Name] [Institute’s Name] Introduction Since few decades, there have been huge advancements in the field of information and technology that has altered the way of doing businesses in developed, as well as developing parts of the globe. In addition, this era of information and technology has resulted in the beginning of globalisation, particularly economic globalisation that has now become a notion of increasing interdependence of nations by supporting and collaborating with each other. In this process, multinational enterprises are playing a crucial role in empowering nations by disseminating technological developments (Pearson, 1987, pp. 23-37), which have now become essential forces behind survival and success of a country internationally. Literature and course readings (Cantwell, 2001) have indicated that multinational enterprises are equipped with a number of tools through which it promotes innovation and development across nations, especially developing countries, such as trade, ventures, collaborative efforts, etc. Among these options, one major actor that plays a significant role is foreign direct investment that is also known as FDI (Balasubramanyam & Salisu, 1996, pp. 92-105). It has been an observation that for developing countries, FDI does not only bring business to the country but it also enables multinational enterprises to bring in their technologies, as well as assets from abroad that results in extraordinary outcomes for the country itself (Blomstrom & Kokko, 2003, n.p). This incoming of assets is one of the fundamental reasons that incline developing countries to give value to foreign direct investments in their regions. However, it is imperative to note that many of the assets besides infrastructure and equipments are mostly intangible, and most importantly, are usually in inadequate supply in host countries, such as international knowledge (Amesse & Cohendet, 2001, pp. 1459-1478), technology, company’s image, quality standards, etc that play a significant role in contributing towards economic development of the country. Particularly, economic development is not a simple notion, which has often been limited to economic progress of a country in terms of its GDP; however, analysis (Borensztein & Lee, 1995, pp. 115-124) has indicated that economic development revolves around economic, as well as social advancement of a country that often does not allow quantitative analysis. Thus, experts usually overlook aspects, such as social justice, political freedom, etc that directly or indirectly results in enhancement of standard of lifestyles of country’s population. One can understand this relationship of FDI with economic development of a country by considering evidence (Borensztein & Lee, 1995, pp. 117-131) that shows that countries with higher rate of economic growth are more likely to develop rapidly in the sectors of education and health resulting in progression in the political system, and subsequently, allocation of wealth and rights. In this regard, while one cannot quantify the relationship of economic growth and social development, it is evident that economic growth creates a positive environment for social progress, and this relationship analysis gives an idea of the role of multinational enterprises through their foreign direct investment in economic development that is holistic development of a country. Discussion In order to exemplify understanding of the above relationship, this section of the paper will include efforts of the research to analyse the role of multinational enterprises that they have been playing by contributing towards technological development in industrial sector of India. Although globalisation (Barnes & Kaplinsky, 2000, n.p) has resulted in an overflow of knowledge and information, developing countries, such as South Africa, India, etc are now depending heavily on their local small and medium enterprises that have now the responsibility to make efficient use of the available knowledge, particularly technology from the international market (Athreye & Kapur, 2001, 399-424). At the same time, while movements of liberalisation and privatisation (Ahluwalia et al, 1996) have opened avenues for multinational enterprises to enter into the domestic markets of India for dissemination of technological advancements to SMEs, it has affected the Indian local market, which creates concern regarding the role of multinational enterprises in host countries, and India in this paper’s case. Moreover, while local markets in India look forward to multinational corporations; it is very imperative for them to understand the significance of innovation (Cantwell, 2001) that has now become a way of deciding an organisation’s survival in the market. In India, it has been observed that local companies usually depend on the multinational enterprises to introduce innovation and diffuse technological spillovers within the industry, as well as across networks of industries; however, it is important that the role in this regard should be mutual, which will then allow actual economic development of a country. Particularly, a technological spillover is simply “transfer of tacit and explicit knowledge and skills from multinational enterprises that result in a progress in the functioning of local partners and SMEs” (Saggi, 2004, pp. 14-16). In order to understand the role of multinational enterprises, it is very essential to understand the channels that allow such spillovers, which are human capital and linkage. In the year 2006, the United Nations Conference on Trade and Development concluded that the linkage between multinational enterprises and local enterprises allows integration of small and medium enterprises into global industrial and production chains that somehow results in the creation of global value chain, and subsequently, in economic development of nations (Anitha & Maran, 2011, pp. 28-34). This clearly indicates the role that multinational enterprises play in enhancing development of host nations, and this is observed in India as well that has been putting efforts to attract foreign direct investments and multinational corporations in its country by bringing MNC-favoring changes in its legislation that are very important for existence of global value chains (GVCs). Analysis of reports related to India has indicated that government policies have an essential role to play in the operationalization of multinational enterprises. For instance, the Foreign Exchange Regulation Act of the year 1973 (Jain, Trehan, & Trehan, n.d., pp. 223) remained the only tool to regulate foreign direct investment until 1991, according to which all the multinational enterprises had to ensure dilution of their rights of ownership to seventy-four percent while offering rest percent to the residents of India. In addition, all the MNCs were required to keep ownership of Indian franchises to forty percent that evidently was a discouraging regulation for the multinational enterprises (Agrawal, 2000, pp. 10-13). As the result, IBM Inc. as well as Coca Cola ended up winding up their investments due to this regulation of Indianisation. However, one can clearly see the distinguished role of policies of host governments as in the year 1991, Dr. Manmohan Singh announced a new policy of LPG (Liberalisation, Privatisation, and Globalisation) (Srivastava, 1996, pp. 35-49), which transformed the whole environment of the Indian region that began to witness entrance of multinational enterprises in the country. As the result of this liberalisation that eliminated the restriction of forty percent ownership, as well as offered incentives to MNCs, the Indian region reported a faster growth in its economy. For instance, during the presence of FERA 1973 Act (Jain, Trehan, & Trehan, n.d., pp. 223), India was having five percent growth in its GDP; however, introduction of LPG in 1991 resulted in growth of eleven percent (Srivastava, 1996, pp. 35-49). Experts believe that many factors could have resulted in this economic growth; however, there was a consensus on the major role played by foreign direct investment that increased in 1990s as India topped the list of top ten beneficiaries of FDI in 1997 (World Bank, 1998, pg. 20) and has continued to enjoy increment in foreign direct investments until today. On the other hand, experts opposing the notion of positive impact of FDI and multinational enterprises on local industries have argued that although there has been major increment in FDIs in the country and the economic growth has increased, however, local industries still lack the same resources and capabilities that it lacked in the past. This indicates the non-transfer of technological knowledge that is one of the basic responsibilities of multinational enterprises in the host country. Analysis (Athreye & Kapur, 2001, 399-424) has shown that this has happened due to less emphasis of local industries on research and development initiatives in the country that is globally considered as the fundamental tool to ensure innovation technologically. One cannot deny that FDI plays a critical role in boosting economic growth in developing countries such as India etc and it can be an efficient way of introducing enhancements in productivity and quality standards through technological spillovers. In response, host governments will also have to realize that multinational enterprises and their FDIs can only act as a catalyst for economic development on domestic level by introducing its technological knowledge, skills, and experience (Chakraborty & Basu, 2002, pp. 1061-1073). In this regard, to sustain, host governments have the responsibility to ensure their emphasis on R&D sector that will sustain the environment, essential for the development of domestic industries. While analysing the process of technological spillover in Indian industries, it is an observation that the multinational enterprises caused spillovers through two channels. Firstly, MNCs brought in their advanced technologies and shared its utilisation by offering technical guidance to the domestic industries. Secondly, multinational enterprises’ FDIs gave opportunity to many managers and technical employees to become mobile and visit primary structures of these MNCs in foreign countries to acquire some training and managerial experience related to superior technologies (Dua & Rasheed, 1998, pp. 153-168). In this regard, this demonstration effect indicates two-way spotlight that MNCs provided to domestic industries in India. On the other hand, multinational enterprises played the role of a dictator as well by applying competitive pressure on domestic industries that enforced these industries to put efforts to improve and enhance their technologies since MNCs were able to offer higher-quality products to the customers at lower prices. In this regard, while multinational enterprises brought in their foreign investments and superior technologies in India, they also put a greater responsibility on domestic industries in terms of innovation. According to some, it causes a positive effect of FDIs on Indian market structure while for some; it resulted in a technological gap that was too big for domestic industries to fill causing them to close down. As the result, adversaries (Chakraborty & Basu, 2002, pp. 1061-1073) have argued that FDIs enforced domestic industries to go into isolation due to this foreign monopoly and although there has been growth in economic indicators, however, this remained limited to economic growth and did not transform into economic development of the whole country. One of the major reasons of this bigger technological gap was once again lesser emphasis of government policies on research and development activities that did not allow the technological spillovers to have extensive effect in the host countries. This explains the reason of varying effects of spillovers in different parts of the world as government policies in some developing parts have been focusing on R&D activities whereas some are overlooking this area causing unstable effects of technological spillovers in different countries. Examples from Indian government policies will enable a critical understanding of the role of policies on spillovers. In the industrial sector, particularly in the manufacturing, Indian government came up with regulations that resulted in creation of foreign monopolies, which improved economic growth but created a technological gap causing lack of economic development (Sahoo, 2005). Particularly, the government categorised the process of technological acquisition. In the first category, if the capability of native technology seemed enough, companies were not allowed to import any further technologies. Secondly, MNCs with simple technologies were offered with the facility of licensing to initiate acquisition of technologies. Thirdly, in case of complicated technologies, MNCs were allowed for foreign equity participation (Sahoo, 2005). This restricted and strict categorisation created monopolistic environment that kept the power in the hands of some while increasing technological gaps in industrial sector of the country. However, in the recent decade, there has been sight alteration in policies of the government, which has enabled domestic industries to acquire and unpack technologies from foreign multinationals (Sahoo, 2005). Still, it has now become essential for the Indian government to revisit its policies extensively as restrictions on foreign ownership in the past affected the quality of technological spillovers that occurred in the country. Now the government will have to come up with an innovative policy to induce foreign multinational enterprises to bring in their superior technologies and fill the gap with extensive research and development activities that still lack in the country. Another factor identified during the analysis regarding non-transfer of economic growth into economic development in India is lack of security of intellectual property rights in India. Experts believe that besides government policies on foreign equity participation, a major factor that determines the extent of technological spillovers in any host country is its IP rights protection that create the whole perception of foreign multinationals about any country. Unfortunately, in late 1990s, India was a country with poor intellectual property rights and after two decades, India is still considered a country having poor IP rights that is one of the main causes of lesser transfers of superior technologies by foreign multinational enterprises in India (Bose, 2007, pp. 56-69). In this regard, while FDIs have a direct relationship with economic growth of host countries, IP protection rights plays an intermediary role in allowing MNCs to transform this growth in development that has been missing in the Indian context. In other words, host countries with poor intellectual property rights are less likely to benefit holistically from foreign direct investments, and it has been an observation that intention of multinational enterprises then remains limited to sales and/or distribution of products in such countries and this seems the case in India as well. For instance, Maruti Suzuki India Limited (Maruti Suzuki, 2013) is one of the major multinational enterprises functioning in India and according to 2009-2010 reports; it showed a turnover of thirty billion Indian rupees (3.6 billion pounds) whereas the Suzuki of Japan (Maruti Suzuki, 2013) enjoyed the ownership of fifty-four percent. During the same year, Nokia India (Nokia, 2013) showed a turnover of twenty-three billion rupees (2.3 billion pounds) whereas its parent company Nokia of Finland enjoyed hundred percent in terms of ownership. Conclusion There are several examples from different divisions of industrial sector of India and they all indicate that although turnovers have been huge but they have remained limited to the extent of sales and distribution due to various factors causing lesser impact of technological spillovers from multinational enterprises in India, especially in its industrial sector. For instance, Maruti Suzuki India Limited (Maruti Suzuki, 2013) brought in its foreign direct investment in the country and it is showing huge turnovers resulting in huge economic growth; however, on the other hand, Jawa/Yezdi was the domestic market leader before entrance of Suzuki of Japan in India. Unfortunately, huge technological gap and intense competitive pressure resulted in closure of its factory in Mysore, India causing increment in the rate of unemployment. Similarly, Fiat cars were once dominating the Indian market with its domestic production; however, FDIs from Suzuki of Japan (Maruti Suzuki, 2013) resulted in almost extinction of Fiat cars in the Indian market since Suzuki of Japan only brought in its FDIs with limited sharing of its superior technologies, which intensified the technological gap causing destruction of local industries. Conclusively, multinational enterprises do play a crucial role in technological development of a developing country, such as that of Indian industrial sector in this paper’s case. It is very imperative to realize that multinational corporations are no longer considered as imperialists but agents of change that can bring economic development in the host country. 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