technology and innovation developments in India

New Science, Technology and Innovation

Developments In India

Science, Technology and Innovation Developments In India

Abstract:

This article reviews the science and technology policies of India and how these have

fashioned India’s technology capability over the years. It shows that while India has

achieved enormous strides in the area of science, technology and innovation,

In appropriate policies in the past have hampered the development of an effective

national innovation system. The article concludes by drawing lessons for the

Development of an EU-wide science and technology policy.

1. Introduction

1.1 The Changing Scientific and Technological Landscape

In the 1950s and 1960s, the United States was internationally pre-eminent in science and

technology. The only country comparable to the US in terms of per capita innovative

output during this time was Switzerland and much of any significant scientific and

technological effort and achievement remained the exclusive preserve of a few advanced

industrialised countries. In the last 30 years or so, however, the economic landscape has

changed considerably and indeed continues to change with amazing rapidity. A situation

of strategic economic parity has come to exist in the triad regions of North America,

Western Europe and the Pacific Rim (including China). Increasing globalisation has

meant that several more nations have become important players on the world economic

stage and the rules of the game have subsequently changed. To some extent, it is no

longer easy for any one player to dictate the rules of the game - to determine what is

right or wrong, or what is or what ought to be.

In the area of science, technology and innovation, the supremacy of the United States

and the few other monopoly powers has become seriously challenged and partly eroded.

Several developments have materialised. Firstly, there has been increased competition

from fast followers, which has subjected advanced nations to competition via imitation by

firms in hitherto less innovative countries. Secondly, there has been a more rapid

diffusion of intellectual capital. This has been aided by the revolution in communications

technology, which has rendered the notion of space and time virtually irrelevant. The

result of this is that the advantage provided by a given amount of innovation decreases

rapidly with increased diffusion of intellectual capital. Thirdly, competition for investments

by multinational enterprises (MNEs) mean that these companies increasingly need to

locate investments wherever circumstances offer the greatest opportunity, including

Research and Development (R&D) activities. Lastly, there has been a steady, albeit

gradual, emergence of more nations that are innovators. These have consciously

committed themselves to the expansion of their innovative capacity with the result that

the historically small set of highly-innovative advanced countries has expanded. In

addition, the Scandinavian countries, the newly industrialising countries of South East

Asia, China and India are also beginning to make the transition from imitator to innovator.

This paper charts the various phases of science, technology and innovation (STI) policies

of India and their impact on the nation’s technology capability, and considers future policy

prospects and development implications. With a population of over 1000 million, India is

the world’s second largest country after China and the largest democracy. In terms of

land area, it is the seventh biggest country in the world. With a GDP of about $430bn,

India is the world’s eleventh richest nation but in purchasing power parity terms, it is

fourth after, the US, China and Japan.

The Indian economy has a strong element of duality. It is one of the most industrialised

countries in the world, with remarkable achievements in indigenous technology,

oceanography, deep-sea oil drilling, nuclear power, space and satellite communications

and armaments manufacture. It is also a successful agricultural country. Three-quarters

of the population owe their livelihoods to the sector, which coupled with fisheries and

mining, account for about one-third of gross domestic product (GDP).

The arrangement of the paper is as follows. After this introduction, section 2 charts

trends in India’s science and technology (S&T) policy since independence in 1947, while

section 3 considers the impact of recent policy. Section 4 looks at India’s stance in

relation to the multilateral system (the WTO), especially with regard to the TRIPS

agreement while section 5 looks at the future stance of policy and its implications for

India’s development. The last section concludes the paper and draws lessons for EU

S&T policy.

1.2 The Rationale for Science and Technology Policy

In a globalising world economy the comparative advantage based on endowments of

basic factors of production, like natural resources, has become less important. An

abundance of traditional factors of production – raw materials, energy, and unskilled

labour – is not enough to guarantee long-term success. Rather, it is continuous

innovation and improvement in productivity that are crucial. In this wise, national

competitive advantage is not inherited – it has to be created. And as most of the

innovative activity takes place in private enterprises, a country’s international

competitiveness is a question of how competitive its firms are, how its industries perform

in world markets, how its institutions are organised and how successfully its science,

technology and industrial policies affect the performance of firms and industries.

While it is the private sector that constitutes the engine of innovation, national policies

create environments that can encourage or constrain the ability of firms to innovate. The

more innovative firms are, the more they are profitable and the more value-added they

create in a nation. It is, therefore, vital for countries to put in place policies to create an

effective and efficient national innovation system (NIS). Four conditions need to be met

for building an effective national innovation system. These are a) strong and competitive

pressures on domestic firms; b) the presence of high quality human capital; c) well developed

links between industry, institutions and academia; and d) openness and

access to foreign technologies. These determinants of an NIS indicate that innovation

involves far more than science and technology. It cannot be denied, however, that a

forward-looking S&T policy can be developed to foster an appropriate mix of these

determinants. Indeed, the first step towards, and the necessary pre-requisite to, any

good NIS is an effective S&T policy. In recognition of this, all advanced and

industrialising countries consciously foster an S&T policy.

The pressures of international competition have made both knowledge creation and

exploitation vital for business success. As a result, the internationalisation of R&D has

increasing relevance for strategic management of companies and the strengthening of

national innovation systems. The globalisation of R&D is establishing deep roots for

several reasons. Firstly, changing geopolitical infrastructures are creating new

opportunities for synergistic R&D activities across national frontiers. Secondly, rapidly

changing technologies are no longer constrained by geographical boundaries. Thirdly,

increasing complexities of technological systems are making it imperative to generate

and implement knowledge in emerging fields quickly and collaboratively. Fourthly, the

need for brainpower with an ever-increasing sophistication is being met by identifying

and employing people with the appropriate skills at appropriate locations wherever they

may be. International R&D strategy is thus emerging to meet these challenges. To this

end, firms in developed countries and increasingly in some developing countries are

being driven to take advantage of world-wide science and technology resources.

These factors have spurred the growth of science and technology developments in those

nations, which have conducive environments. Israel, Taiwan, Singapore, South Korea

and, to a lesser extent, Ireland, have made substantial progress in upgrading their

innovative capacity and, as a result, have become beneficiaries of foreign investments in

science and technology ventures. Although countries such as India, China and Malaysia,

have increased investments in areas related to science, technology and innovation at

modest levels, there is little doubt that some of these, especially China and India, are

potential scientific powerhouses.

2. Trends in STI Developments in India

2.1 Market-oriented Reforms in India

India is experiencing an economic renaissance. Economic reforms introduced by the Rao

administration in 1991 in the wake of serious macroeconomic difficulties have taken root

and a major restructuring of the economy, albeit slow, is continuing. With a population of

over 1000 million including an estimated middle class of about 250 million people, India’s

domestic market potential among developing countries is second only to China’s, and

close to all countries of the Association of South East Asian Nations (ASEAN) combined.

After independence in 1947, the early leaders of India committed themselves to a policy

of industrialisation based on self-reliance. For almost four decades after independence,

India pursued an isolationist and import-substitution strategy across all its sectors. This

produced large and inefficient enterprises, many of them state-owned and unaccustomed

to competition. The result was an economic growth typically of 3.5% per year (equivalent

to 1% growth per capita) – what had become known as the “Hindu rate of growth”.

From the early 1980s, a growing consensus emerged in favour of economic

liberalisation. Powerful vested interests, including leaders of protected industry, unions

and politicians, ensured that early initiatives were limited to little more than incentives to

exporters, minor industrial deregulation and some simplification of the tax regime. The

modest changes led to an average growth of 5.3% a year, which was not only much

higher than that of the decades before but was also better than the growth performance

of all developing countries put together. The high degree of protection from foreign

competition and the basic problem of erosion of competitiveness of Indian exports

continued. However, a more activist policy to achieve a depreciation of the real effective

exchange rate was pursued with a view to boosting exports.

The fiscal policies of the Central Government also became expansionary in the 1980s to

support growing expenditure on account of sharply rising interest payments and

expenditures on defence and subsidies. The gross fiscal deficit of Central Government

increased from 6.2% in 1980/81 to 8.4% by 1990/91. The rate of inflation of 8.2% was

stable but the current account deficit rose from 2.5% in 1985/86 to 3.3% in 1990/91.

The Gulf War in 1990 precipitated a balance of payment crisis and this was not helped by

the political instability at the beginning of the 1990s, which combined to cause a collapse

of international confidence in the ability of the government to manage the economy. This

caused external commercial loans and inflow of non-resident Indian (NRI) capital to dry

up. The stage was set for a possible international default. Despite emergency borrowing

from the International Monetary Fund (IMF), the level of exchange reserves dropped to

just over $1 billion, barely sufficient to finance imports for a fortnight. The rate of inflation

accelerated to double digits (10.30%) from 7.4% a year earlier. By August 1990, inflation

had shot upwards to 17%.

It was within this background that the newly elected Government of Mr Rao launched a

programme of ambitious economic reforms in July 1991. The reforms were designed

within an overall dual strategy whereby fiscal adjustment aims to achieve

macroeconomic stability were combined with structural reforms in industrial, trade and

financial policies to strengthen growth capacity and international competitiveness of

Indian industry.

The main tenets of the reforms included:

·         the opening up of more sectors to private investment and participation – power, steel,

oil refining and exploration, road construction, air transport, telecommunications,

ports, mining, pharmaceuticals and financial services.

·         encouragement of FDI with majority equity, except in a few strategic sectors, and

portfolio investment. Red tape was significantly reduced.

·         de-licensing of most industries to encourage competition. Domestic investment in

defence-related items was permitted.

·         trade liberalisation. Some import quotas were converted into tariffs, and the tariff

system was simplified to reduce the number of bands and achieve a reduction in

overall rates. As of 2001 (April), quantitative restrictions (QRs) on imports have been

removed.

·         the taking out of state control some aspects of business decision-making such as the

location of new enterprise and technology transfer.

·         the exchange regime was liberalised, with the devaluation of the rupee by 22%

against the US dollar in two instalments in July 1991. A market-determined exchange

rate was introduced in March 1993 and current account convertibility in August 1994.

(the rupee is, however, not yet fully convertible on the capital account).

·         Reform of capital markets. Private mutual funds, country funds and foreign

institutional investors (FIIs) were all made active investors.

Since 1991, the reform agenda has been progressed at every annual budget to bring the

Indian economy into closer integration with the rest of the world.

2.2 Trends in India’s Science and Technology Policy

It has long been recognised that investment in science and technology makes substantial

contribution to economic growth in terms of higher growth rates of an economy’s total

factor productivity (Abramovitz, 1956, Denison 1962 and Solow, 1957, among others). In

addition to direct returns, huge (positive) externalities have also been found to be

associated with it (Abramovitz, 1989). Taking cognisance of the importance of

technology’s role in development, advanced countries nurture continuing development of

science and technology and most developing countries adopt R&D policies in the early

phases of their development. Science and Technology policy constitutes an integral part

of a nation’s overall industrial policy (Barber and White, 1987). While the former shapes

the pace and direction of technology development, the latter determines the nature of

demand. This section reviews the evolution of Science and Technology policy in India

since independence.

Science and Technology policy of any nation is carved within the background of overall

industrial policy. If anything, S&T policy is supposed not only to give meaning to, but

more importantly, to ensure achievement of the goals of industrial policy. It is therefore

the thrust and direction of industrial policy that determines the tenets of any S&T policy,

although it must be said that R&D may lead to results that may also change the course of

industrial policy. Even so, S&T policy has almost always been driven by the goals of

industrial development policy. This section therefore describes the development strategy

adopted by the government in the various phases of development and analyses the

accompanying S&T policy. Two strands of S&T policy have existed – policies related to

technology transfer from abroad through formal modes such as FDI, technology licensing

and capital goods imports and domestic technology generation policies.

Having realised that the pursuit of autarkic economic policies in much of the post independence

period to 1990 was a mistake, India undertook sweeping reforms as a way

of speeding economic growth and achieving faster integration into the world economy.

Part of these reforms has been the re-enactment of a science and technology policy

more suited to the achievement of the goals of building a prosperous nation.

The Industrial Policy Statement of 1991 had, among its objectives, the aim of “injecting

the desired level of technological dynamism into Indian Industry” and “the development of

indigenous competence for the efficient absorption of foreign technology”. It also

expressed the hope “that greater competitive pressure will induce our industry to invest

much more in research and development than they have been doing in the past”. The

intention was to create a national innovation system (NIS) that was in sharp contrast to

that prevailing prior to the July 1991. The national innovation system of a country is the

set of institutions, policies and organisations and the interactions between them that

determine the level of innovation arising from that country. While the increase in

globalisation has resulted in some dilution of the importance of the boundaries of the

nation-state from an economic perspective, the NIS continues to be an important

determinant of a nation’s economic performance.

After independence in August 1947, the Indian Government, under Jawaharlal Nehru set

itself the task of socio-economic transformation of the country through a process of

central planning. Science was given considerable importance in the development

“Plans”, as its significance in national development was recognised. Nehru’s firm belief

that science and technology could play a major role in bringing both material and cultural

benefit to the people of India may be summed up in a statement he made prior to

independence and in the preamble of the very first S&T policy document prepared in

1958 under his guidance.

“And I hope with Lord Rutherford that in the days to come, India will again become the

home of science, not only as a form of intellectual activity, but also as a means of

furthering the progress of her people”

Jawaharlal Nehru, 26 December 1937.

“The key to national prosperity, apart from the spirit of the people, lies in the modern age,

in the effective combination of three factors, technology, raw materials and capital, of

which the first is perhaps the most important, since the creation and adoption of new

scientific techniques can, in fact, make up for a deficiency in natural resources and

reduce the demand on capital. But technology can only grow out of the study of science

and its application”.

IPR 1958.

From independence in 1947 to date, India has had three distinct stances of industrial

policy and, in consequence, three phases of commensurate science and technology

policy. Aggarwal (2001) delineates these as (a) the Initial Growth Phase (1947-68), (b)

the Restrictive Phase (1969-1980) and (c) the Liberalized Phase (1980-1990 and 1991 to

date).

The Initial Growth Phase

The genesis of India's industrial policies was the Industrial Policy Resolution (IPR), the

work for which was started in 1948 and passed in 1958. Under this policy, India pursued

a policy of import-substitution and placed emphasis on basic and heavy industries. A

faster growth rate in the productive capacity of capital goods industries was seen as vital

to raising savings and investment rates, diversifying the industrial sector and promoting

manufactured exports. Given the negligible R&D base at this time, flows of foreign

technologies were required and indeed encouraged. FDI, technology licensing and

financial and technical collaborations were allowed over a wide range of industries.

In this liberal atmosphere, industrial boom in India started to take off in the late 1950s.

The policy of import-substitution created and sustained demand for foreign technologies.

Foreign collaborations increased six-fold between 1948/55 and 1964/70. The FDI stock

more than doubled to Rs5660 million between 1948 and 1964. Technology-related

royalty payments jumped sixteen-fold between 1956/7 and 1967/8. As noted by Desai

(1980), the building of industrial capacity proceeded almost totally on the basis of

imported technology, and, in the absence of any need to improve competitiveness, there

was little or no incentive to learn, absorb, assimilate and upgrade foreign technologies to

create capabilities. While industrialisation proceeded on back of foreign technologies,

"R&D promotion policies focused on creating a scientific and research base" (Aggarwal

2001). The IPR (1958) considered the creation of a scientific base as a pre-requisite for

developing the domestic R&D base on the premise that “technology grows out of the

study of science and its application" (Aggarwal 2001). This stance led to substantial

investments in the establishment of science-based educational and R&D infrastructure.

The number of engineering colleges and seats rose from 38 and 2940 in 1947 to 138 and

25000 respectively in 1970. In 1968, the Indian Institutes of Technology, modelled on

the Massachusetts Institute of Technology, were set up. There was also a rapid

expansion of agencies like the Council for Scientific and Industrial Research (CSIR), the

Department of Atomic Energy and the Defence Research and Development

Organisation. Such R&D as was performed at this time was centred on:

a) scaling down of plants based on foreign technology to suit Indian markets

b) adapting foreign processes to Indian conditions and local materials and,

c) tackling on-the-spot production problems and quality control.

As Desai (1980) has put it, this was a period when the emphasis was on R&D with a

short pay-off, although it must be said that over the period India built a substantial

scientific base and R&D capability.

The Restrictive Phase

There was a major policy shift in the late 1960s. A foreign exchange crisis induced the

government to pursue a policy of "self-reliance", thereby moving the focus in national

planning from merely “growth” to “growth with self-reliance and social justice." Besides,

the Monopolistic and Restrictive Trade Practices (MRTP) Act ushered in a period of

regulation in which the expansion of large firms was regulated, a reservation policy to

protect the small-scale sector was introduced and banks and financial institutions were

nationalised to ensure the flow of credit to designated sectors. The result of this policy

change for science and technology was that technological self-reliance also became

important. The basic stance was that technology should not be imported to the detriment

of local development effort and that R&D structures created earlier should be used to

meet the industrial demand for technologies (Sandhya et al 1990). To generate demand

for domestic technologies, the earlier policies on technology acquisition were reversed

and the emphasis was shifted from “science and scientific development” to “technology

and technological development” (Aggarwal 2001). Foreign collaborations were severely

restricted and FDI was allowed only in core industries where no alternative local

technologies were available. To deal with the situation arising from the restrictions on

technology acquisition, a Department of Science and Technology (DST) was set up.

S&T planning was made part of the overall planning process in the Fifth Plan (1974-

1979).

The impact of these policies is well documented. Technology transfers declined

drastically between 1968 and 1980. FDI inflows declined and in the late 1970s there was

a net outflow. Growth of royalty payments slowed, from 22.3% annually between 1970-

76 to 15.2% between 1977-85. Having said that, it must be pointed out that some

positive benefits accrued. Local R&D activities increased. R&D expenditures in private

companies increased more than eight-fold to Rs1207 million between 1970/71 and

1980/81. The number of registered units in the private sector rose from 156 in 1969 to

516 in 1979. R&D expenditures in the CSIR rose from Rs215 million in 1970/71 to

Rs690 million in 1980/81. This led to near self-sufficiency in standard technologies and

India indeed began to export technology.

While the above achievements are certainly noteworthy, these policies did not engender

a well-performing national innovation system. The vital ingredients of technology

acquisition, technology generation and technology diffusion were not balanced and were

not consistent with industrial and macro-economic policies. What is more, the four

conditions - strong competitive environment, high quality human capital, well-developed

linkages between industry, institutions and academia and access to foreign technologies

- were either not tailored to the innovation system or that there was lack of an appropriate

mix of them. Macroeconomic policies stifled all forms of competition. Industrial licensing

suppressed competition from within and restrictive trade and FDI suppressed competition

from without. Industrial production growth rates stagnated. Exports grew slowly so that

by the late 1970s, the balance of payments had become a matter of concern. While,

India achieved self-sufficiency in technologies for local production and consumption due

to the policy of import-substitution and self-reliance, it could not build capacity in worldclass

technologies to produce for international markets (Lall 1987). Although India

achieved proficiency in standard technologies, it remained dependent for highly

expensive and complicated technologies (Bhagwan 1995). Not surprisingly, the share of

technology intensive imports in total imports rose from 63% in 1970/71 to 80% 10 years

later. Total factor productivity declined and became negative (ICICI 1994) and its

contribution to the growth rate of 3% was as low as 0.2% between 1970 and 1980

(UNCTAD 1992).

At the corporate level, in the closed economy that India was at that time, there was little

incentive to improve efficiency of resource use. Besides, the licence regime created a

market structure of a few large firms and a large number of small firms. While the former

lacked the incentive to undertake R&D, the latter were too small and had limited

resources to do so. Policies of the Foreign Exchange Regulation Act (FERA) and MRTP

restricted the growth of large firms, except through diversification. This constituted a

serious disincentive for committing resources to R&D and affected their capability to do

so. Not surprisingly, R&D expenditures became insignificant. In 1982/3, 55% of private

sector R&D units spent less than Rs1 million on R&D, with the average being Rs 0.35

million, as Aggarwal (2001) notes. In the absence of the resources and the need to

generate new technologies, importation was resorted to. Such imported technology was

adapted to local needs, with little effort being devoted to learning, assimilating or

improving it.

The Liberalised Phase

Mid-1991 marks a watershed in this phase. A policy of liberalisation and a reversal of the

previous inward-looking policy had commenced in the 1980s but this was a half-hearted

and scanty attempt to appease certain sections of the economy. In the 1980s, in view of

declining exports, worsening balance of payments and stagnating industrial growth

spanning over a decade, the Government of India decided to re-orientate industrial and

trade policies. The Sixth Plan (1979-84) Document gave a directive of "growth with

efficiency" away from the previous "growth with social justice and self-reliance". The

Industrial Policy Resolution of 1980 stressed the need for optimal use of resources and

higher productivity. It proposed liberalisation of the industrial licensing regime (the

licence raj) and foreign trade. The process of deregulation was implemented in a

number of industries and some major reforms were introduced in the mid-1980s,

including reductions in import restrictions and tariffs.

With shifts in Plan (India’s development plans are operated in 5-year blocks) priorities,

technology acquired a stronger focus. Restrictions on technology imports and foreign

equity participation were relaxed. Up to 51% foreign equity was permitted in many

sectors, except in those reserved for the public sector. In areas of sophisticated

technology and/or export-oriented ventures, up to 100 percent equity was allowed. The

Technology Policy statement of 1983, for the first time, recognised the need for

establishing linkages between scientific, technological and financial institutions to

promote effective transfer of technology from institutions to industry. A fully-fledged

Ministry of Science and Technology was created in 1985, with the earlier Department of

Science and Technology (DST) and a new Department of Scientific and Industrial

Research (DSIR) as constituents. A high level post of scientific adviser and a science

advisory council to the Prime Minister were set up in 1986 to advise the Prime Minister

on major issues relating to S&T development. Also, a quality system management (SM)

scheme to strengthen in-house R&D and provide quality assurance of same was set up

as well as a DSIR scheme to grant recognition to scientific and industrial research

organisations (SIROs) in the private sector.

However, it was in July 1991 that India undertook sweeping reforms to open the country

to foreign investment and deregulate most of Indian industry (see section 2.1). More

than 80 percent of Indian Industry was de-licensed, the number of industries reserved for

the public sector was reduced from seventeen in 1990 to six, and plans were put forward

for the divestment/privatisation of public sector undertakings. Besides fostering domestic

competition, the economy was opened to external/foreign competition. Tariffs were

reduced progressively from a maximum of 300% in 1991 to 65% in 1994/95 and to about

20% currently. The Rupee was made convertible on the current account. The tempo of

liberalisation has continued and every budget proposal since 1991 has included a further

move into reforms in the financial, infrastructure, information technology,

telecommunications and foreign trade and investment sectors.

In this progressive environment, the promotion of R&D has re-established its importance,

not only for the exploitation of inward technology but also to improve the efficiency of

technology transfer. A new draft of the Technology Policy enacted in 1993, placed

emphasis on the strengthening of linkages between industry, R&D institutions and

financial institutions for encouraging commercial exploitation of technologies developed

in laboratories. It recommended a consortium approach to R&D and technology

development involving academic institutions, national research laboratories and user industries

for goal-oriented programmes and new product development. To ensure

success of domestic R&D, many new policy measures have been adopted and

implementation structures set up.

A major initiative has been the restructuring of public institutions and the strengthening of

India's role in international organisations. The CSIR has taken on a more commercial

orientation. Directives have been issued requesting the CSIR to generate at least 30%

of its budget from consultancy and technology "sale" to the private sector. It is hoped

that this figure will reach 45% in the very near future. The CSIR has participated in the

activities of international organisations such as UNCTAD, WIPO, UNIDO, ESCAP and

APCTT at various levels and forums on issues related to science, technology

development and transfer. India plans to strengthen its role in these deliberations. In

addition, India plans to play an active role in the work of the WTO in all areas of

international relations, including the thorny issue of trade-related intellectual property

rights (TRIPS).

3. Response to/Impact of Reforms

3.1 The Macro-economy

India’s economic reforms and trade liberalisation contributed to a dramatic increase in its

economic growth in the mid-1990s. Larger inflows of foreign direct investment and

increased international trade helped India achieve annual average growth rates of 7% in

the mid-1990s. Economic growth slowed, however, in 1997, owing to political instability

and global economic slowdown. Growth picked up again and has hovered around the 6%

mark since then. While not remarkable, especially if set against the growth performance

of China in the 1990s, India’s growth of between 6-7% annually is way above the “Hindu

rate of growth” that characterised much of the post independence period to the 1980s

(table 1).

 

Reform of India’s trade regime has led to increased trade. For most of the 1980s, India’s

total exports hovered around the $10,000 million mark while imports were around

$15,000 million. As open policies encouraged trade, exports rose from $18,145 million in

1990 to $44,560 million in 2000. Similarly, imports rose from $24,072 million to $50,536

million in the same period. The nation has become more open to trade, although the

trade balance increased over the period.

Protectionism afforded Indian industry a home market free of competition. As a result,

there was no great desire to seek foreign markets. What is more, bureaucratic

procedures for entry into foreign markets were cumbersome. Since the early 1990s,

however, Indian firms have had to look beyond the confines of the country for growth and

survival. Companies like Wipro, HCL, Dr Reddy’s Lab, Infosys Technologies and

Ranbaxy Labs have all made substantial incursions into overseas markets, including

acquisitions, joint ventures and R&D centres.

Traditionally an exporter of mainly primary products such as coffee, tea, iron ore and

gems, India has in recent years been exporting high technology products such as

software and pharmaceuticals. In the software sector, the progress has been remarkable.

The growth of about 50% annually in the last six years has been primarily on the back of

software exports. It is forecast that software and related services will grow to account for

7.7% of GDP and 35% of Indian exports by 2008. Also noteworthy is the fact that many

of the Indian companies that have become successful exporters today are new ventures

and where they already existed never exported before prior to 1991.

3.2 The Role on MNEs

3.2.1 Growth of Foreign Investment

One striking feature of the global economy in the last few decades has been the

phenomenal growth of foreign direct investment (FDI) or investment by MNEs in foreign

countries in order to control assets and manage production activities in those countries.

Since the early 1980s, world FDI flows now attributable to over 60,000 MNEs, have

grown much faster than world output (table 2). During 1980-97, global FDI flows

increased at an average rate of about 13% per year, compared with rates of about 7% for

both world exports of goods and non-factor services and for world GDP. In both 1998

and 1999, FDI expanded phenomenally, recording 45% and 55% respectively. A

slowdown occurred in 2000, with a growth of 18% to reach a record world level of $1.3

trillion. The increase in direct investment flows has laid a solid foundation for a marked

expansion in international production by MNEs, which now have an estimated $6.3 trillion

invested in over half a million foreign affiliates throughout the world. The value of sales

by these foreign affiliates has risen much faster than that of foreign trade (world exports)

reaching nearly $16 trillion in 2000.

 

As FDI has expanded in volume, so has it also become more widespread among home

(outward investor) and host (recipient) countries. Developed countries remain the prime

destination of FDI, accounting for more than three-quarters of global inflows. Inflows into

developing countries have, however, been growing steadily since the late 1980s. From

less than $20 billion, FDI inflows to developing countries increased twelve-fold to reach

$240 billion in 2000, representing a share of 19% of the total.

FDI has become an important source of private external finance, especially in developing

countries. Given its potential role in accelerating growth and economic transformation,

there is fierce competition among developing countries in attracting it. Not only can FDI

add to investible funds and capital formation (table 3), it is also a means of transferring

production technology, innovative capacity and organisational and managerial practices

between locations. While the first to benefit is the foreign investor, their assets can also

be transferred to domestic firms and the wider economies of host countries, if a

conducive environment exists. The greater the supply and distribution links between

foreign subsidiaries and domestic firms, and the stronger the capabilities of domestic

firms to capture spill over’s from the presence of and competition from such foreign firms,

the more likely it is that FDI will enhance productivity and competitiveness. MNEs are

looking to invest in countries with state-of-the-art FDI policy frameworks and a range of

business facilitation systems. With liberal policy frameworks becoming commonplace,

success in attracting FDI has become more dependent on business facilitation factors

such as cost reduction, larger markets to reap economies of scale, transport and

communications infrastructure, marketing networks, technology and innovative capacity.

Also increasing in importance is the agglomeration economies that arise from industrial

clustering, regional market access and competitive pricing of resources and facilities.

 

Among developing countries, though, the distribution of FDI inflows is uneven. In 2000,

the major recipient blocs were Latin America and the Caribbean, 35%, East and South

East Asia (excluding China) 39%, China 17%, and Central and Eastern Europe, 10%.

Africa continues to fare worst with a share of less than 4%. India, the largest recipient in

South Asia, received $2 billion in 2000, a world share of only 0.16%.

The 1990s witnessed a radical change in India’s policy towards foreign investment, from

being restrictive and selective to becoming receptive and pro-active. The July 1991

Industrial policy represented a radical transformation of foreign investment policy. Prior

to that, Government policy had been skewed towards investment that involved

technology transfer. This stance found full expression in the 1973 Foreign Exchange

Regulation Act (FERA), which imposed a ceiling of 40% on equity shareholding of foreign

companies and required dilution to 40% of existing companies which were not deemed to

be operating in “hi-tech” and strategic sectors. It also imposed limitations on royalty

payments. The exit from India of companies like IBM and Coca-Cola was the result of

the implementation of this Act.

In the new liberalised environment, however, foreign investment is permitted in virtually

all sectors of the economy. Foreign investment is now actively sought and encouraged

in all sectors, especially in infrastructures. In technology-related investments, royalty

payments have been considerably liberalised. Technology imports are automatically

approved for royalty payments up to 5% of domestic sales and 8% of export sales. Also,

Government permission for hiring foreign technical personnel is no longer required.

The result of these measures have been that FDI rose from under $100 million in 1990 to

a peak of just over $3 billion in 1997, accounting for 3% of developing countries’ inflow.

Since then, inflows have declined, amounting to just about $2 billion in 2000. The

decline in FDI in the last three years has been the result of a combination of several

factors, including political uncertainty in 1997 and 1998 and the world economic

slowdown. Another explanation for India’s small and declining share is the bureaucratic

nature of its approvals-to-actual regime. Less than one-third (31.3%) of the total

amount of FDI approved in the period January 1991 to October 1999 actually

materialised. There is thus need for further reform of the FDI regime if India is to benefit

increasingly from foreign capital inflows. Having said that, it must be noted that there

have been instances where FDI has not been seen to bring net benefits to the host

country. India believes that a “go-slow” strategy to determine the costs and benefits of

each case is necessary, although this can cause delay and, with it, a much lower inflow

than would be the case otherwise.

India has also seen a marked improvement in portfolio investment since 1991. From a

level of only $6 million in fiscal 1990, portfolio investment increased remarkably to $3824

million in fiscal 1994. As table 4 shows, the level of investment fell sharply between

1997 and 1999. The decline is attributable to the contagion, which adversely affected

capital flows to all emerging markets in the 1997-99 period. A strong recovery followed

subsequently. As India continues further reforms in the insurance and other service

sectors, portfolio investment is likely to grow significantly.

 

The United States tops the list of countries investing in India since 1991 and accounts for

over one-quarter of total foreign investments, with Mauritius following with about 10%. In

the three years to fiscal 1997, Mauritius led as the dominant source of FDI inflows, with

the USA and South Korea in second and third places. On the sectoral side, electronics

and electrical equipment and engineering industries account for the largest share of

investment. Investment in telecommunications account for 20% of the total, followed by

the power sector with 17%. The service sector registered a share of 7%.

 

3.2.2 Global R&D Centres

Hirwani and Jain (1999) have shown that although market-oriented activities were more

important to MNEs in most of the 1990s, technology oriented activities are growing in

importance. Hitherto, MNEs had been emphasising a strategy of customising products

for the Indian market and of obtaining cost-efficient manufacturing facilities in India.

Increasingly, however, there has been a clear move towards obtaining access to high quality

scientists, engineers and designers in India. Some R&D centres set up in India by

some MNEs conduct contract research for the corporate laboratories outside India.

Prior to 1991, the establishment of such R&D centres by MNEs was consciously lacking.

Since India signed the GATT Agreement in 1993 and subsequently passed the

Intellectual Property law in 1994, over 60 MNEs have set up R&D centres in technology intensive

industries, mostly to take advantage of the strong pool of highly-trained

engineers and scientists. Before 1991, there were only two such centres in the country.

Apart from the setting up of new centres in India to take advantage of the liberalised

atmosphere, the raison d’être and mode of operation of existing centres have also been

changing by the new market environment. Some companies have completely

restructured their R&D centres in India, shifting the focus from developing products for

Indian markets to making them centres of global excellence. Others have expanded their

operations and hired many Indian scientists and technologists. This is more evident in

the areas of information and computer technology. Such centres conduct R&D for worldwide

operations. The availability of high quality labour has been a motivating factor in the

establishment of centres by companies such as Astra, Unilever, GE and Software

Development Centres of Texas Instruments, Oracle, Microsoft and others. Substantial

R&D presence has also been established in the areas of pharmaceuticals and

biotechnology.

3.2.3 Collaborative Ventures and Technology Alliances

Policies adopted in the era of liberalisation resulted in a tremendous increase in

investment including technology inflows. Table 6 shows some indicators of performance

with regard to technology acquisition. Technology payments have increased substantially

and so has expenditures on the acquisition of new plants and machinery. As a result,

capital goods import increased sharply in the 1990s. At the micro level, policy reforms

have increased pressure for survival and efficiency of Indian organisations. In a

relatively open economy, new business opportunities have also arisen for Indian firms as

a result of greater national integration with the global economy. At the same time, these

reforms have created opportunities for foreign companies to enter the Indian market.

 

Of increasing importance has been the growth of technological strategic alliances for

R&D between MNEs and other foreign firms and Indian organisations having strong

technological capabilities. Simultaneously, some remarkable changes are taking place in

a number of India’s institutes of engineering, science and technology, as well as in some

of the better-known universities. Companies such as IBM, Philips, DuPont, GE and

others have been establishing R&D ventures on the campuses of a number of Indian

academic institutions. This has induced some Indian companies to follow suit, thereby

assisting local organisations and institutions to shift more into business-led R&D.

Recent studies show that there has been a definite change towards increased product

development and innovation (Krishnan and Prabhu, 1959). Much of this has often been

through collaborative arrangements with India and foreign counterparts. An excellent

example of this has been the development of an integrated shop floor automation system

for improving manufacturing productivity. The project was the result of joint effort

between Bharat Heavy Electricals Limited’s R&D Division and PSG College of

Technology in Coimbatore, and with partial financing from, and project monitoring by, the

Ministry of Technology. The software industry typifies how collaboration between local

and foreign experts can lead to a remarkable success story.

Several foreign consultants have, since the mid-1980s, played important roles in new

product development as well as in the process of improving production efficiencies,

optimising product-mix and generally helping companies to become more competitive.

These include firms like McKinsey and Company, Price Waterhouse Coopers and A T

Kearny. International consulting firms like McKinsey and A T Kearny have made

significant contributions in changing mindsets, providing information and data on

international benchmarks and helping to build awareness of international best practice.

These came to India on the wings of liberalisation and have slowly but surely built a base

and reputation for themselves, despite initial widespread scepticism on the part of their

clients.

Consulting firms have also been invited and used by central and some state

governments to restructure state-owned enterprises and infrastructural projects as well

as to provide help in attracting foreign investment and in creating attractive investment

conditions. The states of Maharashtra, Andra Pradesh, West Bengal and Orissa have all

used foreign consultants to varying degrees. Industry associations have and continue to

work with consultants. For example the Confederation of Indian Industry (CII) worked

with Michael Porter to look at the competitiveness of Indian industry while NASSCOM

has worked with McKinsey on the growth potential of the software and IT-enabled service

industries.

3.3 Software, IT-Enabled and Related Services

India has become a prominent destination for the setting up of development centres for

software as well as the provision of back-office and support services such as call centres

and data processing. The Indian software/IT industry is an excellent example of a

domestic industry, which has developed rapidly as a result of collaboration with industry

in the developed world. Its rapid growth has primarily been on the back of large cost

differentials that exist between expert labour in India and the developed world, where

most of the demand resides. These IT centres have either been set up by MNEs as

subsidiary companies or by large Indian companies as committed centres for a particular

company. Contractual arrangements for outsourcing with Indian companies have been

increasing and are now common. These developments have led to the phenomenal

growth of the Indian software and IT-enabled services sector. In fiscal 2000, the industry

reported revenues of $8.26 billion, $6.25 billion of which was accounted for by exports.

Five years ago, the industry accounted for only 2% of the nation’s exports. Today it

accounts for 14% of exports and about 2% of GDP. Some MNEs have also tapped into

the knowledge base of the country and set up knowledge-intensive service businesses to

serve their global operations. These include the McKinsey Centre near Delhi and GE’s

Welch Technology Centre at Bangalore, set up to undertake multi-function R&D.

This remarkable success story has been the result of a policy orchestrated by the Indian

Government in the early 1980s to build technological capability in Electronics. The

genesis was the announcement of a policy on electronic components in 1981, which set

the stage for the creation of an internationally-competitive production base in the country.

In 1983, the Government announced certain special tariff and tax concessions for the

industry. Further in March 1984, the Industrial Policy Resolution of 1958 was amended

to permit the entry by the private sector into the manufacture of telecommunications

equipment and computer hardware. This was followed by a policy to foster the

development of software primarily for export. Imports of inputs for potential software

exporters were facilitated. The Government also lowered duties on imported software

and simplified procedures for such imports for potential software developers and allowed

100% export-oriented companies to import hardware free of duty. This policy came to be

known as the “flood in, flood out” approach, allowing imports to flood in, in the hope that

exports would flood out (Desai and Khan 1986).

The domestic electronics market was later opened to foreign participants as long as such

entrants shared equity with Indian partners. A flood of entry took place immediately, with

companies like Hewlett Packard, DEC, Olivetti and others coming in. In the software

segment, 100% equity shareholding was allowed for foreign firms that were 100% export oriented.

They also benefited from generous subsidies in “export processing zones”

(Khan 2000).

The number of software companies has grown to over 1600, employing over 300

thousand people. New local set-ups are constantly coming on stream, just as more

foreign companies are either setting up in India or availing themselves of IT services at

highly competitive rates. It is estimated that the software/IT sector could grow to

achieve exports worth about $50 billion by 2008. This may be optimistic in view of

certain weaknesses and constraints. Firstly the Indian software industry typically

operates at the low market end of the global business. Secondly, it is hampered by weak

telecommunications and networking infrastructure. What is more, the Indian business

environment does not provide a good learning ground for software developers owing to

the very little customer/client interaction that exists with domestic industry. In order to

achieve this projected growth, the Indian Prime Minister has set up a task force on

Information Technology and Software Development to foster the local development of

critical inputs such as human capital, telecommunications infrastructure and world-class

IT hardware.

3.4 Commercial Orientation of Public Research Organisations

India has a strong industrial research infrastructure, which was fostered in the early

stages of its post-independence growth. While the supply-side was generously

supported, the industrial research system, prior to liberalisation, was mostly geared to

import substitution (Bowonder and Richardson, 2000). The publicly funded Council of

Scientific and Industrial Research (CSIR) and other bodies tended to be isolated entities

with little or no links to industry. In such a protected environment, there was no need to

benchmark their activities to those of global players. Also their activities were only

marginally focused on commercialisation. The last decade has seen many of these

laboratories become more commercially oriented. They have been directing their efforts

towards international quality R&D. Two recent major policy thrusts have been (a) an

increase in the quest for patenting in Europe and the USA, as a means of engendering a

strong desire to undertake R&D and to innovate and (b) an increase in the commercial

orientation of industrial research, with a view to making these bodies less dependent on

public budgetary support.

New Science, Technology and Innovation Developments In India

3.5 Industrial Clusters

The agglomeration, scale and scope economies that are reaped in Silicon Valley are well

known. In pre-liberalised India, the government explicitly tried to promote balanced

industrial development by providing incentives for companies to set up in “backward”

areas. In pursuit of this goal, public sector units were set up in locations that sometimes

created strong locational disadvantages for their future development as well as for

efficiency. A departure from this policy, especially by some entrepreneurially minded

state governors (Chief Ministers) and a conscious encouragement of industrial clusters in

recent years, have created enormous benefits to firms and local economies. Bangalore,

dubbed the Silicon Valley of India, is clearly the base of a high technology cluster.

Thirteen of the twenty-three companies in the world rated at level 5 on the Software

Engineering Institute’s Capability Maturity Model (CMM) are located in Bangalore

(Krishnan, 2001). About 35% of the risk capital invested in India between 1998 and 2001

is estimated to have been invested in Bangalore. In view of Bangalore’s success, other

states such as Masharastra and Andra Pradesh are encouraging other high technology

and biotechnology clusters.

3.6 FDI Spill-overs and Technological Capability

Liberalisation policies and the response by both foreign and Indian companies alike have

had many spillovers that are valuable for India’s technological capability. The growth of

the software industry has had wide-ranging impact on the economy. The demand for

software imports and the setting up of foreign development centres have contributed to

the rapid increase in compensation levels, estimated at an annual rate of 25% in the

second half of the 1990s. Other benefits have included stock options and good

employment opportunities, thereby slowing brain drain to some extent. Foreign

participation has exposed Indian engineers and scientists to new technologies and made

them more sensitive to the protection of intellectual property (software IP piracy was

estimated to have risen from 59% to 61% between 1999 and 2000 ( Krishnan, 2001).

Another factor has been the sharp increase in the output of degree- and diploma awarding

institutions. The number of institutions offering formal degree-level education in

engineering more than doubled between 1990 and 2000, from 339 to 776. Student intake

capacity also doubled with 80% rise in the science/engineering places.

Although venture capital organisations started to emerge in India in 1986, the growth of

technology-based ventures did not catch up. In the last decade, however, there has been

a substantial rise in IT-based venture capital. Nigam (2001) records that venture capital

investments reached $350 million in 2000, as against a figure of less than $5 million in

1995. A large chunk of this amount (70%) was directed into the IT sector. Many new

venture capital firms are being set up, either by Indian-based industrialists and young

professionals or by Indians based overseas.

Although recent studies (Chandrashekar and Basavarajappa, 2001; Mehta and Sarma,

2001) show that there has been little change in R&D intensity of Indian industry, there

has been a clear shift toward increased product development and innovation (Krishnan

and Prabha, 1999). This has been accompanied by increased awareness of intellectual

property (IP) rights and, by implication, the importance of patenting. According to the US

Patent Office, of the ten India-based organisations which filed the largest number of US

patents in the 1995-2000 period, three are Indian pharmaceutical companies. The CSIR

has also been filing patents in India and the US, all this result of new outward-looking

policies.

4. Science and Technology Policy in Relation to the Multilateral

System

India is a founder member of the General Agreement on Tariffs and Trade (GATT) 1947

and its successor, the World Trade Organisation (WTO), which came into effect on

January 1 1995, after the conclusion of the Uruguay Round of multilateral trade

negotiations. India's participation is based on the need to ensure more stability and

predictability in international trade with a view to achieving more trade and prosperity for

itself and the other members of the WTO. The multilateral trading system administered

by the WTO aims to bring about orderliness, transparency and predictability in global

trade through reductions in tariffs, progressive removal of non-tariff barriers, elimination

of trade-distorting measures and systems of values to serve as guidelines for national

legislation to bring about uniformity in laws and regulations everywhere.

The establishment of the WTO has created a forum for continuous negotiations to

reconcile differing and oftentimes conflicting interests of members. Although there is

unanimity in the provisions of International Trade theory that free trade enhances global

welfare, nationalism and differing goals as well as the appropriation of the benefits of

trade lead to many disagreements and conflicts within the global trading system.

Conflicts arise between developed and developing countries (as a result of differing

developmental needs and goals) and even between developed or developing country

blocs. India strongly subscribes to the multilateral approach to trade relations and grants

MFN treatment to all its trading partners, including even those, which are non-members

of the WTO. Within the WTO, India has committed itself to ensuring that the sectors in

which developing countries hold a comparative advantage are adequately opened up to

international trade and also that the special Differential Treatment Provisions for

developing countries under various WTO Agreements are translated into specific

enforceable dispensations in order that developing countries are facilitated in their

developmental efforts.

In line with the stance of many developing countries, India feels very strongly that the

multilateral system should reflect the concerns of developing countries. India supports its

arguments with basic principles. The Uruguay Round negotiators stated their intentions

clearly in the Preamble to the Marrakech Agreement establishing the WTO. They

recognised that "their relations in the field of trade and economic endeavour should be

conducted with a view to raising standards of living and ensuring full employment and a

large and steadily growing volume of real income”. They also recognised "that there is

need for positive efforts designed to ensure that developing countries, and especially the

least developed among them, secure a share in the growth in international trade

commensurate with the needs of their economic development." As India sees it,

globalisation has caused uneven growth, increasing the disparities between the richest

and poorest nations. There is need to address the implementation of existing

agreements and operationalising the special and differential clauses in favour of

developing countries.

India's WTO Commitment

Like other members of the WTO, India has a commitment to the multilateral body, both in

the formulation of policies and in the adherence to agreed policies. For the purpose of

this paper, it will suffice to look at India's stance regarding:

a) trade and foreign direct investment

b) the environment, and,

c) Science and technology, especially issues regarding trade related aspects of

intellectual property rights (TRIPS).

a) Trade and Foreign Direct Investment.

Since 1991, successive governments have progressively reduced tariff protection and

simplified India's restrictive import licensing regime. Tariffs have been reduced from an

average of 71 percent in 1993 to a current average of 20 percent. Also the number of

items subject to import licensing has been reduced, albeit with an emphasis on industrial

and capital goods. There is still need for further reforms in the import-licensing regime

and in the tariff structure, which remains complex and high in several industries.

India has simplified its foreign investment regime and opened up a number of sectors to

foreign direct investment. Foreign participation of up to 51 or 74 percent can take place

automatically in the manufacturing sector. Production in the food-manufacturing sector

has grown rapidly following increased investment. In this sector, up to 50 and 100

percent participation is allowed automatically for foreigners and non-resident Indians.

Permission for controlling equity in automobile manufacturing has triggered a high rate of

investment. The gap between FDI approvals and out-turns remain stubbornly high, with

the latter representing less than one-third of the former, at best. Greater transparency

and speed in decision-making could promote a more efficient and productive out-turn

b) The Environment (Montreal Protocol)

The Montreal Protocol on substances that deplete the ozone layer is a landmark

international agreement designed to protect the stratospheric ozone layer. The treaty

was signed in 1987, by 24 original members, and substantially amended in 1990 and

1992. The original list of members has expanded to 175. The Protocol stipulated the

phasing out of compounds that deplete the ozone layer by 2000 (2005 for methyl

chloroforms). India acceded to the Protocol on 17 September 1992. In 1993, it

proposed a detailed country programme to phase out ozone depleting substances (ODS)

in a manner that will not put undue economic burden on both consumers and industry.

Such a stance obviously causes delay in meeting international obligations but India

intends not only to meet its obligations but also continue to contribute to the formulation

and implementation of policies to achieve the provisions of the treaty.

c) The TRIPS Agreement.

While India takes several issues (see below) with the trade-related aspects of intellectual

property rights (TRIPS) agreement, it has taken steps to meet some of the provisions

and intends to meet the deadline provided to developing countries. The TRIPS

Agreement is based on the recognition that increasingly the value of goods and services

entering into international trade resides in the know-how and creativity incorporated into

them. As table 7 shows, technology goods have greatly expanded their share of global

trade, from 54 percent in 1976 to 72 percent in 1996. The TRIPS agreement, therefore,

seeks to provide minimum international standards of protection for such know-how and

creativity in the areas of copyright and related rights, trademarks, geographical

indications, industrial designs, patents, layout designs of integrated circuits and

undisclosed information. It also contains provisions aimed at the effective enforcement

of such rights and provides for multilateral dispute settlement. Transitional periods by

which developed, developing and least-developed countries should meet obligations

under the Agreement are respectively January 1996, January 2000 and January 2006.

 

For reasons that will be discussed below, India, like China, has shown signs of

resistance to quick enforcement of the provisions of TRIPS. However, under pressure

from its own domestic industry and the United States, India strengthened its copyright

law in May 1994, placing it at par with international law. The new law, which came into

effect in May 1995, fully reflects the provisions of the convention on copyrights, to which

India is a party. India is required to comply with WTO-standard IPR laws by 2005. In the

meantime, India plans to participate fully in the evolution of a more equitable system

through the various forums.

TRIPS and India's Negotiating Stance with the WTO

The problems inherent in any system as complex as the WTO and comprising so many

members with differing interests, aims and objectives, cannot be overemphasised. Not

surprisingly, India while committed and having much faith in the multilateral body and in

multilateral negotiations, also has many apprehensions and disputes. Detailed

discussion of India's concerns is beyond the scope of this paper. Owing to its relevance

to this paper, we will consider India's negotiating stance with the WTO with regard to the

Trade-related Aspects of Intellectual Property (TRIPS).

Agreement.

The TRIPS Agreement constitutes one of the most thorny issues in the WTO debate.

India sees two sides of this important coin that are difficult to reconcile. On the one

hand, there is provision to ensure availability of technology for development, especially to

developing countries. On the other, there is the recognition that owners of technology

need to be compensated for their proprietary knowledge. The debate has thus polarised

into one of developed versus developing countries’ interests. The preambular objective

of the TRIPS Agreement is a desire to ensure that measures and procedures to enforce

intellectual property rights do not themselves become barriers to legitimate trade.

Another objective is to contribute to the transfer and dissemination of knowledge and

technology with a view to aiding socio-economic and technological development.

India raises three important issues regarding the TRIPS Agreement. These are (i)

technology transfer; (ii) biodiversity; and (iii) geographical indications.

i) Technology Transfer

Article 7 of the TRIPS Agreement states that “the protection and enforcement of

intellectual property rights should contribute to the promotion of technological innovation

and to the transfer and dissemination of technology to the mutual advantage of

producers and users of technological knowledge, and in a manner conducive to social

and economic welfare, and to a balance of rights and obligations”. The statement is

clear in its recognition of the right of owners/developers of technology to seek a return on

their investment and of the obligations placed on users to provide compensation for

appropriating such knowledge. In recognising that the possibility exists for imbalance in

this two-party system, Article 8.2 states that appropriate measures may be needed to

prevent abuse of intellectual property rights by holders or “the resort to practices which

unreasonably restrain trade or adversely affect the international transfer of technology”.

Urata (1998) argues that there is no evidence of transfer of technology to developing

countries. A recent analysis of the mode of technology transfers since the mid-1980s

suggests that since the mid-1980s there has been a reversal of the popularity of arm’s

length licensing towards intra-firm transfers. It notes that 80% of transfers by US

companies and 95% by German companies in 1995 were made on internal basis as

against figures of 60% and 92% respectively in 1985. Yet, the transfer of technology at

fair and most favourable terms has been highlighted in all discussions and debates on

sustainable development. The preambular statement of the WTO affirms the objective of

sustainable development in a manner consistent with the respective needs and concerns

of members at different levels of their development. The WTO is thus obligated by

implication, India argues, to facilitate easy access to and wide dissemination of

technology relevant for sustainable development. On the contrary, the adoption of

TRIPS is likely to restrict the imitative and adaptive R&D that most firms in developing

countries carry out (Kumar et al 1997) and which formed the basis of development in

many now advanced nations during their period of development.

The issue India takes with the TRIPS Agreement includes, inter alia, the following:

a) the fact that the TRIPS Agreement in its current form might tempt IPR holders to

charge exorbitant and commercially unviable prices for the transfer or dissemination of

technologies held through such IPRs. High cost of technology prevents poorer

developing countries from acquiring appropriate technology. There is thus need to

develop systems for the effective transfer of technology at fair and reasonable costs for

developing countries so as to harmonise the objectives of the WTO Agreement and the

TRIPS Agreement.

b) Article 40 recognises that licensing practices or conditions pertaining to IPRs could

restrain competition and have adverse effect on trade. Also, Article 66.2 obliges

developed country members to incentivise their enterprises to transfer technologies to

least developed countries. There has been very little progress on this front and there is

concern about the effectiveness of the Agreement to facilitate technology transfer.

c) A variant of the technology transfer agenda relates to the Committee on Trade and

Environment and the need to meet international environmental standards. The concern

here regards the need to make available, upon demand, environmentally-sound

technologies at fair and favourable terms to countries which have an obligation to adopt

these standards under international law.

d) Prospective technology seekers in developing countries face a number of difficulties in

their commercial dealings with holders in developed countries, namely those that arise

from imperfections in the market for technology, those attributable to the lack of

experience and skill in adequately concluding legal arrangements in the acquisition

process, and those government practices in both developed and developing countries

that influence and conditions the flow of technology. These difficulties need to be

addressed specifically in order to fully implement TRIPS provisions on technology

transfer.

(ii) Biodiversity

India sees an urgent need to harmonise the approaches to the utilisation of living

resources contained in the TRIPS Agreement, on one hand, and the UN Convention on

Biological Diversity (CBD), on the other. The CBD categorically reaffirms that nation

states have sovereign rights over their own biological resources and recognises sharing

equitably the benefits that arise from the use of these resources, as well as from

traditional technology and knowledge. The TRIPS Agreement on the contrary, does not

address issues relating to patenting of plants and animals or to the issue of benefit

sharing in the commercial exploitation of in situ materials. It is important to reconcile the

provisions of the CBD and those of the TRIPS Agreement within the overall objective of

conservation of biological resources with sustainable development.

(iii) Geographical Indications

Geographical Indications of goods refers to the indication which identifies such goods as

agricultural goods, natural goods or manufactured goods, as originating or manufactured

in the territory of a country or a region or locality in that territory, where a given quality,

reputation or other characteristic of such good is essentially attributable to its

geographical origin, and in case where such goods are manufactured goods, then either

the goods are manufactured or processed in such territory, region or locality as the case

may be. Article 23 (Section 3 of Part 11) provides for additional protection for

geographical indications for wines and spirits. Unfortunately, such protection is not

available to other goods. India considers this a serious anomaly and proposes that such

higher level of protection should be available for other goods such as export-interest

items like basmati rice, Darjeeling tea and alphonso mangoes.

5. The Future of Science and Technology Policy in India

India has achieved world-class excellence in a number of science-intensive sectors such

as nuclear power, satellite communications and defence. Since nearly half of R&D

spending is incurred in theses sectors, the Government has been concerned to enhance

the spin-offs from these investments as well as encourage technology transfers between

these research centres and between the centres and the wider industry. India can also

be described as truly scientifically-proficient in many other years.

Even so, the Department of Science and Technology realises that there is urgent need to

"revitalise the scientific enterprise" of the country and raise the standards of S&T in

Indian institutions to meet the challenges of an increasingly technological world. The

Minister for Science and Technology, Dr Murli Joshi, has emphasised the need for India

to evolve its own S&T policy that is deeply rooted in the Indian “ethos of a holistic and

interactive approach to human nature and development” (Andhra News, 12/09/2001)..

To this end, the DST set up a committee under the chairmanship of Professor

Goverdhan Mehta in October 2001 to prepare a draft S&T Policy document and

implementation strategy for the years ahead. The document, which will be finalised this

year is ambitious and forward-looking and aims, inter alia, to

i) promote the teaching and practice of all disciplines of science at school and

college levels,

ii) encourage the participation of all sections of the population in S&T endeavours

iii) ensure that academic and R&D institutions function with the greatest autonomy

and accountability,

iv) integrate the teaching and practice of science with the widely prevalent and

existing knowledge,

v) harness modern scientific and technological advances so that rapid progress is

made in the improvement of the quality of life of the people

vi) encourage the highest level of innovation and R&D in industry and to promote

private/public collaboration in all areas of S&T,

vii) integrate science and technology with all spheres of national activity in order to

enhance India's global competitiveness,

viii) exploit the full power of S&T for the mitigation of natural hazards, particularly,

earthquakes, floods, cyclones and drought,

ix) use S&T as a vehicle for international co-operation and collaboration and to

promote the pooling and sharing of material and intellectual resources for common goals.

In effect, India plans to integrate science and technology into all spheres of national

activity and gear the generation of scientific and technological developments to poverty

alleviation and the improvement of the quality of life of its nationals.

India has achieved remarkable competence in a number of scientific and high-technology

areas. In the area of nuclear science and technology, it has developed competence in

atomic weaponry, nuclear power generation and the use of nuclear science in medicine.

India has successfully designed, built and launched its own communication satellite

systems. It’s strength in software design and IT is well known. This has become a

magnet for drawing global IT businesses into the economy. Recently, India unveiled it

first passenger jet aircraft and proposes to enter commercial airline production.

The new policy document is geared to strengthening these areas as well as developing

capabilities in other areas of national interest. India maintains collaborative S&T

projects with many advanced and developing countries. Although India has had S&T

ventures with a number of European countries, notably Britain and Germany, the first

EU-India agreement on co-operation in S&T was signed in July 2000. The agreement

seeks to encourage EU-wide collaboration with India in several areas of science and

technology. India proposes to strengthen its existing S&T ties as well as enter into new

ones for mutual benefit. It is also poised for a bigger voice in multilateral negotiations

with a view to working for a fairer system for developing countries.

6. Summary and Implications for EU-wide S&T Policy

The prosperity of any economy depends on the productivity of its economic assets. Many

studies have shown the vital role technological innovation plays in engendering

productivity growth and long-run economic growth, and in determining a nation’s

standard of living. In a globalising world economy, the link between innovative capacity

and prosperity has grown ever tighter and a rapid rate of innovation is needed to drive

productivity growth. Advanced countries are becoming increasingly labour-constrained.

Maintaining economic growth will, therefore, demand a stepped-up rate of innovation,

and perhaps, the importation of skilled labour from other countries, as has been

witnessed in some countries in recent years. Economic development in developing

countries will in a similar vein depend on a more efficient use of resources as well as

stepped-up innovation.

Like other countries, India in its quest to achieve industrialisation and improve the quality

of life of its people, has fostered an Industrial and S&T policy since the early years of

independence. Although it has achieved much progress in the area of science and

technology, a policy of isolationism and a failure to develop an appropriate mix of the

determinants of an effective NIS, has meant that today, India’s performance is much

lower than would have been the case otherwise. The poor performance started in the late

1960s. In the protected regime that India went for, it could not build capacity to innovate

and produce internationally competitive technologies. The process of liberalisation that

started in the 1980s and accelerated in the 1990s, however, put competitive pressures

on Indian firms to modernise and upgrade their technologies. At the same time, many

MNEs entered the Indian market via FDIs and technology investments. Several foreignowned

and jointly-owned R&D centres have been established. Indian organisations and

institutions have been encouraged to become more commercial-orientated and outwardlooking.

Other measures have included direct intervention in forging links between

industry and universities and among firms, strengthening of existing infrastructure and

the creation of new institutions that may have important ingredients in the innovation

chain.

To meet the increasing challenge of globalisation, India has drawn up a new science and

technology policy document, which will form the basis for enhancement in its

technological capability in the coming years. The new document recognises the need to

shift the emphasis from S&T policy to “innovation” policy. To this end, the document aims

at establishing and strengthening techno-economic network rather than supporting

science and technology per se.

India’s history of science and technology policies holds valuable lessons for other

industrialising developing countries, and indeed for EU-wide S&T policies. While the EU

is composed of advanced and mostly scientifically advanced and proficient countries,

efforts to establish a EU-wide policy regime are worthwhile. First and foremost, an

agenda for EU-wide research (the ERA agenda) is a legal and political obligation under

the Amsterdam treaty. This recognises research and technological development (RTD)

as an essential element of industrialisation and employment, competitiveness and the

protection of its citizens and the environment. Secondly, an EU-wide S&T platform is

justifiable on account of the synergies that can be obtained from the fact that a) high level

research is increasingly complex and interdisciplinary; b) high level research is

increasingly costly, and c) certain high level research projects demand substantial

“critical mass”. Thirdly, EU countries conduct less research than Japan and the US. To

remain competitive, there is need to catch up with these major competitors.

Some lessons may be gleaned from the Indian experience with regarding to strategies

for achieving an effective policy regime at the EU level. Firstly, there is need to ensure

that research expenditures are cost-effective. India spent substantial sums of money

without engendering an effective NIS. Apart from exploratory basic research, efforts

should be made to achieve perceived potential benefits. Secondly, efforts must be

directed at determining what synergies, if any, exist between the S&T regimes of

member countries and develop strategies for exploiting them. This may imply a) the

mutual opening-up of national programmes; b) the networking of national level research

activities; c) the strengthening of existing EU S&T collaborative and joint initiatives; and

d) the establishment and strengthening of existing S&T ventures between the EU and

R&D proficient countries, such as India, in areas where these countries have

considerable strengths; and, f) the strengthening of the links between industry and

academia. Thirdly, steps must be taken to open up any protected markets to foreign

competition. This will induce EU firms to become globally competitive. India’s

companies lost the ability to compete in the protected environment in which they

operated. Lastly, the EU must take a leading role in multilateral negotiations with a view

to promoting proposals, which enhance free trade, sustainable development,

environmental protection and international relations.

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