Volume 17, Number 2 Article by Vinish Kathuria and Smruthi Das June, 2005
Impact of FDI on R&D Strategies of Firms in the Post-1991 Era :
The liberalisation of the Indian economy in 1991 has resulted in many MNCs setting up base in the country. In order to compete with these firms, domestic firms have to either innovate or use new technology in their production process. With the reforms making technology imports cheaper, the trend among local firms is to import technology from abroad instead of spending on R&D. Given the fact that a vibrant and competitive domestic manufacturing sector is indispensable for the growth of a country, particularly in the strong patent regime that the world is moving towards, such a strategy may not prove viable in the long run. It is uncertain whether the step of doubling government expenditure on R& D in the Tenth Five Year Plan will strengthen the R&D base of the manufacturing firms.
Against this background, Vinish Kathuria and Smruti Das undertook an investigation into the effect of FDI on the R&D activities of the domestic firms in the 90s, to find out whether post-1991 FDI has substituted in-house R&D or encouraged it. To this end, the effects of FDI inflows on the innovation strategies of 190 local firms belonging to seven industries are analysed, using Probit and Tobit models. The data for two years, 1996 and 2001, were used in order to differentiate between the period immediately after liberalisation and the later one, when the effects of liberalisation were expected to have been absorbed. The results show that in the post liberalisation era, the relationship between FDI and domestic R&D has undergone a change, with substitution coming out clearly in the later period. This implies that wide-open FDI and technology transfer policies may not always be conducive for domestic technological efforts, and we need to rethink our FDI policy, aiming at a more target-oriented and selective approach.
Reprint No 05201
