Technology Transfer Through FDI In India

Foreign technology collaboration is widely perceived as an effective means to address the technology gap in any developing economy. However, any foreign technology purchase is ruled by the various specific terms of technical collaboration contracts imposed by the technology supplier on the licensee. A number of restrictive and prohibitive intellectual property and other conditions may largely restrict the scope of technology transfer to the licensee, in both ‘within firm’ and ‘open market’ purchases. Perpetual payments of high value, limited technology transfer and continued technological dependence on foreign collaborators may result, and local innovation efforts of Indian licensee firm may get fairly inhibited. Owing to lack of evidence on technical collaboration contracts, these underlying aspects of technology transfer process in India remain largely unexplored. Studies shows that the foreign technical collaborations of 164 FDI manufacturing companies in India and identifies a range of restrictive terms of foreign technical collaboration in many instances. Limited active absorption of foreign technology by local affiliates is indicated by companies in their disclosures in financial statements for a recent year. The local innovation initiatives are low or negligible for a majority of them.

Technology flows from an MNC parent to an affiliate located in a developing economy is considered as a prime source of technology transfer and a key contribution of FDI to the host economy by the policymakers in various developing regions today. It is assumed that once an MNC establishes a branch in a country, the trade in technology by the foreign affiliated firm in lieu of these payments lead to effective transfer of technology eventually through spillovers and regular absorption by the host nation. It is with these clear set of expectations that technology related payments have been encouraged by host developing economies over years and these payments are also directly considered as an approximate indicator of transfer of technology to them. In fact, the perceived technology transfer through foreign invested firms is one of the main reasons for promoting foreign investment and supporting the establishment of wholly or partially owned subsidiaries of MNCs through frequent trade and investment policy reforms by several developing regions of the world. The Indian case has been no different, where FDI is primarily viewed as a major vehicle of technology transfer by policymakers and has been actively and purposefully encouraged under a sequence of trade and foreign investment liberalization reforms so vigorously since 1991.

The company documents including the annual financial statements of these companies were procured from the MCA website. FDI invested companies were identified from the document that indicates the foreign shareholding in each company. For an identification of manufacturing companies and for mapping any company to an industrial group, the ITC HS code (4-digit) of the principal product (that earned highest revenue) in the study year 2015-16 disclosed by companies in the annual financial statements was used. Indian Trade Classification based on Harmonized System of Coding is provided by Directorate General of Foreign Trade (DGFT) that describes 98 product chapter codes under 21 sections. The information on the pattern of technology linked payments, research and development expenditure, technology absorption status and technical collaboration details (as far as traceable) were procured for the sample FDI companies from these annual financial statement’s documents (including information on Board of Director’s report) of individual companies. The extent of probable technological dependence on the foreign supplier has been assessed from the perpetual pattern of technology import, the inclination to develop local innovative capabilities and research efforts by select companies.

Inclination for Absorption of Foreign Technology and Local Innovation:

Efforts Under the provision of section 134(3)(m) with rule 8(3) of the Companies (Accounts) Rules, 2014, the additional information pertaining to ‘Conservation of Energy, Technology absorption, Foreign Exchange earnings and outgo’ are required to be disclosed as annexure to Report of Board of Directors by Companies together with their annual filing of Annual Financial Statements. The disclosures are required to include the information on efforts made towards technology absorption, the benefits derived like product improvement, reduction, product development or import substitution, and in case of imported technology (imported during the last three years reckoned from the beginning of the financial year), the details of technology imported, the year of import, whether the technology been fully absorbed, if not fully absorbed, areas where absorption has not taken place, and the reasons thereof, and the expenditure incurred on Research and Development are needed to be reported. This information that are part of the Director’s report are also available in the annual financial statement documents (XBRL format) of sample companies that were downloaded from MCA website, and they were used for the analysis.

Limited Scope of Technology Transfer under Restrictive Terms of Technical Collaboration:

In view of the prevalence of a range of restrictive conditions on the use and dissemination of intellectual property or technical knowhow in a number of customary technical collaboration agreements that may substantially limit the transfer of technology to any licensee located in a developing economy in present times, a closer review of the terms of foreign technical collaboration contracts is imperative. This is critical also because a rising number of such foreign collaborations involve financial relations with the technology supplier under FDI route. The possibility of technology transfer via the FDI mode of  technology acquisition in a developing host economy may remain largely limited, mainly due to the weak bargaining power of the licensee in such set-up. The specific terms of technical collaboration contract that may reasonably limit the technology transfer extent from the technology supplier or licensor to the affiliated or unrelated licensee and eventually to the host developing economy where the licensee is located are particular direct clauses linked to non-transferability and indivisibility of license, strict confidentiality or secrecy of intellectual property or knowhow, restrictions placed on use of technology and geographical territory of its application, strict duration of contract, stringent termination and post-expiration requirements, restrictions on research and development and grant back provisions. In addition, the terms pertaining to nonexclusively of license, export restrictions, tying-in clauses linked to sales or imports, provisions for quality control, non-competition clauses and other unfair terms reflect the control that the licensor may directly or indirectly exercise on technology or intellectual property. In effect, these prohibitive clauses collectively ensure that the purchased technology or knowhow remains an exclusive asset of the licensor with a very limited scope for eventual ‘real acquisition’ or ‘absorption’ by the licensee either during the duration of the agreement or even after the expiry or termination of contract.