FDI as arranged marriage

FDI as arranged marriage

The National Manufacturing Competitiveness Council, or NMCC, an advisory group set up by the Prime Minister, has suggested that the government should reconsider current policies on foreign direct investment, or FDI, that make it very easy for global firms to set up wholly owned subsidiaries in India. In most industries, multinational companies should be asked to come in only with local partners, says NMCC.

NMCC’s advice owes more to East Asian-style industrial policy rather than the old swadeshi view of the world. The aim is to ensure that FDI leads to technology transfer.

It is perhaps no surprise that the advisory body is headed by V. Krishnamurthy, a former chairman of Maruti Udyog. He couldn’t have missed a cue from South Korea, where the 1962 automobile industry promotion policy banned all foreign automobile companies, except in partnership with domestic firms. Toyota first and then General Motors partnered with the South Korean firm that went on to become Hyundai Motors.

Some technology dispersion does happen naturally through a firm’s supply chain. But fine-tuned government intervention, according to economists such as the late Sanjaya Lall of Oxford University, is vital for technological transfusions as well.

In the 18th and 19th centuries, technology dispersion automatically followed from foreign investments, as with British investments in the US. But today’s restrictive intellectual property rights, or IPR, regime dampens technological diffusion across the world. In a “second-best" world, the proposed regulation can be seen as a counterweight to the IPR regime.

Foreign firms essentially trade some IPRs, by entering into partnerships with local firms, against the benefits of access to growing markets. A country such as Bangladesh is unlikely to benefit from such a policy, since it has little to offer in return. Only if India sustains its robust economic growth would foreign firms be willing to make the trade-off between technology transfer and market access.

A variant of this policy was tried out during the tentative reforms of the 1980s, but with mixed success. Those lessons, too, need to be kept in mind.

Should foreign firms be forced to come in with local partners? Write to us at views@livemint.com