THE current approach to the Eleventh Plan identifies that the “growing interest of foreign direct investors in the economy provides a valuable method of injecting resources into the economy, upgrading our technological standards and building international partnerships which can have many positive effects.” Therefore – according to the Approach Paper – the only measure needed for technology development is to provide world-class infrastructure and more foreign investor friendly climate. The Approach Paper is rooted in the neo-liberal model of globalisation, where autonomous development of technology is hopeless. The only hope of acquiring advanced technology is to become junior partners to MNCs.
In this view, as the MNCs control the current generation of technologies and are creating the next generation ones, the only possible route to advanced technology lies in partnering them. The evidence however does not show that MNCs cause diffusion of advanced technology systems in other countries; such advances tend to remain within the fold of these companies only. The entry of major brand names into other countries is the primary thrust of the MNCs. Therefore, catching-up in technology does not take place automatically by allowing MNCs free entry including location of their R&D facilities.
The current WTO battle between the developed countries and the developing ones is a defensive one from the point of view of developing countries. While the developed countries want to open the markets of the developing countries further, the G20 or G90 are trying to restrict this as well as extract some concessions. However, a change in the terms of trade demands that we look how different countries are integrating themselves at different levels in the global economy. Control over advanced technology is the key to determining the level at which countries integrate themselves. At the lowest rung are countries that are bartering their natural resources for manufactured commodities. At the middle level, are countries like China, Brazil, India, South Korea, etc., which are able to win some space for themselves and are able to sell manufactured goods; at the top of the heap are advanced countries, who not only sell knowledge intensive goods but also knowledge itself as a commodity. The key question therefore is how to catch up in technology. It is only by catching up in technology that the larger question of a more equal world can be resolved.
Though in opposition to neo-liberal globalisation, some radical forces are equally pessimistic about developing technology without the MNCs. Therefore they propose a relatively autarchic and ‘closed’ economy. Obviously, as this closed economy cannot reproduce all the advances made elsewhere, the need then to reject the consumerist life style of the ‘west’: the terrain of struggle is then one of life styles. While issues such as consumerism and paths of development are important, limiting the growth of technology based on such considerations alone would inevitably lead at some point to the failure of such a closed economy: autarchy is not an option in the world of today. Partially de-linking the economy may be transitional path, but in the long term, catching up in technology is the only way to break out of the cycle of under-development and dependence.
It might appear that as technological development is dependent on the already existing pool of technological knowledge, companies or countries that already have this knowledge are the more likely to develop technology. Further, it has been argued that economies of scale operate in developing technology also: the bigger the R&D player, the bigger are the chances of making the requisite knowledge breaks. Since less developed countries neither have this existing pool of knowledge nor can hope to match the scale of R&D investment required, it might appear that they are forever condemned to backwardness. Reality however is not that bleak. The continuous nature of technological change opens out windows of opportunity for others. The neo-liberal model misses out the changing nature of technology and a dynamic view of the process. That is why their advocacy of the global MNCs as the only vehicle of change.
While the earlier model of indigenisation that many countries pursued did help to build a large manufacturing base – India, South Korea, Brazil – all being examples of this, in a period where technological change is extremely rapid, such an indigenisation model may no longer work. Therefore, while indigenisation is what has led to countries such as India having successfully built up a real manufacturing and knowledge base, this may not be enough in the fast changing technology world of today. We need not only to understand the technology cycle but also the absolute measure of time in this technology cycle. If the entire cycle from birth to death of a technology – as it is in the semi-conductor technology – is only 24 months and not 10-15 years as it used to be in the early 20th century in the automobile industry, the strategies of entry and survival also need to change. We, therefore, need to examine the impact of continuous cycle of innovation on our indigenisation paradigm and modify it accordingly so as to take advantage of the windows of opportunity and break the technology cycle.
Each technology that enters the market, starts with a number of variants in its early phase, standardises to only a few in the course of a shake out period and then remains in its mature phase for some time before undergoing another cycle of innovation. This is the technology cycle. A number of studies have shown that firm size helps in entering the market and staying the course. However, it helps less in high technology areas, where entry by small firms is quite common. In contrast, innovation in mature technologies is much more likely to come from large firms, where the existing pool of knowledge pre-requisite for such innovation is likely to be within the larger firms. The small firms stay here in niche markets and not as competitive threats to the big.
In the first phase of a new technology, the investment cost required to enter the market is quite low. However, the human capital or knowledge required is high. The first phase therefore requires human capital in terms of knowledge and trained human power. Getting on to new technologies right in the beginning allows a low entry cost, but also a higher risk of failure. Not all such attempts will succeed. But some will, and this allows firms (and countries) to adopt what can be called a ‘fast seconds’ approach to innovation. This is what Japan had done earlier. South Korea has also demonstrated a similar ‘fast seconds’ approach and both these countries have invested heavily in R&D after their initial market successes.
The other entry point in entering the technology cycle is at the mature phase of technology. Here the investment costs are high but risks are low. Traditionally, Indian entrepreneurs as well as the State sector have chosen this route. In this, obviously, the terms of global integration do not change, as the skill level required at this stage is not very high. However, having entered at this level, for survival firms have necessarily to be large. This opens up the possibility of entering the next phase of innovation cycle, provided they have a strategy of doing so.
One of the consequences of rapid technological change is that repeated windows of opportunity will appear in terms of developing new technologies. We need to focus on where and how we can leverage our strengths, either in terms of the market or in technical expertise and knowledge to develop future technology. We must also work out a two-pronged strategy: one in which we focus on important areas but with stable and mature technology. The other is a strategy of entering very early in new technologies, which have a much larger impact.
ENTERING CYCLES AT DIFFERENT PHASES
There are two kinds of innovations: one is incremental innovation, more important in the more mature technologies; the other is new technology – those that break with the past decisively. The important aspect of such new technologies is that they are characterised by a number of simultaneous innovations (or innovation clusters) and generally form a close network of formal and informal relationships. That is why hi-tech industries tend to locate themselves in close geographical proximity.
The characteristic of new technology innovations is that they generally do not occur within the confines of the large firms. Large firms tend to concentrate on technology that is useful to their current core set of products. This is where existing knowledge is generally confined to the company and providing an advantage over outsiders. However, new technologies generally do not have an existing pool of knowledge except external public domain ones and this allows “outsiders” to compete on equal terms with larger firms. In fact, larger firms are handicapped as they may regard such products or technologies to be competition to existing lines and tend to mothball such technologies. Most often, large firms buy up the successful innovators after the technology is seen to be successful rather than promote such technologies themselves.
The other critical question is the relationship between new technologies and state support. Neo-liberal theorists argue that resource made available to R&D funding from state sources mean that more efficient forms of private resources are crowded out. They therefore argue that private and venture capital is best suited for developing new technologies and therefore for a disengagement of the State from such funding. The evidence from the US shows clearly that this is not the case. Even with well-developed venture capital, the role of the State is crucial in nurturing new technologies (Branscomb, Lewis M and Philip E Auerswald, Between Invention and Innovation: An Analysis of Funding for Early-Stage Technology Development, NIST GCR 02-841, 2002).
As we have discussed earlier, the two entry points in the technology cycle are either the first phase, where the capital costs are low and knowledge is available in the public domain; the second is the mature phase where the technology is relatively stable and if there are large domestic companies, they can be used to break the cycle of dependence. If we want to break the cycle of dependence, we should look at each of these areas: new technologies as well as areas where there are already large domestic firms.
If we look at the technology scenario today, energy sector is a relatively mature technology. In this, there is obviously a renewal of old technology stock that is taking place with the new generation of automation and materials entering the market. But such renewal is necessarily much slower than the speed with which new technologies are developing, for example, in the IT, telecommunications, entertainment and automation technologies. The strategies that are required for the energy sector are relatively different than that of the new technology sectors mentioned above.
The energy sector falls, therefore, more into the mature phase of the technology cycle. It means that it needs large firms or institutions that have already accumulated enough knowledge to develop the next generation of incremental innovation required for the sector. It also would penetrate slowly, as the capital costs of existing plants are sufficiently high for them not to be written off with any new technology unless it is a dramatically different one with far greater bang for the buck than the current ones.
In energy, India already has large public and domestic private sector undertakings (BHEL, L&T, etc.) that have the requisite size and expertise to develop the next generation of technologies. All the conditions of developing innovation in the mature phase exist in these entities. We also have one of the largest markets for power equipment in the world. The only support that is required is that of State policy. This is what China and South Korea are doing: using their captive market to force large global corporations to transfer technology and use this to develop the technology further. If we believe that technology can only be created through MNCs, we would then miss a real window of opportunity that exists: a captive market and an institutional set-up capable of developing new technologies in these areas.
The task is to have a strong national program supported by a strong network of institutions, which then can be developed further to break the monopoly over technology of a select few large global corporations.
The other area is automation technologies. However pervasive the energy sector is, its major revolutionary impact was during the industrial revolution and introduction of mass manufacture. Automation technologies today are virtually changing the way companies produce goods and take them to the market. If energy powered the earlier revolution of mass manufacture, this one bids fair to change the paradigm of mass production to flexible production systems. Instead of mass production, we are seeing the first phase of the mass customisation market. And this means the rules of the game are being written anew.
The production systems today are changing rapidly from mass production of goods to mass customisation of goods. Mass production, starting with the industrial revolution to the Fordian paradigm, brought down cost while providing high quality. It achieved this using standardisation of components and goods, economies of scale and quality control. However, it produced rigid production structures, large plants and eliminated or minimised customer choices. As Henry Ford was reported to have said, “You can have any colour as long as it’s black”. The end user was willing to sacrifice variety for quality and low cost. Customised goods remained but as expensive goods for an elite and a niche market.
This is still the way the majority of manufacturing is performed today. But things are starting to change. In addition to high quality, low cost, and fast delivery, many customers now demand products that exactly fit their needs. We are moving towards an environment where factories will start combining mass production and customisation into “mass customisation.” The customer today wants variety and high quality and wants it at the same cost. However, this is not mass customisation. Mass customisation is the customer expecting his or her exact specification to be produced in the factory and reach him/her in a matter of days. The factory taking the order from the customer then has to schedule the production process and meet the delivery target of a few days. This is the direction we are moving today in manufacturing systems: nimbleness and agility of manufacture coupled with flexible production.
The other change in the production process is that it is possible to de-scale technology far more effectively. This allows much smaller plants to be competitive in the market. Large plants with the economies of scale and rigid structure are giving way to much smaller plants.
All this allows us to look at automation technologies and how to upgrade our small producers to become globally competitive. Earlier, advanced technology automatically meant large plants. This is no longer true. It is possible to use state-of-the-art technology of automation in selected parts of the process that requires such high quality controls, while retaining other parts of the production process to be largely manual. Such a possibility would mean that large parts of Indian industry, which is currently finding it difficult to compete either domestically or internationally, would be able to provide goods at lower costs but with the requisite level of quality: they can be competitive not only in terms of costs but also in terms of quality.
However, this will not happen by itself. India needs a directed effort from the State to develop such automation technologies, as well as de-scale the production processes. If this does not happen, large parts of Indian industry – small and medium scale – would just die out with increased global competition.
The key to automation technologies is software. And this is where some of the most exciting developments have taken place recently in technology development. The GNU/Linux operating system is only one example of open source and free software developments. Other examples of collaborative models of development are developing not only in software but also in biotechnology. India is already an emerging software super power. All that it needs is the State to support a major effort to produce the new technologies of automation so that we can climb on to the on-going mass customisation paradigm that is opening up in the world. Such an effort to support our small and medium scale sector is all the more needed since we have the capability to develop cutting edge technology due to our software skills. All we need is a change in mind-set: instead of body shopping to global software companies, develop new automation technologies by ourselves.
India has high quality of research personnel and software professionals available at a very low cost. Can we as a nation leverage this strength to capture a niche in the global market and from there deepen and widen our salience? This is the challenge that we face today. I believe that such a project will not only help Indian industry but can also be collaboratively developed with other third world countries to provide meaningful industrial solutions for the future. And only this will produce a more equitable global order. Defensive battles in WTO will only get us some temporary respite. What we need to do is to change the terms of integration itself. That can only come from developing the next generation of technologies.