Technological acquisition and investment: lessons from recent indian experience

Abstract

Most of the existing studies on investment functions ignore the role of technology acquisition in influencing investment decisions. This study argues that technology acquisition will decisively influence investment behavior, modernization, and expansion plans of firms. However, capability of the firms to acquire technology differs considerably. Following the Schumpeterian paradigm, we maintain that the entrepreneur's decision to invest and expand would depend on the technological opportunities available. The main role of the entrepreneur in the Schumpeterian framework is to exploit an invention or new technology in introducing new processes and products. The policy regime in India prior to 1985 did not permit the firms to take advantage of technological opportunities created abroad in introducing new technologies and expanding their capital base. The reforms introduced since 1985, for the first time, permitted the Indian firms to expand their product range, introduce new technologies, and increase their capacities without obtaining prior official sanction. This study, therefore, examines the role of technology acquisition in influencing investment decisions of private corporate firms in the aftermath of Indian economic reforms introduced in 1985. Using pooled cross-section data for 1987-88 to 1989-90 on a sample of 325 large corporate firms from seven industries, the present study examines the interfirm differences in investment behavior. The focus is on the impact of the first phase of economic reforms introduced in India post-1985. The model specified in the study postulates that acquisition of new technology made possible by economic reforms brings down costs and boosts demand. This increases the profit rate for firms using new technology. Technology acquisition per se takes place through technology imports via licensing or arms-length purchase of technology through the market, intrafirm transfer of technology by way of foreign direct investments, and direct import of capital goods embodying new technology. The process is facilitated by R&D expenditures. Empirical tests of the model carried out for each industry separately indicate that interfirm differences in the investment rate at the firm level are due to a number of factors. Opportunities to import machinery and license technology through arms-length purchase of technology influence the investment rate positively as these expenditures promote acquisition of technology. In other words, a government policy aimed at discouraging technology imports would also deter the growth of firms. Government policy before 1985 did hinder technology imports. This was partly to protect indigenous technology and partly to conserve foreign exchange. The results of the study further show that in-house R&D expenditures promote capacity expansion. This is despite the fact that most sample firms had small R&D budgets. Firms with R&D units are better placed to locate new technology and adapt it to suit Indian market conditions. This facilitates exploitation of technological opportunity leading to expansion of capital stock. However, the ability of a firm to exploit technological opportunities depended, to a considerable extent, on the age of its plants and machinery. This is because firms with older machinery and plants find the switch to new technology more difficult as most of their equipment and machinery are not suitable for modernization. The results of the study show that firms with machinery of recent vintage modernize and expand their capital base, using new technology, since it is easier for them to make the change. These empirical results have several policy implications for decision-makers in both the public and private sectors. The policymakers can draw inferences about the positive impact of the economic reforms on the capacity expansion and growth of firms. This, perhaps, provides a justification for taking the reform process to its logical end. Because economic reforms facilitate technology acquisition and capacity expansion, decision-makers ought to initiate the reform process in other spheres where it is yet to commence. Furthermore, modernization of plant and machinery and technology acquisition are a continuous process. The cost of modernizing a plant with dated machinery will be very high as older, outdated machinery is not compatible with the current vintage. An upgrade, therefore, is difficult if not impossible. Interruption of a technological upgrade due to changes in government policy ranging from total ban on technology imports to liberal import policy would enhance the cost of technology acquisition. The empirical results also indicate that even modest R&D activities facilitate the identification, location, and importation of relevant technology. Thus, firms with in-house R&D units grew faster. In countries like India, vigorous encouragement of R&D ought to be on the policy agenda of both corporate and government policy framers. Though our sample deals with Indian firms, it has relevance for other countries, because in most countries higher growth rates are being registered in industries that have been experiencing rapid technological development with better technological opportunities. Further, in a given country, firms that went in for acquisition of new technology invested more.