LEARNING TO INDUSTRIALIZE Also by Sanjaya La/1 PRIVATE FOREIGN MANUFACTURING INVESTMENT AND MULTINATIONAL CORPORATIONS: An Annotated Biblio­ graphy FOREIGN INVESTMENT, TRANSNATIONALS AND DEVELOPING COUNTRIES (with ) THE GROWTH OF THE PHARMACEUTICAL INDUSTRY IN DEVELOPING COUNTRIES THE MULTINATIONAL CORPORATION: Nine Essays DEVELOPING COUNTRIES IN THE INTERNATIONAL ECONOMY: Selected Papers DEVELOPING COUNTRIES AS EXPORTERS OF TECHNOLOGY THE NEW MULTINATIONALS: The Spread of Third World Enterprises (with E. K. Y. Chen, J. Katz, B. Kosacoff and A. Villela) MULTINATIONALS, TECHNOLOGY AND EXPORTS THEORY AND REALITY IN DEVELOPMENT: Essays in Honour of Paul Streeten (editor with Frances Stewart) Learning to Industrialize

The Acquisition of Technological Capability by

Sanjaya Lall University Lecturer in Institute of Economics and Statistics and Fellow, Green College, Oxford

M MACMILLAN PRESS © Sanjaya Lall 1987

All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright Act 1956 (as amended), or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 7 Ridgmount Street, London WClE 7AE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

First published 1987

Published by THE MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG2l 2XS and London Companies and representatives throughout the world

British Library Cataloguing in Publication Data Lall, Sanjaya Learning to industrialize: the acquisition of technological capability by India. I. Technological innovations-India 2. India -Industries I. Title 338.4'567'0954 HD45 ISBN 978-0-333-43376-8 ISBN 978-1-349-18798-0 (eBook) DOl 10.1007/978-1-349-18798-0

The does not accept responsibility for the views and interpretations in this book, which are those of the author and should not be attributed to the World Bank or to its affiliated organisations. The findings and conclusions are the results of research supported by the Bank; they do not necessarily represent official policy of the Bank. The designations employed and the presentation of material in this document are solely for the convenience of the reader. With love and hope to Maya and Priya, our daughters Contents

List of Abbreviations ix Preface and Introduction xi

1 The Analytical Framework 1 1.1 What is 'technological capability'? 1 1.2 What TC comprises 3 1.3 How TC may arise 11 1.4 Costs and benefits of TC 20 1.5 Conclusions: some limitations 21

2 The Policy Setting 23 2.1 Introduction 23 2.2 Trade policies 24 2.3 Industrial policies 29 2.4 Science and technology policies 32

3 The Sample Background 38 3.1 Introduction 38 3.2 Manufacturing firms 39 3.3 Consultants 50

4 Cement 52 4.1 Technological background 52 4.2 Cement manufacturing in India 53 4.3 TC in a cement manufacturer 57 4.4 TC in two cement equipment firms 63 4.5 TC in a consultant 69 4.6 Conclusions 73 5 Steel 75 5.1 Technological background 75 5.2 Iron and steel manufacturing in India 77 5.3 TC in the public sector plants 85 5.4 TC in a private sector plant 93 5.5 Two metallurgical consultants 100 5.6 Conclusions 108 vii viii Contents

6 Textiles 110 6.1 Technological background 110 6.2 The textile industry in India 111 6.3 Textile machinery production in India 119 6.4 TC in two leading textile producers 121 6.5 TC in two textile equipment manufacturers 127 6.6 TC in a small consultant 139 6. 7 Conclusions 141

7 Special Case Studies 144 7.1 Hindustan Machine Tools 144 7.2 Bharat Heavy Electricals Limited 152 7.3 Hindustan Lever: a multinational affiliate 161 7.4 Bajaj 170 7.5 TELCO 175 7.6 Engineers India Limited 183 7.7 Summary and Conclusions 188 7.8 Appendix: BHEL's list of technology exports 191

8 India's Acquisition of Technological Capability: A Synthesis 193 8.1 Introduction 193 8.2 The technological setting 195 8.3 Some constraints on the three industries 197 8.4 Technological capabilities in the three sectors 200 8.5 The special case studies 217 8.6 Consultancy enterprises 224 8.7 Achievements and failures 226

9 Conclusions: General Implications for Industrialization 230 9.1 Introduction 230 9.2 Significance of technological learning 230 9.3 Nature of the learning process 233 9.4 Limits to TC in developing countries 238 9.5 Impact of government policies 239

Notes 242 References 242 Index 250 List of Abbreviations

Names of Firms (In Alphabetical Order)

Manufacturers ACC Associated Cement Companies Limited ABL Associated Babcock Limited Bajaj Bajaj Auto Limited BD Bombay Dyeing and Manufacturing Company Limited BHEL Bharat Heavy Electricals Limited HL Hindustan Lever Limited HMT Hindustan Machine Tools Limited LMW Lakshmi Machine Works Limited Reliance Reliance Textile Industries Limited SAIL Steel Authority of India Limited Star Star Industrial and Textile Enterprises Limited TELCO Tata Engineering and Locomotive Company Limited TIS CO Tata Iron and Steel Company Limited· WIL Walchandnagar Industries Limited

Consultants Bhagwati Bhagwati Associates (Private) Limited DC Development Consultants (Private) Limited Dastur M.N. Dastur and Company (Private) Limited ElL Engineers India Limited MECON Metallurgical and Engineering Consultants Limited

Other Acronyms

CSIR Council of Scientific and Industrial Research FERA Foreign Exchange Regulation Act MNC Multinational Corporation MRTP Monopoly and Restrictive Trade Practices Act NIC Newly Industrializing Country QC Quality Control R&D Research and Development RM Raw Material

ix x List of Abbreviations

S&T Science and Technology TC Technological Capability TE Technology Exports TNC Transnational Company Preface and Introduction

The ability to understand, deploy and improve upon technology is the essence of industrial development. This has been long accepted for the industrially developed countries. The significance of technological progress for developing countries has not, however, been properly appreciated. Perhaps it has been assumed that it is relatively easy for industrial late-comers to learn techniques which have been fully assimilated elsehere. Perhaps it is due to the neglect of 'minor innovation' which characterizes the study of technology more gener­ ally. Whatever the explanation, it is becoming clear with recent research that technological development in the Third World is an important, complex, and highly differentiated phenomenon. It is important because it constitutes the basis of successful industrial growth by the NICs (newly industrializing countries), as revealed by their produc­ tivity increases or penetration of international markets. It is complex in that it is neither easy nor automatic. It requires not just a base of skilled technical manpower, but deliberate, often risky, strategies of investing in learning and innovating. It is differentiated because it is highly sensitive to the economic policy environment. As such, differ­ ent developing countries show very different rates of technological competence, and different degrees of success in exploiting that com­ petence in industrial development. This book is concerned with the acquisition of technological capabilities in India. It draws upon the findings of a research project on 'The Acquisition of Technological Capability', financed by the World Bank. The project (RPO 672-48) was directed by Carl Dahl­ man and Larry Westphal, and covered four newly-industrializing countries. Apart from India, these were South Korea, Brazil and Mexico. The research started in 1982 and spanned nearly three years. There was an earlier phase of this project which covered exports of technology. The findings of this phase were published under my editorship in the May/June 1984 issue of World Development. Each country was studied by different researchers, following a similar methodology and using identical questionnaires. Each covered four common industries- cement, iron and steel, pulp and paper, and textiles- but also included particular case studies which appeared to be of special interest in terms of technological development. The

xi xii Preface and Introduction

Indian study initially covered 22 enterprises in total, 16 manufactur­ ing firms and 6 consulting engineers. For the purposes of this book, the pulp and paper industry was dropped, since many of its findings were similar to those of the other industries. Thus, this book deals with the experience of 14 manufacturers and 5 consultants. The book falls into three parts. The first comprises chapters I to 3, and provides the background to the study. Chapter I sets out the analytical framework: the concepts used in the study may not be familiar to many economists, and so merit explanation. Chapter 2 describes the policy setting in which technological development took place. Not very surprisingly, policy interventions in a highly regulated economy like India's assume disproportionate significance in deter­ mining the pace, nature and success of technological development. A brief chapter cannot deal fully with the intricacies of Indian policies, but some understanding is essential to the exposition of the detailed micro-studies. Chapter 3 gives some background information on the sample firms. The next 4 chapters present the findings on technological develop­ ment. Chapters 4 to 6, dealing in turn with cement, steel and textiles, begin with a thumbnail sketch of recent technological developments and government policy in the relevant sector. They go on to analyze how technological capabilities were developed, why they succeeded or failed, and how they compare with world technological levels. Chapter 7, on special case studies, has a slightly different format. Relevant policies and technological factors are described as part of the analysis of each firm's experience. Chapters 8 and 9 attempt to synthesize these findings and draw implications of wider relevance. The reader who is interested in the broad themes of technological and industrial development can com­ bine these chapters with the analytical framework (chapter 1) and the conclusions to the industry chapters to capture the essence of the study. The detailed industry studies have a wealth of findings which the general student of industrialization should find of interest. One of the lightest of burdens a researcher carries is to acknowledge the many debts he has accumulated during the preparation of a study. The foremost debt in this case is institutional. The Development Research Department of the World Bank sponsored the fieldwork on which this book is based, and generously gave permission for me to use the findings for publication in this form. However, the Bank bears no responsibility for the views expressed here. The evolution of my thinking on Indian technological development Preface and Introduction xiii

was influenced greatly by interaction with the researchers responsible for the other country studies. Alice Amsden and Linsu Kim (who jointly worked on South Korea) and Francisco Sercovich (on Brazil) provided many valuable insights. Carl Dahlman, who studied Mexico and was the project coordinator at the World Bank, and Larry Westphal, Chief of the Bank's Productivity Division, where this project was launched, were a constant source of stimulus, encourage­ ment and comment. The success of the entire project in this relatively uncharted territory is due largely to their endeavours. Needless to say, none of these people is responsible for the interpretations I have placed on the evidence from India. Simon Teitel of the Inter American Development Bank, which participated in sponsoring the Brazil study, was among the first economists who recognized the significance of indigenous technologi­ cal effort in developing countries. His perceptive criticisms were very helpful in clarifying ideas and concepts. In the early stages of the project, Jorge Katz, a pioneer in research on firm-level technological change in Latin America, gave advice and guidance. The analytical framework testifies to the extent to which I drew upon the ideas of these scholars. A number of people helped with the execution of the India project in its various phases. Rajiv Kumar, Ritu Kumar and Mohammad Saqib provided research assistance in India. Hamid Alavi at the World Bank collected background industrial data on all the countries studied. The Delhi office of the World Bank gave access to some of its documents and helped in conducting some of the fieldwork. The Indian Council for Research on International Economic Relations, New Delhi, was my base for a sabbatical year when I worked on this project (and others). To everyone who worked there, and in particular its Chairman, K. B. Lall, my thanks. Ashok Desai, who knows more about Indian technology than anyone else, gave generously of his ideas and knowledge. I also wish to express my gratitude to all those in the Indian government and business enterprises who spent their precious time to further the interests of research. It would not be appropriate to name them here individually. However, their cooperation and candour­ and, at times, their warm hospitality- was vital for this study. The benefits for me went far beyond the requirement of the research project. They included a far better understanding of the working of the Indian industrial system, of its richness and vitality and, sadly, of its frustrations and wastes. At a personal level, they encompassed xiv Preface and Introduction opportunities to visit and learn about the country of my birth after a long absence from it. I hope that this study, critical though it is of Indian policies on industrialization, will assist others in the under­ standing of one aspect of the complex economics of that country. Over the years that this project has run, a great deal of secretarial effort has gone into typing (and retyping) the various drafts. My grateful thanks are due to Gillian Coates, Caroline Wise, Caroline Baldwin, Melanie Mather, Sybil Owen and Nicola Ralph at the Institute of Economics and Statistics in Oxford, to Deepa Sachdeva and Rajini Mathur at the Indian Council for Research on Inter­ national Economic Relations in New Delhi, and to Diane Bayus at the World Bank. Finally, the constant encouragement and moral support which my wife, knowingly, and our children, unwittingly, provided were the bulwark without which this effort would not have come to fruition.

SANJAYA LALL