Tackling The MNC Menace

By Kirit Parikh
Last Updated: Sunday 28 June 2015

Tackling The MNC Menace

-- TO USHER in new technology and additional investment, and promote exports, Direct Foreign Investment (DFI) is advocated by several experts. All DFI'S opponents argue that multinational companies (MNC) will never part with their technology. It is opposed on the ground of the adverse impact it could have on our domestic industries and technical capacities, and the cost of high profits that foreign firms would repatriate.

DFI does bring in new investment and supplements domestic investment. Foreign investment of us $ 10 billion/year could raise the growth rate of India by 1.5 per cent, which is fairly commendable. If the economy were to grow at 7.5 per cent, instead of 8 per cent, it will help all including the poor.

The soft technology of management, project planning and execution, organisation and sales are often the main advantages of having multinationals around. These technologies are easily emulated and diffuse in the rest of the economy spurring allround efficiency. The infusion of new technology, even if it is not shared with Indian industry, will at least provide better products to Indian consumers and hopefully, encourage Indian manufacturers to better the output quality of their production.

DFIs can also vastly promote our exports. A significant portion of the world trade is intra-firm trade that is an MNC exporting from one subsidiary in one country to its sister concerns in other countries.

The fear that MNCS will hinder and even crush Indian technological development may deserve some merit. MNCS come with established brand names and large advertising budgets, as well as access to cheap credit. The advertising budget advantage will certainly be important for items of mass consumption. But here, the Indian consumer is very price conscious and the MNC in question will have to compete hard on the price front, For manufacturers who purchase capital and intermediate goods, product performance will be the decisive factor and not advertising. Thus, MNCs are likely to drive out only relatively inefficient firms producing inferior products at high cost in our country.

Another possible threat from these multinationals is that MNCS can also try to drive out potential Indian competition in areas of high-tech relevance. This proves that the greater threat to Indian technologies is from the import of computer chips and not potato chips!

Therefore, what we need is a strategic technological vision. In today's rapidly changing technological scene, the pace of innovation is so high that no country can be a technological leader in all areas. Similarly, we will be technological leaders only in some selective fields. The technological leadership would not be attained by protection but by mounting adequate, sustained and focussed R&D efforts, and by creating a policy environment in which such efforts flourish. In critical defence - related technologies, obviously, nobody will sell this technology to our country. It needs to be developed indigenously.

Finally, the MNC'S concern for high profits is often misplaced. If an MNC makes 100 per cent profit by selling a product in a free competitive market at a price lower than others, their rate of profit should not be our concern. If profit is excessive, other producers will have incentives to move in and provide competition, and soon the excess profit would disappear.

The areas of concern are where our domestic markets are distorted: like power sector. Since we subsidise electricity and many consumers do not pay its full cost, the marginal social value of electricity may be lower than the cost of producing it. If we promise a high rate of return to foreign private power producers, it can happen that India would pay up more than what it profits. This is not an argument against foreign entry into power generation; the latter situation should depend on reasonable terms and realistic price from users.

In summary, I think rather than projecting MNCs as economic demons, one can gain a lot from their incorporation into the economy of the country. All we need is to ensure protection to Indian entrepreneurs and plan a strategic R&D policy, and of course, negotiate better deals than the Enron deal.

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