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Transnational Corporations and Local Innovation

Series Editors:

José E. Cassiolato, Federal University of Rio de Janeiro, Brazil.

 

Maria Clara Couto Soares, Federal University of Rio de Janeiro, Brazil.

This series of books brings together results of an intensive research programme on aspects of the National Systems of Innovation in the five BRICS countries — Brazil, Russia, India, China, and South Africa. It provides a comprehensive and comparative examination of the challenges and opportunities faced by these dynamic and emerging economies. In discussing the impact of innovation with respect to economic, geopolitical, socio-cultural, institutional and technological systems, it reveals the possibilities of new development paradigms for equitable and sustainable growth.

Books in this Series

The Role of the State
Editors: Mario Scerri and Helena M. M. Lastres
ISBN 978-0-415-84254-9

Inequality and Development Challenges
Editors: Maria Clara Couto Soares, Mario Scerri and Rasigan Maharajh
ISBN 978-0-415-71032-9

The Promise of Small and Medium Enterprises
Editors: Ana Arroio and Mario Scerri
ISBN 978-0-415-71036-7

Transnational Corporations and Local Innovation
Editors: José E. Cassiolato, Graziela Zucoloto, Dinesh Abrol, and Liu Xielin
ISBN 978-0-415-71038-1

Financing Innovation
Editors: Michael Kahn, Luiz Martins de Melo and Marcelo G. Pessoa de Matos
ISBN 978-0-415-71039-8

Transnational Corporations and Local Innovation

EDITORS

José E. Cassiolato

Graziela Zucoloto

Dinesh Abrol

Liu Xielin

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First published 2014 in India
by Routledge
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British Library Cataloguing-in-Publication Data
A catalogue record of this book is available from the British Library

ISBN 978-0-415-71038-1

Contents

List of Abbreviations

vii

List of Figures

xv

List of Tables and Boxes

xix

Foreword by François Chesnais

xxv

Preface

xxix

Introduction: BRICS National Systems of Innovation

JOSE É. CASSIOLATO and MARIA CLARA COUTO SOARES

xxxi

1. FDI and National Systems of Innovation: Lessons from the Experience of BRICS

JOSÉ E. CASSIOLATO, GRAZIELA ZUCOLOTO, DINESH ABROL, and LIU XIELIN

1

2. Transnational Corporations and the Brazilian National System of Innovation

JOSÉ E. CASSIOLATO, GRAZIELA ZUCOLOTO, ROSILÉIA MILAGRES, and FABIO STALLIVIERI

68

3. Transnational Corporations and Russia’s National Innovation System

ALEXANDER SOKOLOV and PAVEL RUDNIK

133

4. Foreign Direct Investment and National Innovation System: Evidence from India

DINESH ABROL

189

5. The Role of Transnational Corporations in the National Innovation System: The Case of China

LI YANHUA

281

6. Transnational Corporations and National Systems of Innovation: The Case of South Africa

MYRIAM VELIA, GLEN ROBBINS and MBOFHOLOWO TSEDU

336

About the Series Editors

399

About the Editors

401

Notes on Contributors

403

Index

406

List of Abbreviations

AAR

Consortium comprising Alfa Group, Access Industries and Renova

ADR/GDR

American Depositary Receipts/Global Depositary Receipts

AGOA

African Growth and Opportunity Act

AMBEV

America’s Beverage Company (Companhia de Bebidas das Américas)

AMO ZIL

automobile plant ZIL (Avtomobilnoe Moskovskoe Obshchestvo – Zavod Imeni Likhachova)

AMR

Alcoa Metallurg Rus

APDP

the Automotive Production and Development Programme

AsgiSA

Accelerated and Shared Growth Initiative for South Africa

ATMS

Advanced Technology Manufacturing Strategy

BACEN

Central Bank of Brazil (Banco Central do Brasil)

BASIC

Brazil, South Africa, India, and China

BAT

British American Tobacco

B-BBEE

broad-based black economic empowerment

BCB

Central Bank of Brazil (Banco Central do Brasil)

BEA

Bureau of Economic Analysis

BEE

Black Economic Empowerment

BERD

business expenditure on R&D

BMPA

Belokalitvinsky Metallurgical Production Association

BNDES

Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social)

BNDESPar

Brazilian Development Bank Participations (BNDES Participações)

BP

British Petroleum

BPO

business process outsourcing

BRICS

Brazil, Russia, India, China, and South Africa

CARG

compound annual rate of growth

CBFI

Consultative Board on Foreign Investment

CBU

completely built unit

CDIAC-UN

Carbon Dioxide Information Analysis Center–United Nations

CEMIG

Minas Gerais Energy Company (Companhia Energética de Minas Gerais)

CGEE

Center for Management and Strategic Studies (Centro de Gestão e Estudos Estratégicos)

CIP

Critical Infrastructure Facility

CIS

Commonwealth of Independent States

CISCO

Cisco Systems, Inc.

CITIC

China International Trust and Investment Company

CJV

contractual joint venture

CKD

completely knocked down

CMIEC

China Metallurgical Import and Export Corporation

CNOOC

China National Offshore Oil Corporation

CNPC

China National Petroleum Corporation

CNPq

National Council for Scientific and Technological Development

COFCO

COFCO Corporation

COSCO

China Ocean Shipping Group Co.

CPqD

Research and Development Center for Telecomunications (Centro de Pesquisa e Desenvolvimento em Telecomunicações)

CSIR

Council for Scientific and Industrial Research

CSN

Brazilian Steel Company (Companhia Siderúrgica Nacional)

CUTRALE

Cutrale Citrus Juices

CVRD

Vale do Rio Doce Company (Companhia Vale do Rio Doce)

DE

domestic enterprises

DfID

Department for International Development

DIPP

Department of Industrial Promotion and Policy

DSIR

Department of Scientific and Industrial Research

DST

Department of Science and Technology

dti

Department of Trade and Industry

ECLAC

Economic Commission for Latin America and the Caribbean

EE

electrical and electronics

EJV

equity joint venture

EOG

Exxon Oil and Gas Ltd

EPO

European Patent Office

ESF

Elbe-Stahlwerke Feralpi GmbH

ETN

Eaton Corp PLC

EU

European Union

FDI

foreign direct investment

FDIC

Foreign Direct Investment Company

FE

foreign enterprises

FEMA

Foreign Exchange Management Act

FERA

Foreign Exchange Regulation Act

FIAC

Foreign Investment Advisory Council

FIG

Foreign Investment Grant

FII

Foreign Institutional Investor

FINEP

Studies and Projects Finance Organization (Financiadora de Estudos e Projetos)

FIPB

Foreign Investment Promotion Board

FPS

Foreign Promoter Share

GDP

gross domestic product

GE

General Electric

GEAR

Growth, Employment and Redistribution

GERD

gross expenditure on research and development

GFCF

gross fixed capital formation

GM

General Motors

GPINs

global production and innovation networks

HEI

higher education institution

HHI

Herfindahl–Hirschman Index

HP

Hewlett-Packard

HRST

human resources in science and technology

HSE

Higher School of Economics

HSRC

Human Sciences Research Council

IBGE

Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística)

IBM

International Business Machines Corporation

IBSA

India, Brazil and South Africa

ICT

information and communication technology

IDP

investment development path

IDZ

Industrial Development Zone

IEDI

Institute for Studies in Industrial Development (Instituto de Estudos para o Desenvolvimento Industrial)

IEG

Institute of Economic Growth

IHI Corp.

Ishikawajima-Harima Heavy Industries Co., Ltd.

IISc

Indian Institute of Science

IIT

Indian Institute of Technology

INPI

National Institute of Industrial Property (Brazil)

INRIA

National Institute for Research in Computer Science and Control (Institut National de Recherche en Informatique et en Automatique)

INTEL

Intel Corporation

IP

intellectual property

IPAP

Industrial Policy Action Plan

IPEA

Institute for Applied Economic Research (Instituto de Pesquisa Econômica Aplicada)

IPR

intellectual property rights

IRL

India Research Laboratory (IBM)

ISIC

International Standard Industrial Classification

ISO

International Organization for Standardization

ISS

International Space Station

ISSEK

Institute for Statistical Studies and Economics of Knowledge.

IT

information technology

ITC

International Trade Centre

JSE

Johannesburg Stock Exchange

JV

joint venture

LDCs

less developed countries

LG

LG Electronics

LNG

liquefied natural gas

LSE

London Stock Exchange

M&A

mergers and acquisitions

M&M

Mahindra and Mahindra

MBA

Master of Business Administration

MIDP

Motor Industry Development Programme

MIPT

Moscow Institute of Physics and Technology

MMX

Mineração e Metálicos

MNC

multinational corporation

MNE

multinational enterprise

MOFTEC

Ministry of Foreign Trade and Economic Cooperation

MoU

Memorandum of Understanding

MSF

Doctors Without Borders (Médecins Sans Frontières)

MSU

Lomonosov Moscow State University

MUV

multi-utility vehicle

NACI

National Advisory Council on Innovation

NASDAQ

National Association of Securities Dealers Automated Quotations

NASSCOM

National Association of Software and Services Companies

NBFCs

non-banking financial companies

NBS

National Bureau of Statistics of China

NCAER

National Council of Applied Economic Research

NCEs

new chemical entities

NDDS

Nipissing District Developmental Screen

NDDS

new drug delivery system

NDP

National Development Plan

NIS

National Innovation System

NISTADS

National Institute of Science, Technology and Development Studies

NPC

National Planning Commission

NRI

non-resident Indian

NSI

National System of Innovation

OECD

Organisation for Economic Co-operation and Development

OEM

original equipment manufacturer

OFDI

outward foreign direct investment

OGL

open general licence

OMZ

United Heavy Machinery

ONAKO

Orenburg Oil Company

ONERA

The French Aerospace Lab

PBG

Pepsi Bottling Group

PC

parent company

PCD

Personal Computing Division (IBM)

PCT

Patent Co-operation Treaty

PE

private equity

PID

Programme of Innovation Development

PINTEC

Brazilian Survey on Technological Innovation/Brazilian Innovation Survey

PUC

paid-up capital

QRs

quantitative restrictions

R&D

research and development

RAS

Russian Academy of Sciences

RBI

Reserve Bank of India

RF

Russian Federation

RFBR

Russian Foundation for Basic Research

RFTR

Russian Foundation for Technological Development

RTFP

Regional Trade Facilitation Programme

RUSNANO

Russian Corporation of Nanotechnologies

RVC

Russian Venture Company, Inc.

S&T

science and technology

SA

South Africa

SADC

Southern African Development Community

SANAS

South African National Accreditation System

SARB

South African Reserve Bank

SEZ

special economic zone

SI

system of innovation

SIAM

Society of Indian Automobile Manufacturers

SKD

semi-knocked down

SIDANKO

AO Siberian Far-Eastern Oil Co

SME

small- and medium-scale enterprise

SMEDP

Small and Medium Enterprise Development Programme

SMMEs

small, micro and medium enterprises

SMZ

Samara Metallurgical Plant

SPE

Special Purpose Entity

SRA

Strategic Research Agenda

SSP

Skills Support Programme

STI

science, technology and innovation

TAM

TAM Airlines

TC

technological capabilities

TFP

total factor productivity

THRIP

Technology and Human Resources for Industry Programme

TINA

there is no alternative

TIPS

Trade and Industrial Policy Strategies

TISA

Trade and Investment South Africa

TNC

transnational corporation

TNK-BP

Tyumen Oil Company-British Petroleum

TP

Technology Platform

TRIPS

Trade Related Aspects of Intellectual Property Rights

TsAGI

Central Aerohydrodynamic Institute

UAC

United Aircraft Corporation

UBM

Ural Boeing Manufacturing

UFMG

Federal University of Minas Gerais (Universidade Federal de Minas Gerais)

UFRJ

Federal University of Rio de Janeiro (Universidade Federal do Rio de Janeiro)

UNCTAD

United Nations Conference on Trade and Development

UOP

Universal Oil Products

USPTO

US Patent and Trademark Office

USSR

Union of Soviet Socialist Republics

UTC

United Technologies Corporation

VC

venture capital

VCP

Votorantin Pulp and Paper (Votorantim Papel e Celulose)

VSMPO

Verkhnaya Salda Metallurgical Production Association

WFOE

wholly foreign-owned enterprise

WTO

World Trade Organization

List of Figures

1

The Narrow and Broad Perspectives on NSI

xxxvi

2

Manufacturing Sector: BRICS’ Share in World GDP, 1970–2009

xliii

1.1

Policy Measures Related to FDI in the World, 1992–2010

6

1.2

GE: Total Revenues by Main Organizational Divisions, 2008

11

1.3

Sources of Information used by Large TNCs for Innovation

14

1.4

US TNCs: Relative Participation of Subsidiaries — R&D Performed, Sales, Employment, and Compensation, 1992–2008

21

1.5

R&D Expenditures/Sales by US Parent Companies and US Subsidiaries, 1990–2008

23

1.6

FDI Inflows to BRICS Countries, 1990–2010

36

1.7

OFDI of BRICS Countries, 2000–2010

46

2.1

Brazil: FDI Inflows — Total Percentage of World Total and Percentage of Total Inflows to Developing and Transition Economies, 1970–1989

70

2.2

Brazil: FDI Flows as a Percentage of GFCF, 1970–2007

73

2.3

Brazil: Stock of FDI as a Percentage of GDP, 1980–2007

74

2.4

Brazil: FDI Inflows as a Percentage of Exports

75

2.5

Brazil: Per Capita FDI in US$, 1970–2007

75

2.6

Brazil: FDI Inflows — Total, Percentage of World Total and Percentage of FDI to Developing and Transition Economies, 1990–2010

78

2.7

M&A Share on FDI Flow, 1995–2008

81

2.8

Brazil: M&A by Country of Origin, 2005–2012

82

2.9

Brazil: Remittance of Profits and Dividends/Exports

85

2.10

Brazil: Remittance of Profits and Dividends, and Deficit on Service Account

86

2.11

Brazil: Relative Technological Effort and Foreign Control by Sector, 2000

111

2.12

Brazil: OFDI — Share of World Total and Share of Developing and Transition Economies, 1970–2007

112

2.13

Brazil: OFDI — FDI Outward Stock — Developing Countries and Brazil, 1990–2011

114

2.14

Brazil Net Outflow of FDI, 1990–2011

115

3.1

Imports

136

3.2

FDI into the Russian Economy, 2001–2009

139

3.3

Total Revenues of Enterprises

156

3.4

Distribution of Active Foreign-owned Enterprises by Type of Economic Activity, Number of Enterprises, as Percentage of the Total Number of Foreign-owned Enterprises, 2006

158

3.5

Organisations Engaged in R&D: Russian and Foreign-owned (Fully or Partially), as Percentage of the Total Number of Organisations

160

3.6

Companies’ Innovation Activities — By Form of Ownership, Percentage, 2006

162

3.7

OFDI between 2001 and 2009

179

4.1

Sector-wise Composition of FDI Stocks, 1987–2000

208

4.2

Sectors Attracting Highest FDI Inflows, August 1991–September 2005

209

4.3

Pattern of Markets Served by Inward FDI

222

4.4

Locational Determinants of FDI

223

4.5

Number of Firms with FDI for R&D in India

229

5.1

Structure of NIS with Participation of TNCs

283

5.2

Inward FDI Flow in China, 1983–2009

285

5.3

Inward FDI by Sector, 1991–2008

286

5.4

Relationship between Industrial Agglomeration and FDI Inflow in Manufacturing Industries, 2005

288

5.5

Share of Top 10 Investors (Actual using FDI) in China, 1995 and 2005

290

5.6

Ratio of Total Education Investment to GDP, 1992–2010

308

5.7

Knowledge Share with Local Companies by 38 Beijing-based R&D Institutes

311

5.8

Chinese OFDI by Destination, 2005, 2007 and 2010

323

5.9

Number of Chinese Foreign Investment Firms, 1982–2004

326

6.1

FDI Inflows into the SADC and South Africa, 2000–2011

340

6.2

South Africa’s Direct and Portfolio Investment, 1998–2010

342

6.3

South Africa’s Stock of FDI Assets by Area, 1999–2006

349

6.4

South Africa’s Stock of FDI Liabilities by Area, 1999–2006

350

6.5

Highly Important Factors that Affect Innovation, 2002–2004 and 2005–2007

379

6.6

Highly Important Effect of Innovation on Outcomes for Enterprises, 2002–2004 and 2005–2007

380

A6.1

Growth of FDI Stock into South Africa by Main Regions, 1990–2006

395

List of Tables and Boxes

Tables

1

BRICS: Average Rates of Growth of Real GDP, 1980–2015

xlii

2

BRICS: Merchandise Trade Value (Current) and Share in World Total, 2000–2010

xlv

3

BRICS: Foreign Trade and Share of GDP

xlvii

4

BRICS: FDI, Inflows and Outflows Share in the World Totals

xlvii

1.1

FDI and TNCs — Select Statistics, 1980–2008/2011

2

1.2

FDI and TNCs — Select Indicators, 1980–2008/2011

2

1.3

Share in R&D Expenditures Performed by US TNC Subsidiaries, 1989–2007

24

1.4

Share in Sales of US TNC Subsidiaries by Country and Region, 1989–2007

26

1.5

R&D Expenditures/Sales by US TNC Subsidiaries by Country and Region, 1989–2007

28

1.6

Employment in R&D/Total Employment of US TNCs’ Parent Companies and Subsidiaries, 1994–2004

29

1.7

US TNCs: Compensation by Employee, 1989–2007

30

1.8

BRICS TNCs among the Top 1,000 Non-EU Investors in R&D, 2010

47

1.9

BRICS TNCs among the Top 1,000 Non-EU Investors in R&D, 2005

51

2.1

Brazil: FDI Inflows by Select Sectors, 1996–2009

83

2.2

Brazil: TNC Subsidiaries — Relative Share on Sector, Total Net Sales

85

2.3

Brazil: Manufacturing Firms with more than 500 Employees by Control of Capital, 2005

88

2.4

Brazil: R&D Expenditures and R&D over Net Sales Ratio of the Innovative Firms with more than 500 Employees (Manufacturing Sector) by Sector and Ownership, 2003–2005

89

2.5

Brazilian Manufacturing Firms with more than 500 Employees by Origin of Capital — Total R&D and Innovation Expenditures, 2003–2005

93

2.6

Brazilian Manufacturing Firms with more than 500 Employees by Origin of Capital — R&D/Employee, 2003–2005

95

2.7

Brazil: Number of Patent and Industrial Design Application by Capital Control, 1991–2004

96

2.8

R&D/Net Sales — 150 TNCs and their Subsidiaries in Brazil, 2003–2005

98

2.9

R&D/Total Number of Employees — 150 TNCs and their Subsidiaries in Brazil, 2003–2005

100

2.10

Net Sales/Total Number of Employees — 150 TNCs and their Subsidiaries in Brazil, 2003–2005

101

2.11

Select TNC Subsidiaries — R&D Over Sales and Percentage Distribution of R&D Expenditures by Selected Topics of Subsidiary in Brazil (Sub) and Parent Company

104

2.12

Select TNC Subsidiaries: Reasons for Not Investing in R&D in Brazil

105

2.13

Brazil: 30 Largest TNCs — Relationship with Government, 2008

117

2.14

Brazilian TNCs — Select Variables, 2009

118

2.15

Brazilian TNCs in the Meat Processing Sector — BNDES Support, 2008

119

2.16

Direct Investment Abroad: Equity Capital by Major Destination, 2011

121

2.17

Direct Investment Abroad: Equity Capital by Sector — Average, 2010–2011

121

3.1

Foreign Investments by Country of Origin

140

3.2

Number of Foreign-owned (Fully or Partially) and Russian-owned Companies

157

3.3

Average Annual Number of People Employed in the Economy

157

3.4

Foreign Investments by Type of Economic Activity as Percentage of Total FDI Inflow

159

3.5

The Planned Budget of PIDs of 47 Largest Russian State-owned Companies

165

3.6

R&D Expenditures Leveraged by Innovation Strategies of the Biggest Russian State-owned Enterprises

165

3.7

Foreign TNCs’ Intramural R&D Expenditures, by R&D Sectors

171

3.8

Average Monthly Salaries of R&D Personnel, by R&D Sectors

172

3.9

Russian TNCs (Except Financial Institutions) with Largest Foreign Assets, August 2006

180

3.10

FDI into Russian Non-Banking Sector Companies in 2007 and I–III Quarters of 2008

182

3.11

OFDI by Russian Non-Banking Sector Companies

183

4.1

Evolution of Policies of FDI Promotion and Innovation-making in India

194

4.2

Stock of Private Foreign Capital in the Indian Corporate Sector

197

4.3

Changing Distribution of Foreign Direct Capital Stock in India

199

4.4

Pattern of Distribution of FDI in Terms of Projects and Companies, 2003–2009

203

4.5

Industry Analysis: Number of FDI Projects from all the Regions, by Activity

205

4.6

Activity-wise FDI Projects from Western Europe

206

4.7

Statement on Sector-wise FDI Inflows, April 2000–April 2009

207

4.8

fDi Markets: Industry Sector Report — Number of Projects, January 2003–May 2009

210

4.9

fDi Markets: Currency FX Rate — US$ for Sectors as per ISIC, January 2003–May 2009

213

4.10

Sectoral Distribution of Jobs Projected to Arise from Inward FDI, 2003–2009

217

4.11

FDI Equity Inflows to Indian States

220

4.12

Industry Analysis: Number of Projects by Activity from USA in India

231

4.13

Share of FDI Firms in all Firms’ Output

238

4.14

Analysis of Pharmaceutical FDI: Number of Projects by Activity

250

4.15

Disease Type-wise Product R&D Activities of Domestic firms Active in India, 1999–2009

252

4.16

Disease Type-wise Product R&D Activities of Foreign Firms Active in India, 1999–2009

254

4.17

Pattern of Pharmaceutical Innovations, 1999–2007

257

4.18

R&D and Non-R&D Acquisitions of Domestic Pharmaceutical Companies, 1999–2009

262

4.19

Main Indian TNCs by Sector, Percentage of Assets Held Abroad and their Foreign Affiliates

263

5.1

The Inward FDI (Actual Using FDI) by Region, 2000–2005

284

5.2

Inward FDI by Industry, 2008

287

5.3

Top 10 Investors in China, 1995 and 2005

289

5.4

Contribution of Inward FDI to the Economy, 1993–2008

291

5.5

Contribution of Foreign Investment Enterprises in Chinese Manufacturing Industries, 1998 and 2004

291

5.6

The Differences in Some Innovation Indicators between DE and FE in Chinese Manufacturing Industry

292

5.7

The Importance of Foreign Investment Enterprises in Chinese High-Tech Industries, 1998 and 2004

293

5.8

The Importance of Foreign Companies in New Product Output and Export

294

5.9

Market Distribution of Subsidiary Companies of TNCs, 2005

295

5.10

FDI Forms and Proportions

296

5.11

The M&A in China Deals by TNCs

297

5.12

The Evolution of Chinese NIS

299

5.13

R&D Expenditure, By Main Actors

300

5.14

Transition of Chinese FDI Policies

302

5.15

Main Chinese FDI Policies in the Last 20 Years

303

5.16

Patents Jointly Applied for by Higher Education Institutions and Industrial Entities, 1 January 1985–10 July 2005

304

5.17

Some Joint R&D Organisations of Tsinghua University with TNCs

306

5.18

The Stock of Chinese HRST and Researchers

307

5.19

Knowledge Transfer between TNCs and Local Suppliers

314

5.20

Suzhou Industry Cluster: Some Information

315

5.21

Suppliers Attracted by TNCs in Suzhou Industry Cluster

315

5.22

The Employees of New Cooperation Development Park in Suzhou Industrial Garden

316

5.23

Representing Enterprises of the Industry Group in Suzhou

317

5.24

Some TNCs’ R&D Centres in China, 2006

318

5.25

R&D Expenditure of Foreign Firms in Some Industries, 2000 and 2004

318

5.26

Gross Industrial Output Value in Electronics Industry, 1995

320

5.27

Developing Stages of Chinese OFDI

322

5.28

Top 15 Destinations of China’s OFDI, Cumulative, up to 2010

324

5.29

OFDI by Industry, up to 2010

325

5.30

Typical OFDI Deals by Chinese TNCs in Developed Economies

328

6.1

FDI Inflows into Southern Africa — Period Averages

341

6.2

Position of South Africa in the Distribution of FDI Flows among Economies by Flow Range, 2010 and 2011

346

6.3

Foreign Ownership of Domestic Innovation: European (EPO) and US Patents (USPTO) at the PCT

363

6.4

R&D Performing Firms that Report R&D Collaboration

365

A6.1

South Africa: Origin of Net FDI Inflows, Value and Percentage of Total

396

A6.2

Geographic Origin of South Africa’s FDI Stock, 2006

396

A6.3

Sectoral Composition of Net Foreign Investment in South Africa

397

A6.4

Main Investment Support Instruments in South Africa of Relevance to Foreign Investors

398

Boxes

2.1

The Innovation System of Telecommunications in Brazil

109

3.1

International TNCs Engaged in R&D and Innovation Activities in Russia

166

Foreword

This is a timely book on an important subject, namely, the effects of foreign direct investment (FDI) and the operations of transnational corporations (TNCs) on the innovation systems of host countries, in the case of this book, the BRICS countries. The five country case studies provide abundant material, which the introductory chapter starts to synthesise. The emergence of the BRICS countries has already changed deeply the economic and political configuration of the world and it will do so increasingly. However, in the area of science, technology and innovation (STI), a gap remains with the advanced industrialised countries. On account of the course taken by the historical development of the world economic and political system, notably since the 18th century, these countries possess highly-developed innovation systems. They also remain by far the main source of FDI and are home to the large majority of TNCs. Only Japan in the 1960s and Korea in the 1980s succeeded in rejoining in these respects the industrialised countries of the North Atlantic.

Before coming to the current objectives of FDI and the technology-related strategies of TNCs, it may be useful to recall the recent and present economic context and the specific constraints under which those seated in the industrialised countries of the North Atlantic are operating. This can help to understand the way they approach their operations in host countries. Since the 1990s, the setting of FDI has been that of a long term slowdown in the rate of growth and the rate of investment of Organisation for Economic Co-operation and Development (OECD) countries as well as of changes in capital ownership leading to contemporary ‘corporate governance’ and the rule of shareholder value maximisation. In the United States, the change in ownership favoured large institutional financial investors and has given an important say to financial fund managers in corporate policy. In Europe, change came through the extensive privatisation of corporations previously publicly owned and government controlled. Increasingly, the operations of quoted corporations have been subservient to the imperatives of shareholder value maximisation. The 1990s also saw the growth of public and then of consumer and mortgage debt and thus the rise of interest-based financial income. In toto, the story, from the early 1990s on, has been one of growth of dividend and interest income at the expense of reinvested profit and, most of all, at that of the salaries earned by the overwhelming majority of employees and workers, including those engaged in engineering or in research activities. The primacy of financial accumulation and a top heavy financial system triggered off a string of currency and financial market crises which began in the periphery before moving in 2001, with the dotcom crash on NASDAQ to the heart of the system. The accentuated recourse to debt-led growth after 2002 fuelled a housing and construction boom itself artificially supported by the fabrication and marketing of evermore sophisticated but finally worthless securitised assets until the whole macroeconomic and financial configuration ran into the wall in 2007.

The world economy taken as a whole has not yet emerged from the global economic and financial crisis triggered off in August 2007 by the international contagion of the United States’ mortgage-backed asset market collapse. The subprime junk asset crisis transformed itself in 2008 into a dramatic liquidity and solvency crisis of major Wall Street financial institutions that threatened to pull down the entire world financial system and led to a sharp fall in world trade and employment. Some countries, notably BRICS, managed to weather off the 2009 recession successfully. Nonetheless, to differing degrees they have finally all experienced its very negative impacts. With regards to the industrialised countries, nearly six years after the start of the subprime debacle, the United States, which stood at the epicenter of the crisis and was the initial seat of the world recession, and the member countries of the European Union (EU) and in particular the Eurozone which bore the brunt of its impact, are still experiencing either very slow growth or outright recession. The reason for this, put in a nutshell, is the clinging-on by these countries to the finance-dominated accumulation regime and hence the priority given to creditors and rentiers and the restoration of debt-led growth. In the EU countries with particularly high levels of public debt, governments have chosen (the United Kingdom), or been forced (the Southern, Balkan and Baltic EU countries) to enact ‘shock strategy’ austerity policies.

In this context of low growth and quasi-recession, TNCs can only satisfy shareholders and help keep stock markets remain reasonably buoyant they must globalise more than ever their operations outside the OECD. Thus, in 2012 China and Brazil were respectively the first and third recipients of total world FDI. FDI can be seen as pursuing three main types of objectives: access to and control of natural resources, notably minerals; access to markets; finally, access to productive assets of different types. In industries where host countries have started building scientific and technological capacities in given sectors, their access will be targeted through acquisitions and mergers (TNCs’ preferred route) or otherwise through joint ventures. However, today, perhaps the most prized productive asset targeted by TNCs are educated and skilled personnel, be they on-site workers, engineers or researchers available for employment at lower and often much lower salary levels than in TNCs’ home countries. In the context of financialisation, productive-asset seeking FDI targeting human resources has taken the form of export-oriented offshoring and outsourcing.

Within this breakdown of FDI objectives, innovation-related investments and research and development (R&D) outlays made by TNCs are of two types. The first are the ones considered necessary for properly satisfying domestic demand in a context of strong global–local oligopolistic rivalry with other TNCs and possibly of competition with host-country domestic firms to the extent that these are allowed and helped to grow in size and increase their own technological competence. R&D aimed at adapting products or processes to local conditions may provide knowledge that TNCs can then diffuse with their global group structures. The second outlays are those where TNCs aim at maximising the benefits of offshoring by integrating local technological assets into their global corporate R&D network. The enhancement of host country National Systems of Innovation (NSIs) has never been a concern of TNCs. It is established that when their presence is not overwhelming, they can spur domestic firms’ efforts to improve technological competencies. But otherwise, as the country studies in this book show quite well and as the introductory chapter stresses in its final sections, concerted measures by host governments and domestic firms are required for maximising the possible contribution of TNCs to the strengthening of the National System of Innovation as well as for offsetting possible negative effects of their presence such as crowding out and monopolising demand for very skilled personnel. The use by host countries of all available political and legal devices available in order to protect strategic industries, just as many of the industrialised countries do, is only legitimate national behaviour. It can also represent the general interest of the majority of the people of our planet. This is why I hail the decision just made by the Supreme Court of India against a major pharmaceutical TNC. This ruling defends genetic drug production and raises a barrier against the spurious patenting of products with exactly the same therapeutic properties.

France

François Chesnais

April 2013

Former Professor of Economics,
University of Paris 13

Preface

This series is the result of a collaborative effort of several people and institutions. The contributions presented here consolidate the findings of the project ‘Comparative Study of the National Innovation Systems of BRICS’ sponsored by the International Development Research Centre (IDRC). The project is rooted in a larger research effort on BRICS National Innovation Systems being developed in the sphere of the Global Research Network for Learning, Innovation and Competence Building Systems — Globelics. The Globelics initiative on BRICS brings together universities and other research institutions from Brazil, Russia, India, China, and South Africa. It seeks to strengthen an original and less dependent thought, more appropriate to understanding development processes in less developed countries.

First and foremost, we would like to thank Professor Bengt-Åke Lundvall, the coordinator of Globelics, who supported and promoted the BRICS project from the outset in 2003 and organised the First International Workshop of the BRICS Project in Aalborg, Denmark, in 2006. Without his leadership and enthusiasm the project could not have taken off.

We owe special thanks to project researchers and coordinators for their engagement in project activities and accessibility which helped overcome difficulties that naturally emerge from the geographical and cultural diversity of BRICS. We are also very grateful to the ones who provided the necessary administrative and secretarial support allowing the good performance of the project, especially Luiza Martins, Fabiane da Costa Morais, Tatiane da Costa Morais, and Eliane Alves who helped in editing activities and whose support was crucial for formatting book manuscripts and organising tables and figures. Max dos Santos provided the technical IT support for the research network.

The core ideas analysed in this series were discussed at international seminars organised in Brazil (2007), South Africa (2008), India (2009), and Brazil (2009) under the auspices of the BRICS Project, gathering scholars, academics, policy makers, businessmen, and civil society representatives. Our understanding of this complex theme has evolved considerably thanks to constructive criticism from the seminar participants. We are grateful to them as well as to all other people not named here who also helped in the implementation of the project.

None of this work would have been possible without financial support. The support given by the IDRC was essential for the completion of this project and we are very obliged to them and their staff for their support. We would especially like to thank Richards Isnor, Federico Buroni, Gustavo Crespi, Veena Ravichandran, and Clara Saavedra. We are also grateful to Bill Carman, IDRC Publisher, for the technical assistance provided in the preparatory work that led to this publication.

Supplementary grants were received from various agencies of the Brazilian Ministry of Science and Technology, especially the Studies and Projects Finance Organization (FINEP) and the National Council for Scientific and Technological Development (CNPq). In particular, we would like to thank the General Secretary of the Ministry of Science and Technology, Dr Luiz Antonio Elias, and the President of FINEP, Luis Fernandes, who have given enthusiastic support to the BRICS project since its inception.

Introduction

BRICS National Systems of Innovation

José E. Cassiolato and Maria Clara Couto Soares


Preamble

The world is experiencing significant transformations in its geo-political and economic constitution. The processes of transformation have accelerated over the last decades. A significant part of the growth potential of the world economy nowadays and for the coming decades resides in some fast-developing countries. Brazil, Russia, India, China, and South Africa (BRICS) have displayed such potential for dynamic change. In a historic rupture with past patterns of development, the BRICS countries are now playing a major role in alleviating the current global crisis whilst revealing new and alternative progressive paradigms.

Much beyond the emphasis given by international agencies to the identification of investment possibilities in the BRICS production structures or to the prospects presented by their consumer markets, our perspective in analysing the BRICS countries is inspired by their significant development opportunities, as well as their several common characteristics and challenges, and the learning potential they offer for other developing countries. Identifying and analysing these opportunities and challenges will help to uncover alternative pathways towards fulfilling their socio-political-economic development potential within the constraints of sustainability.

The central focus of this book series is the National System of Innovation (NSI) of the five BRICS countries. Each book deals with a key component of the innovation system, providing the reader with access to analyses on the role played by the state, the financing, direct investment, and the small and medium enterprises (SMEs), besides approaching a particularly relevant — though still not extensively studied — aspect of the BRICS economies: the challenge of inequality and its interrelations with the NSIs of these countries.

The research endeavour that generated the publication of this book series has gathered universities and research centres from all the BRICS countries, as well as policy makers invited to discuss the outcomes. The research development and the comparative analysis of its results are intended to bring to light the challenges and opportunities of the BRICS countries’ National Innovation Systems (NISs) from the points of view of these same countries. Part of the effort undertaken was addressed to the construction of a shared methodology aimed at advancing the comprehension of the specificities of innovation systems in each country. This was done in view of the need for improvements in the analytical framework used for the analysis of the NISs located in countries outside the restricted sphere of developed countries. Special attention was paid to the political implications. However, instead of searching for generalisable policy recommendations, it was sought to identify and analyse bottlenecks that are common to the BRICS economies, their complementarities and competition areas, as well as other aspects of major importance for supporting decision makers and that are able to incite reflection about the subject of innovation and development in other less developed countries (LDCs).

It is worth mentioning that the research consolidated in this publication is rooted in a larger research effort on BRICS NISs being developed in the spheres of Globelics (http://www.globelics.org) and the Research Network on Local Productive and Innovation Systems (RedeSist) at the Economic Institute of the Federal University of Rio de Janeiro (http://www.redesist.ie.ufrj.br). Globelics is an international academic network which uses the concept of innovation systems as an analytical tool aimed at the comprehension of the driving forces that push economic development. It aims to advance the use of the innovation system perspective on a world basis. Established in 2002 and inspired by renowned scholars from the field of economics of innovation such as Christopher Freeman (1987) and Bengt-Åke Lundvall (1992), the Globelics network has, among others, the purpose of encouraging knowledge exchange between LDCs, thus fostering mutual learning across innovation research groups in Latin America, Africa and Asia. With this, it is sought to strengthen an original and more autonomous approach to understanding the development processes in developing countries. On the other hand, the focus put by the Globelics network on the study of innovation systems of BRICS results from the recognition that understanding the particular dynamics which connects the knowledge base with innovation and economic performance in each of the five BRICS countries is, today, a precondition for better appreciating the direction that the world economy will be following (Lundvall 2009). It is within such analytical field that the contribution offered by this book series is inserted.

In the following sections we (a) present the broad conceptual approach of NSI used as the guiding analytical framework for the research gathered under this book series; (b) characterise the increasing importance of the BRICS countries in the global scenario; and (c) introduce the five-book collection on NSIs in the BRICS countries.

NSI and Development — A Broad Perspective

One of the most fruitful ways of thinking developed in advanced countries in the last 30 years came from a resurrection and updating of earlier thinking that emphasised the role of innovation as an engine of economic growth and the long-run cyclical character of technical change. A seminal paper by Christopher Freeman (1982) pointed out the importance that Smith, Marx and Schumpeter attached to innovation (ibid.: 1) and accentuated its systemic and national character (ibid.: 18). Freeman also stressed the crucial role of government policies to cope with the uncertainties associated with the upsurge of a new techno-economic paradigm and the very limited circumstances under which free trade could promote economic development. Since it was formulated in the 1980s, the system of innovation (SI) approach has been increasingly used in different parts of the world to analyse processes of acquisition, use and diffusion of innovations, and to guide policy recommendations.1

Particularly relevant in the SI perspective is that since the beginning of the 1970s, the innovation concept has been widened to be understood as a systemic, non-linear process rather than an isolated fact. Emphasis was given to its interactive character and to the importance of (and complementarities between) incremental and radical, technical and organisational innovations and their different and simultaneous sources. A corollary of this argument is the context-specific and localised character of innovation and knowledge. This understanding of innovation as a socially determined process is in opposition to the idea of a supposed techno-globalism and implies, for instance, that acquisition of technology abroad is not a substitute for local efforts. On the contrary, one needs a lot of knowledge to be able to interpret information, select, buy (or copy), transform, and internalise technology.

Systems of innovation, defined as a set of different institutions that contribute to the development of the innovation and learning capacity of a country, region, economic sector, or locality, comprise a series of elements and relations that relate production, assimilation, use, and diffusion of knowledge. In other words, innovative performance depends not only on firms and R&D organisations’ performance but also on how they interact, among themselves and with other agents, as well as all the other forms by which they acquire, use and diffuse knowledge. Innovation capacity derives, therefore, from the confluence of social, political, institutional, and culture-specific factors and from the environment in which economic agents operate. Different development trajectories contribute to shape systems of innovation with quite diverse characteristics requiring specific policy support.

It is this understanding of the systemic nature of innovation that allows for two crucial dimensions of the SI approach to be explicitly discussed: the emphasis on historical and national trajectories and the importance of taking into account the productive, financial, social, institutional, and political contexts, as well as micro, meso and macro spheres (Freeman 2003; Lastres et al. 2003). Although all of these contexts are relevant for a discussion about development, two in particular should be singled out that are pertinent to this study. One is the financial context, recognised by Schumpeter (1982 [1912]) in his TheTheory of Economic Development. For him, entrepreneurs, to become the driving force in a process of innovation, must be able to convince banks to provide the credit to finance innovation. In this sense, any discussion about innovation systems has to include the financial dimension.2 The other is the idea that space matters, that the analysis of systems of innovation should be done at the national (Freeman 1982; Lundvall 1988) and local levels (Cassiolato et al. 2003).

The national character of SI was introduced by Freeman (1982, 1987) and Lundvall (1988) and has been widely used as an analytical tool and as a framework for policy analysis in both developed and underdeveloped countries. As a result, research and policy activities explicitly focusing on SI can be found in most countries and a rapidly growing number of studies of specific NSIs have been produced. Although some authors tend to focus on the NSI in a narrow sense, with an emphasis on research and development efforts and science and technology (S&T) organisations, a broader understanding of NSI (Freeman 1987; Lundvall 1988) is more appropriate. This approach takes into account not only the role of firms, education and research organisations and science and technology institution policies, but includes government policies as a whole, financing organisations, and other actors and elements that influence the acquisition, use and diffusion of innovations. In this case emphasis is also put on the role of historical processes — which account for differences in socioe-conomic capabilities and for different development trajectories and institutional evolution — creating SI with very specific local features and dynamics. As a result, a national character of SI is justified.

Figure 1 is an attempt to show both the narrow and the broad perspectives on NSI. The broad perspective includes different, connecting sub-systems that are influenced by various contexts: geopolitical, institutional, macroeconomic, social, cultural, and so on. First, there is a production and innovation sub-system which contemplates the structure of economic activities, their sectoral distribution, degree of informality and spatial and size distribution, the level and quality of employment, the type and quality of innovative effort. Second, there is a sub-system of science and technology which includes education (basic, technical, undergraduate, and postgraduate), research, training, and other elements of the scientific and technological infrastructure such as information, metrology, consulting, and intellectual property (IP). Third, there is a policy, promotion, financing, representation, and regulation sub-system that encompasses the different forms of public and private policies both explicitly geared towards innovation or implicitly, that is, those that although not necessarily geared towards it, affect strategies for innovation. Finally, there is the role of demand, which most of the time is surprisingly absent from most analyses of SI. This dimension includes patterns of income distribution, structure of consumption, social organisation and social demand (basic infrastructure, health, education).

Figure 1: The Narrow and Broad Perspectives on NSI

Image

Source: Adapted from Cassiolato and Lastres (2008).

This portrayal of the National Innovation System framework is a corollary of an understanding that

• innovation capacity derives from the confluence of economic, social, political, institutional, and culture-specific factors and from the environment in which they operate, implying the need for an analytical framework broader than that offered by traditional economics (Freeman 1982, 1987; Lundvall 1988);

• the number of firms or organisations such as teaching, training and research institutes is far less important than the habits and practices of such actors with respect to learning, linkage formation and investment. These shape the nature and extensiveness of their interactions and their propensity to innovate (Mytelka 2000; Johnson and Lundvall 2003);

• main elements of knowledge are embodied in minds and bodies of agents or embedded in routines of firms and in relationships between firms and organisations. Therefore, they are localised and not easily transferred from one place/context to another, for knowledge is something more than information and includes tacit elements (Lundvall 1988);

• the focus on interactive learning and on the localised nature of the generation, assimilation and diffusion of innovation implies that the acquisition of foreign technology abroad is not a substitute for local efforts (Cassiolato and Lastres 1999);

• national framework matters, as development trajectories contribute to shape specific systems of innovation. The diversity of NSIs is a product of different combinations of their main features that characterise their micro, meso and macroeconomic levels, as well as the articulations among these levels (Freeman 1987; Lastres 1994).

From the specific point of view of LDCs the usefulness of the SI approach resides precisely in the facts that (a) its central building blocks allow for their socio-economic and political specificities to be taken into account and (b) it does not ignore the power relations in discussing innovation and knowledge accumulation. As this book argues, these features are particularly relevant in the analysis of the BRICS countries’ innovation systems. As the analysis of economic phenomena also takes into consideration their social, political and historical complexity, policy prescriptions are based on the assumption that the process of development is influenced by and reflects the particular environment of each country, rather than on recommendations derived from the reality of advanced countries. A number of development studies followed these ideas, arguing that technical change plays a central role in explaining the evolution of capitalism and in determining the historical process through which hierarchies of regions and countries are formed. Celso Furtado (1961), for instance, established an express relation between economic development and technological change pointing out that the growth of an economy was based on the accumulation of knowledge, and understood development within a systemic, historically determined, view. Although original, these contributions have a close correspondence with Myrdal’s (1968) proposition that: (a) contexts and institutions matter; (b) positive and negative feedbacks have cumulative causation; (c) cycles may be virtuous or vicious, and with Hirschman’s (1958) point that interdependencies among different activities are important.

The need to address paradigmatic changes and the problems and options deriving from the upsurge of information technologies led to the outbreak in Latin America in the 1980s of a series of interconnected work from the innovation perspective. Building on Furtado’s work on changes associated with the industrial revolution, authors like Herrera (1975) and Perez (1983) analysed the opportunities and challenges associated with the introduction of these radical changes in the region. It was only then that the innovation and development literature started to integrate the empirically validated knowledge about learning inside firms with the contributions stemming from the work of Freeman, Perez, Herrera, and others on new technologies, changes of techno-economic paradigms and systems of innovation. What gave special impetus to this direction was the empirical work focusing on technological capability building as part of a broader NIS. The role of government policies in orienting the speed and direction of technological changes was also highlighted (Freeman and Perez 1988).

Development processes are characterised by deep changes in the economic and social structure taking place from (technological and/ or productive) discontinuities that cause and are caused by the productive, social, political, and institutional structure of each nation. Development is also seen as a systemic process, given the unequal capitalism development in the world. The recognition of national specificities of these processes is also fundamental. We found the same stress on the national character of development processes in List’s work (1841), and on the NSI idea of Freeman (1982) and Lundvall (1988) in Furtado’s (1961) discussion about the transformation of national economies where their structural complexity is manifested in a diversity of social and economic forms. For Furtado, it is in this transformation that the essence of development resides: structural changes ‘in the internal relations of the economic and social system’ (ibid.: 103) that are triggered by capital accumulation and technological innovations. The emphasis on diversity, and the recognition that: (a) both theory and policy recommendations are highly context dependent, (b) the economy is firmly embedded in society, and (c) knowledge and technology are context-specific, conform some general identities.

Furtado (1961) established a direct relation between economic development and technological innovation pointing out that the growth of an advanced economy was based on the accumulation of new scientific knowledge and on the application of such knowledge to solve practical problems. The Industrial Revolution set into motion a process of radical changes based on technical progress that has lasted till now and that is at the root of how the world economy is conformed. In essence, those changes: (a) rendered endogenous the causal factors related to growth into the economic system; (b) made possible a closer articulation between capital formation and experimental science. Such articulation has become one of the most fundamental characteristics of modern civilisation. As pointed out by Furtado (ibid.), the beginning of such a process took place in the countries that were able to industrialise and create technical progress first, and the quick accumulation made possible in the development of this process became the basic engine of the capitalist system. For this reason, there is a close interdependency between the evolution of the technology in the industrialised countries and the historical conditions on the basis of which such development was made possible. As the behaviour of the economic variables relies on parameters that are defined and evolve into a specific historical context, it is quite difficult to isolate the study of economic phenomena from its historical frame of reference (Furtado 2002). This assertion is more significant when analysing economic, social and technological systems that are different from each other, as in the underdeveloped economies. In this context, underdevelopment may not, and should not, be considered as an anomaly or simply a backward state. Underdevelopment may be identified as a functioning pattern and specific evolution of some economies. Social and economical peripheral structure determines a specific manner under which structural change occurs (industrialisation during the 1950s and 1960s) and technical progress is introduced. Hence different outcomes from those in developed countries are to be expected (Furtado 1961; Rodriguez 2001).

The neo-Schumpeterian perspective also argues that economic development is considered a systemic phenomenon, generated and sustained not only by inter-firm relations, but most significantly by a complex inter-institutional network of relations. Innovation is eminently a social process. Therefore, development — resulting from the introduction and diffusion of new technologies — may be considered as the outcome of cumulative trajectories historically built up according to institutional specificities and specialisation patterns inherent to a determined country, region or sector. Each country follows its own development trajectory according to its specificities and possibilities, depending fundamentally on their hierarchical and power position in the world capitalist system. The more distant underdeveloped countries are from the technological frontier, the larger will be the barriers to an innovative insertion in the new technological paradigm. More serious than technological asymmetries are knowledge and learning asymmetries, with the implication that access, understanding, absorption, domination, use and diffusion of knowledge become impossible. However, even when the access to new technologies becomes possible, most of the time they are not adequate for the reality of underdeveloped countries and/or these countries do not have a pool of sufficient knowledge to make an adequate use of them. This occurs because the learning process depends on the existence of innovative and productive capabilities that are not always available. On this aspect, Arocena and Sutz (2003) argue that there are clearly learning divides between North and South that are perhaps the main problem of underdevelopment nowadays.

The Increasing Relevance of the BRICS Countries

The BRICS denomination was originally used to connect the dynamic emerging economies of Brazil, Russia, India, China, and South Africa as continental countries bearing a strategic position in the continents of the Americas, Europe, Asia, and Africa. The BRICS are also joined by their large geographical and demographic dimensions. Collectively, they were home to 42.2 per cent of the world population as of 2010 representing nothing less than 2.9 billion people. In addition, the five countries account for approximately 30 per cent of the earth’s surface, holding significant reserves of natural resources such as energy and mineral resources, water and fertile lands. As well, BRICS countries have 24.3 per cent of world biodiversity; Brazil alone embracing 9.3 per cent of the total (GEF 2008).

Moreover, it is the recent performance of these economies and their macroeconomic indicators that make them more and more the focus of surveillance and analysis. In fact, the BRICS countries display a growing economic importance. In 2000, the five countries accounted for 17.1 per cent of the global gross domestic product (GDP) in public–private partnership. Their share increased to 25.7 per cent in 2010, with China and India accounting for 13.6 per cent and 5.5 per cent respectively, followed by Russia (3 per cent), Brazil (2.9 per cent) and South Africa (0.7 per cent) (IMF 2011).

The participation of the BRICS countries in world GDP is expected to rise sharply in the years to come. The impact of the financial crisis and global recession on developed world economy over the last three years has only lent support to this expectation, beyond attracting attention to the BRICS economies’ capacity to remain immune or quickly recover from the crisis. Large domestic markets, proactive investment policies, monetary and tax policies with anti-cyclic capacity, presence of major public banks, and high level of reserves are elements increasingly recognised as having helped at least some BRICS economies to be less affected by the crisis.

While growth slowed in all major regions, China and India continued to grow rapidly in 2009 and 2010 (Table 1). In other BRICS countries the crisis rebounded fast. In Brazil, the GDP fell 0.2 per cent in 2009, but the economy surpassed pre-crisis growth rates in 2010 (7.5 per cent). South Africa showed a GDP decrease by 1.8 per cent in 2009 and had a 2.8 per cent increase in 2010. In Russia, heavily dependent on commodities like oil and gas, the economy has been hit more severely by the global crisis. It experienced shrinking of almost 8 per cent in 2009 but the GDP growth recovered to 3.7 per cent in 2010, beating the developed economies’ growth rates. Prospects for 2015 show the five economies representing 29.5 per cent of the world economy.

The economic performance of the BRICS countries has, however, varied widely during the last decades as shown in Table 1. China has maintained its position as the fastest growing economy worldwide. India has also grown significantly and regularly. Brazil has had an irregular performance, well below its potential, but showed an enhancement in the second half of the 2000s. Russia, after the severe 1990s crisis that resulted in a decline of 40 per cent in its real GDP, has recovered and South Africa has had a small improvement in its economic performance that remains below its potential.

These different performances were accompanied by significant changes in the productive structure of the five countries, which reflect dissimilar development strategies.

The competitiveness of China’s industrial sector is the main source of the country’s impressive economic growth. The share of industry in the composition of China’s GDP is unusual and growing: it was around 40 per cent in 1990 and reached 48 per cent in 2009. In contrast, in 2008, 56.1 per cent of the Chinese labour force still remained in rural areas. The relative share of the agricultural sector, which accounted for 30.2 per cent in 1980, is constantly falling, to 11 per cent of GDP in 2009. The share of services grew from 21.6 per cent in 1980 to 41 per cent in 2009.

Table 1: BRICS: Average Rates of Growth of Real GDP, 1980–2015 (percentage)

 

1980–1990

1990–2000

2001–2005

2006

2007

2008

2009

2010

2015*

Brazil

2.8

2.9

2.8

3.7

5.7

5.1

–0.2

7.5

4.1

Russia

–4.7

6.2

7.4

8.1

5.6

–7.9

3.7

5.0

India

5.8

6.0

6.9

9.8

9.3

7.3

6.5

9.7

8.1

China

10.3

10.4

9.6

11.6

13.0

9.0

8.7

10.3

9.5

South Africa

1.6

2.1

4.0

5.4

5.1

3.1

–1.8

2.8

2.8

Developed Countries

3.1

2.8

1.9

2.8

2.5

0.8

–3.2

3.0

2.3

Source: UNCTAD (2010) for the period 1980–2008 and IMF (2011) for 2009–2015 data. See http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx (accessed 15 March 2011).

Note: *Estimate.

Really impressive is the mounting share of China’s manufacturing sector in world manufacturing GDP (Figure 2). In 1990, it represented 3.1 per cent of global manufacturing GDP, achieving 21.2 per cent in 2009.

Figure 2: Manufacturing Sector: BRICS’ Share in World GDP, 1970–2009

Image

Source: UNCTAD (2009). See http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx (accessed 15 March 2011).

China has diversified its industrial system to a significant degree during the last 25 years and the share of technologically intensive sectors in industrial output in 2009 reached 42 per cent of the total value added by the manufacturing sector. In the other four countries this share is around 15 per cent.3 In addition, some major differences in the characteristics of the BRICS countries’ manufacturing sectors should be noticed.

Brazil has gone through a structural transformation since the late 1980s, with a significant reduction of the share of industry in total GDP (declining from 41.7 per cent in 1980 to 25.4 per cent in 2009) and a high growth of services (from 50 per cent to 68.5 per cent in the same period). It is worth emphasising that agricultural goods that have had an important role in the country’s trade surplus were responsible for only 6.1 per cent of GDP in 2009, showing a fall from 9.0 per cent in 1980. In Brazil, as in Russia and South Africa, the products based on natural resources and commodities have a relatively greater share of national GDP than in China and India.

Russia’s economic development is heavily dependent on energy and raw material resources. As in Brazil, the contribution of manufacturing sector to GDP in Russia has declined since the 1980s, decreasing from 44.6 per cent in 1983 to 32.9 per cent in 2009. The share of defence-related industrial complex in manufacturing is significant, together with the strong production base in non-electric machines and equipment. The oil and gas industry alone accounts for more than 10 per cent of the gross value added. The share of services in total GDP has grown in the last two decades achieving 62.4 per cent in 2009 while agriculture has decreased its participation accounting for only 4.7 per cent in 2009.

The Indian economy is essentially service-led. Skills in the manufacturing sector are relatively modest and concentrated in non-durable consumer goods and in the chemical-pharmaceutical complex. However, some manufacturing segments in the automobile complex and in certain basic industries have been developing rapidly in recent years. Since the mid-1980s, the contribution of industry to India’s GDP has been almost constant and around 26 per cent, but from 2004 to 2009 it increased to 28.3 per cent. India’s capacity in the area of services is significant, particularly those linked to information and communication technology (ICT). The share of services in GDP has grown from 39 per cent in 1980 to 54.6 per cent in 2009. Although the agricultural sector is declining in India’s GDP, it still represented 17.1 per cent in 2009 (compared to 36.8 per cent in 1980) and constitutes an important determinant of the overall economic growth.

The services sector has also been playing a more important role in the South African economy. The share of this sector in GDP was 45.4 per cent in 1980 and increased to 65.8 per cent in 2009. The development of the financial sector and the growth of tourism have contributed to this growth. Finance, real estate and business services are expanding their share with regard to government services. South Africa’s industrial sector is heavily based on natural resources, mainly steel and non-ferrous metals, with some increases in capacity occurring in non-durable consumer goods and the automobile sector. The share of industry-added value in total GDP value decreased from 48.4 per cent in 1980 to 31.4 per cent in 2009. The metal and engineering sectors dominate the manufacturing sector. Although agriculture is responsible for a small share of South Africa’s GDP (3 per cent in 2009), it still represents an important source of employment. The minerals and mining sector remains important also with respect to both employment and foreign trade.

The changes observed in the participation of BRICS countries in international trade were even more significant (Table 2). Their share in merchandise trade value more than doubled in the short period of 2000–2010, exports rising from 7.5 to 16.4 per cent and imports from 6.2 to 14.9 per cent. However, the contribution of the five countries varied significantly. The most notable fact is the well-known growth of China in the merchandise trade value: its exports mounted from 3.9 per cent to 10.4 per cent of world exports reaching US$ 1.58 trillion in 2010, and imports increased from 3.4 per cent to 9.1 per cent in the same period.

Table 2: BRICS: Merchandise Trade Value (current, US$ billion) and Share in World Total, 2000–2010 (percentage)

 

2000

2005

2010

Exports

Value

%

Value

%

Value

%

World

6,448.57

100.00

10,495.70

100.00

15,174.44

100.00

Brazil

55.12

0.85

118.53

1.13

201.92

1.33

China

249.20

3.86

761.95

7.26

1,578.27

10.40

India

42.38

0.66

99.62

0.95

221.41

1.46

Russia

105.57

1.64

243.80

2.32

400.42

2.64

South Africa

31.95

0.50

56.26

0.54

85.70

0.56

 

2000

2005

2010

Imports

Value

%

Value

%

Value

%

World

6,662.89

100.00

10,800.15

100.00

15,353.26

100.00

Brazil

58.64

0.88

77.63

0.72

191.46

1.25

China

225.02

3.38

660.21

6.11

1,396.20

9.09

India

51.52

0.77

142.84

1.32

328.36

2.14

Russia

49.13

0.74

137.98

1.28

273.61

1.78

South Africa

30.22

0.45

64.19

0.59

96.25

0.63

Source: UNCTAD (2010).

India also experienced a sharp increase of exports, reaching 1.46 per cent of the world total in 2010. Fostered by Chinese growth and commodities boom, the share of Brazil and Russia in world exports grew rapidly from 2000 to 2010, increasing almost four times. South Africa is the only BRICS country that still shows less than 1 per cent of world exports. On the import side, India and Russia increased their share in world imports more than fivefold. Except India and South Africa, the other BRICS countries managed to keep a surplus in their merchandise trade in 2010. In India inflows on account of invisibles have been helpful in financing the growing deficit in merchandise trade.

The BRICS economies have significantly increased their openness to international trade in the last decades. They have raised their exports and imports both in volume terms as a share of GDP, but the level of trade openness has varied quite a lot (Table 3). The greater changes occurred in China and India, particularly since the 1990s when they speeded up their international trade flows. Currently, China, South Africa, and Russia are the BRICS economies with the higher levels of openness. The Brazilian economy, despite the liberalisation process in the 1990s, remains the most closed amongst the BRICS countries.

Table 3: BRICS: Foreign Trade (current, US$ million) and Share of GDP (percentage)

 

Exports + Imports (US$ million)

Countries

1970

1980

1990

2000

2010

Brazil

8,719

25,412

61,212

113,762

393,379

China

4,833

38,919

11,471

474,227

2,972,960

India

4,792

28,839

51,144

93,941

540,489

Russia

349,249

136,973

627,323

South Africa

8,352

50,411

486

56,782

161,953

 

Exports + Imports (GDP) (%)

Countries

1970

1980

1990

2000

2010

Brazil

13.0

10.3

14.0

17.6

18.8

China

5.3

12.9

29.9

39.6

50.6

India

7.9

15.7

15.8

20.4

31.3

Russia

36.1

52.7

42.4

South Africa

45.7

61.2

43.4

42.7

44.5

Source: United Nations (2010); World Bank (2011).

The bilateral trade flows between BRICS countries have been relatively restricted. However, since the first half of the 2000s there was a widespread increase of exports and imports flows between the five economies, but particularly a stronger presence of China as an important trade pole for the other four countries (Baumann 2009). In 2009, China surpassed the United States as the main trade partner of Brazil and also emerged as the second main trade partner of India and Russia. The converse does not however hold, as these four economies don’t match their respective rankings insofar as they are neither the top import suppliers nor export destinations for China. China exports to Brazil, India, Russia, and South Africa at a more intense pace than it imports from them. In addition, the latter are concentrated on a few primary goods intensive in natural resources while China’s exports are much more diversified and led by manufactured goods. Therefore, despite the fact that intra-BRICS trade has increased in recent years, the flows are still restricted in size and unbalanced in terms of the different rhythms and compositions of the BRICS bilateral commercial transactions.

In the last decades, the BRICS countries have been the recipients of significant amounts of foreign direct investment (FDI). Brazil received the greatest share of FDI of all BRICS economies until the first half of the 1980s. Although China has surpassed Brazil since 1985, Brazil continued to be a major destination for FDI during the 1990s, most notably during the process of privatisation that took place during that decade. Since the 2000s, Russia and India have been strengthening their relevance as FDI inflow destinations (Table 4). In 2010, the BRICS countries received 17.6 per cent of global FDI inflows. Especially since 2005, there was a sharp increase of BRICS’ FDI outflows. With the exception of South Africa, BRICS countries more than tripled their FDI outflows from 2005 to 2010, raising their participation in the world total from 3.6 per cent to 11.1 per cent in the period.

BRICS countries also followed different development strategies regarding FDI. Particularly remarkable has been the Chinese policy to attract multinational companies since the beginning of the 1990s. Inserted in a broader strategy aiming to expand its technological knowledge and later to strengthen the domestic industries and enterprises, China imposed conditions — such as the establishment of joint ventures (JVs) and that R&D be carried out locally — that had to be met before the subsidiaries were to operate in China or sell in its markets. Brazil, Russia and South Africa — countries that liberalised their economies with few restrictions — got more portfolio investment, but most of the investment received by the manufacturing sector was used to buy up local companies. In China and India, where the capital account was not liberalised, FDI seems to have been concentrated in new investments in production and innovation.

Other relevant macroeconomic indicators could be added — such as the impressive share of BRICS in international monetary reserves (about 40 per cent of the total) — but the interest in these five emerging economies goes beyond this area. Together with their expanding economic relevance, these countries are claiming a rising geopolitical influence. They have been important players in their geographic areas of influence. However, they are pushing to have an increasing voice in the international high-level decision-making institutions, particularly through reforms in the UN system and in the Bretton Woods organisations. New dialogue spaces bringing together BRICS countries, such as the IBSA (India, Brazil and South Africa), BRICS and BASIC (Brazil, South Africa, India, and China) signal concrete steps to move forward the cooperation and coordination within and amongst these countries, which intends to go further than the mere economic sphere.4

Table 4: BRICS: FDI, Inflows and Outflows Share in the World Totals

Select Years

1970

1975

1980

1985

1990

1995

2000

2005

2010

FDI Inflows (%)

 

 

 

 

 

 

 

 

 

Brazil

2.94

4.53

3.53

2.54

0.48

1.29

2.34

1.53

3.90

China

NA

NA

0.11

3.50

1.68

10.96

2.90

7.37

8.50

India

0.34

0.32

0.15

0.19

0.11

0.63

0.26

0.78

1.98

Russian Federation

NA

NA

NA

NA

NA

0.60

0.19

1.31

3.31

South Africa

2.50

0.71

–0.02

–0.80

–0.04

0.36

0.06

0.68

0.13

FDI Outflows (%)

 

 

 

 

 

 

 

 

 

Brazil

0.01

0.38

0.71

0.13

0.26

0.30

0.19

0.29

0.87

China

NA

NA

NA

1.01

0.34

0.55

0.07

1.39

5.14

India

0.00

0.00

0.01

0.01

0.00

0.03

0.04

0.34

1.11

Russian Federation

NA

NA

NA

NA

NA

0.17

0.26

1.45

3.91

South Africa

0.12

0.44

1.46

0.08

0.01

0.69

0.02

0.11

0.03

Source: UNCTAD (2010).

Their growing leverage in international relations together with other emerging countries is associated with a repositioning of the balance of power on the world stage, which was intensified by the recent world crisis. BRICS countries want to see these changes reflected in the institutions of global governance. Since their economies will probably continue to account for a sizeable portion of the increase in global GDP in the near future, it is expected over time that BRICS will exert increasing financial and political influence, even if limited by their considerable differences and constraints to form a coherent political bloc anytime soon.5

The increased influence of these countries took place during a period marked by intense transformations in the global society. One of these remarkable changes is the integration in the economy of a significant portion of previously marginalised segments of the BRICS population. The highly populated China and India led this process in terms of world shares, but Brazil also had an important participation (Soares and Podcameni 2014). The present and potential dimension of BRICS domestic markets as well as the policies adopted by some BRICS countries aiming to reduce their dependence on developed countries’ consumer markets has been drawing increasing attention in the last years. According to one estimate, two billion people from BRICS will join the global ‘middle class’ by 2030 (Wilson and Dragusanu 2008) representing a huge impact on the demand profile with expected reflexes on global investments as well as on innovation.

Simultaneously, several hurdles remain for the BRICS to overcome. One of them is the growing social gap caused by the unequal distribution of recent economic growth. While the percentage of the population below the poverty line has decreased over the past 30 years in most of the BRICS countries, inequality is still a major issue for these economies. In fact, the BRICS countries, except Brazil, show a trend of increasing income inequality that — particularly since the 1990s — has been following the rapid economic growth. Moreover, despite the improvements in recent years, Brazil is still among the countries with the worst distribution of income, together with South Africa that found itself in an even worse situation.6 In addition, India and Russia are among those with the largest percentage of the population living below the poverty line.7 Furthermore, beyond the income dimension, inequality has a multi-dimensional character in the BRICS countries. This challenge is exacerbated by race, gender, ethnic, and geographic dimensions and therefore demands more integrated solutions (Scerri et al. 2014).

One of the problems associated with the high poverty levels and the perverse distribution of income is the limited access to quality public services — education, health, housing and infrastructure, safety and security, etc. These problems are common to the five countries, where a significant portion of the population lacks access to essential goods and services, and demand urgent redress. This situation is reflected in poor human development indices in the BRICS countries. Other undeniable challenges faced by BRICS are unemployment, poor quality employment and increasing informality.

Another evident challenge in all five countries is the huge regional disparity in human and economic development. There is also a large gap between the rural and urban population. In general, the wealthier regions are those that are more industrialised. Practically 60 per cent of the total GDP of Brazil originates in the states of the southeast. The Chinese economic development model favours the coastal provinces, while other provinces in the interior are much less developed. In South Africa, economic activity is concentrated in Gauteng province and in the western part of Cape Town. The industrial development of Russia occurred principally around cities such as Moscow, St Petersburg, Nizhny Novgorod, and Ekaterinburg. India also shows significant inequalities between the rich regions to the south and the northern regions of the country as well as between the rural and urban populations. Therefore, regional redistribution of income and access to essential goods and services is another significant challenge that these five countries have in common (Scerri et al. 2014).

The negative environmental impact of recent growth is another huge challenge to be faced by BRICS countries. According to the Carbon Dioxide Information Analysis Center–United Nations (CDIAC-UN) data for 2008, the BRICS countries are responsible for emitting 35.3 per cent of the world’s total CO2.8 China is ranked as the world’s largest emitter, accounting for 21.9 per cent followed by the United States (17.7 per cent), India (5.4 per cent) and Russia (5.3 per cent). South Africa and Brazil are responsible for 1.4 per cent and 1.2 per cent of global emissions respectively, and occupy the 13th and 17th positions internationally. If we take the example of China, we observe that fossil-fuel CO2 emissions in the country have more than doubled in the 2000 decade alone. Energy efficiency is a big problem in China and energy consumption per product is about 40 per cent higher than in the developed world. Other environmental problems are also critical. For instance, 40 per cent of river and 75 per cent of lake water is polluted leaving 360 million rural people without clean water. As in China, the environmental impacts in other BRICS countries are also mounting.

Other than extending the existing problems in BRICS countries, one general and common issue should be emphasised. This relates to the sustainability of its current growth trajectory. This is true in terms of growing inequality, increasing environmental impacts, as well as regional and other imbalances. However, there are some recent changes that may open better future prospects.

All the BRICS countries have an important role to play in shaping the future of the world economy, but China will probably have a more prominent role in this respect. The Chinese system of innovation has been undergoing some changes in order to address two new proclaimed goals: the building of a ‘harmonious growth’ and the development of ‘indigenous innovations’.9 The harmonious growth aims at reducing the growing social and environmental imbalances. China’s emerging ‘high-growth with low-carbon’ strategy has been emphasised by recent policy decisions, together with measures directed to reduce rural–urban social gaps. The indigenous innovation goal refers to the efforts to make China less reliant on foreign technology through the building of a new kind of relationship between national and foreign players in the process of developing and using new technologies.10 China is pursuing these goals especially by linking innovation to domestic needs and by giving increased priority to domestic consumption.11

For Brazil, India, Russia, and South Africa, Chinese success may lead to strategies towards strengthening domestic technological capabilities and fostering clean technologies. Nevertheless, the differentiated role of the BRICS countries in the configuration of global power and the global economy will in some way constrain the evolution of BRICS national systems for innovation. In addition, their NSIs are highly dependent on their historical development and on how the different domestic actors interpret global developments as well as how they position themselves in the national and international economies. Yet, more flexibility for setting up new industrial and technological policies may be expected.

Introduction to Books 1–5

This book series attempts to cover five themes that are crucial to an understanding of the National System of Innovation of BRICS. The first book The Role of the State, edited by Mario Scerri (South Africa) and Helena M. M. Lastres (Brazil), aims at exploring the relationship between the state and the National Systems of Innovation in BRICS countries. An evolutionary approach has been adopted in order to capture the nature of the state in the respective countries and thus understand the historical and ideological basis for its role in the evolution of the NSI in the five countries. As a background, it is argued that debates on the role of the state in the development process, especially since the 1980s, have often focused on the apparent dichotomy between market-driven and state-driven development. This is a rather wasteful diversion, since it should be accepted as a starting premise that the state is essential to the structural transformation that is required for development.

The second book addresses an aspect of the NSI that is normally absent from the discussion: the relation between innovation and inequality. The objectives of the book Inequality and Development Challenges, edited by Maria Clara Couto Soares (Brazil), Mario Scerri and Rasigan Maharajh (South Africa), were to trace the trends in interpersonal and inter-regional inequality within BRICS in an evolutionary perspective and to analyse the co-evolution of inequality and the innovation system to highlight how the various elements of innovation and the production system and inequality mutually reinforce.

The book is driven to improving our understanding of this issue. The inequality concept is considered in its multi-dimensional character, embracing a phenomenon that goes beyond the mere income dimension and is manifested through forms increasingly complex, including, among others, assets, access to basic services, infrastructure, knowledge, as well as race, gender, ethnic, and geographic dimensions. The book adopts the broad approach of the NSI to analyse the relations between BRICS innovation systems and inequality, departing from a co-evolutionary view.

As shown in the book chapters, innovation can affect inequalities in different ways and through distinct trails that are influenced by national conditions, and shaped by public policy interventions. Although innovation does not constitute the main factor of influence on inequality, it is suggested that distinct strategies for technological change may lead to different outcomes in distributive terms, thus either aggravating or mitigating inequality. Based on this understanding, the book corroborates the hypothesis that inequalities need to be explicitly taken into account in development strategies since the benefits of science, technology and innovation (STI) are not automatically distributed equally. Therefore, advancing the comprehension of inter-relations between innovation and inequality may be helpful to find ways to shape the National Innovation Systems so that they reduce rather than increase inequalities.

The third book aims at analysing the contribution of small-and medium-scale enterprises (SMEs) in the National System of Innovation. The objective of the book The Promise of Small and Medium Enterprises, edited by Ana Arroio (Brazil) and Mario Scerri (South Africa), is to explore three main research goals. In the first place, to provide an overview of the main characteristics of micro, small and medium firms in the Brazilian, Russian, Indian, Chinese, and South African National Systems of Innovation as a basis to examine the contribution of SMEs to the economy of each country. A second goal is to bring to the forefront crucial issues in the discussion of industrial and technological policies for small firms, including the recent evolution and future trends of policies and instruments, their applicability and coordination, as well as a discussion of the macroeconomic, legal and regulatory environment. A final research objective is to draw out initiatives to promote innovation in SMEs that address common bottlenecks in BRICS countries and that can contribute to policy design and implementation by these and other countries.

The fourth book discusses the relationship between TNCs and the National System of Innovation of BRICS countries. In the book Transnational Corporations and Local Innovation, edited by José E. Cassiolato (Brazil), Graziela Zucoloto (Brazil), Dinesh Abrol (India), and Liu Xielin (China), the thesis of technological globalisation is taken with some caution, refuting the idea that R&D activities would be inexorably internationalised. In fact, technological innovative activities in TNCs have been transformed, in relation with the financialisation of TNCs, as evidenced by the rise of their intangible assets (which includes R&D, patents and trademarks) and a reorientation of R&D expenditures towards non-scientific activities and very downstream development.

The book chapters present a detailed presentation of the relation of the position and evolution of TNC in the country. Subsequently, there is a discussion on the local factors affecting innovation by TNCs and local firms in the country. Government policy towards TNCs has been important but as the Chinese experience shows, access to local buoyant markets has also been vital. Other issues discussed refer to how the government protects local companies from the competition of TNCs. Spillovers of TNCs to local BRICS enterprises have also been analysed and the immediate conclusion is that there is hardly any convincing evidence regarding either the existence or non-existence of spillovers. An in-depth analysis of outward FDI (OFDI) has also been conducted.

Finally, the fifth book deals with finance and funding in the National System of Innovation. The objective is to analyse institutional character and support instruments for the innovation financing process in BRICS, focusing on institutional structure and innovation policy. This book, Financing Innovation, edited by Michael Kahn (South Africa), Luiz Martins de Melo (Brazil) and Marcelo G. Pessoa de Matos (Brazil) contributes to understanding the varied approaches to the financing of innovation. It draws on the experience of five diverse countries each of which has undergone dramatic structural adjustment in the last two to three decades. The experience of the BRICS countries presents a unique set of case studies of the transition from largely closed centrally planned and state-driven economic and science policy to a more open and market-led situation. The contributing authors examine the varying approaches to the provision of support to the full range of activities that contribute to innovation ranging from scholarship support to doctoral students, to R&D tax incentives and the provision of seed capital.

The significance of financing investments in innovation has been pointed out as an important structural bottleneck that is yet to be solved by the private financial institutions. If, on the one hand, the internationalisation, deregulation and globalisation of financial markets signals the possibility of resources at lower costs, on the other, the characteristics of investments in innovation such as the length of time needed for development, the uncertainty and the risk, point to the need of setting national institutional arrangements.

Image

Notes

1. This is also true in Latin American countries, where it is being applied and understood in close connection with the basic conceptual ideas of the structuralism approach developed in the region since the 1950s under the influence of the Economic Commission for Latin America and the Caribbean (ECLAC). In fact, since the mid-1990s, the work of RedeSist — the Research Network on Local Productive and Innovative Systems — based at the Economics Institute of Rio de Janeiro, Brazil, has been using such a dual frame of reference.

2. See, for instance, Mytelka and Farinelli (2003); Freeman (2003); Chesnais and Sauviat (2003).

3. The following data on BRICS countries’ value added by sector (per cent of GDP), 1980–2009 is based on the UNCTAD Handbook of Statistics (2010).

4. The IBSA Dialogue Forum was established in June 2003 in Brasilia, Brazil.

BRIC was formally constituted in June 2009 at a summit of the four countries in Yekaterinburg, Russia. In 2011, South Africa joined the group, which changed its denomination to BRICS.

BASIC of the G4 was formed during the international climate change negotiations in December 2009 in Copenhagen, Denmark.

5. There are several economic and geopolitical factors that restrict a greater convergence of interests among BRICS countries in multilateral negotiations. The analysis of these constraints goes beyond the limited scope of this concept note, but we could cite the aforementioned relatively low degree of trade complementarities between BRICS as an important one.

6. In 2008, Gini indexes were respectively 0.54 and 0.67 according to Brazilian and South African national institutes of statistics.

7. According to World Bank statistics, the population below poverty line was 28.6 per cent in India and 30.9 per cent in Russia in the mid-2000s.

8. It is important to mention that CDIAC-UN data considers only global carbon dioxide emissions from the burning of fossil fuel, but not emissions from deforestation or other greenhouse gases, including methane.

9. See the AeA research team’s ‘China’s 15-year Science and Technology Plan’, in Competitiveness Series, American Electronics Association, Vol. 14, April 2007, p. 2.

10. The US Information Technology Office in Beijing refers to indigenous innovation as a term combining three distinct elements: yuanshi (original, or genuinely new); jicheng (integrated, or combining existing technologies in new ways); and yinjin (assimilated, or making improvements to imported technologies). See http://www.usito.org/ (accessed 8 January 2013).

11. In November 2008, China launched a US$ 584 billion anti-cyclical package. According to the HSBC report on climate change (Robins 2009) almost 40 per cent of the total package resources were allocated to ‘green’ themes. Among others, it combined the search for a lower carbon pattern with the offering of better transport conditions for lower income people placed in rural areas, fostering a niche for the development of innovations capable of attending to the specificities of this domestic market segment.

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———, 1992. National System of Innovation: Towards a Theory of Innovation and Interactive Learning. London: Pinter.

———, 2009. ‘The BRICS Countries and Europe’, in J. E Cassiolato and V. Vitorino (eds), BRICS and Development Alternatives: Innovation Systems and Policies. London: Anthem Press, xv–xxi.

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Mytelka, L. K. and F. Farinelli, 2003. ‘From Local Clusters to Innovation Systems’, in J. E. Cassiolato, H. M. M. Lastres and M. L. Maciel (eds), Systems of Innovation and Development: Evidence from Brazil. Cheltenham: Edward Elgar, 249–72.

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1

FDI and National Systems of Innovation

Lessons from the Experience of BRICS

José E. Cassiolato, Graziela Zucoloto, Dinesh Abrol, and Liu Xielin


Foreign direct investment (FDI) is an important facet of the globalisation process. In 1982, FDI flows amounted to US$ 58 billion, and in 2007, about US$ 2 trillion, reaching, after world crisis, US$ 1.5 trillion in 2013 (Table 1.1). In 1980, FDI stock corresponded to approximately 6.6 per cent, and in 2011, to 29.3 per cent of the world GDP (Table 1.2). Stock and flows of FDI are not homogeneously distributed among nations, and important changes have been observed in the last 20 years. Up to the early 1990s, approximately 95 per cent of FDI originated in the developed world (USA, Western Europe and Japan) and 85 per cent were directed to the same region (UNCTAD 2009). Such situation changed radically in recent years: in 2007, 68.7 per cent of FDI flows went to developing countries (UNCTAD 2008) and approximately 16 per cent of the world FDI originated in these countries (UNCTAD 2009).

There have been other important new trends regarding FDI in the last 20 years (Tables 1.1 and 1.2). First, rates of FDI growth since the early 1980s have been more than twice the rate of world investment1 which signals the increasing importance of TNCs in the world economy. Second, a significant share of FDI is via mergers and acquisitions (M&A) (US$ 112 billion in 1990 and US$ 1,031 billion in 2007), showing that a large part of new FDI does not generate new production capacity but rather is linked to a process of capital concentration and is part and parcel of a financial dominated accumulation regime (Chesnais and Sauviat 2003).

Table 1.1: FDI and TNCs — Select Statistics, 1980–2008/2011 (current, US$ billion)

 

1982

1990

2004

2007

2008

2011

FDI Inflows

58

207

744

1,975

1,790

1,524

FDI Stock

790

1,942

11,100

17,901

15,451

20,438

Income of FDI

44

74

562

1,182

1,171

M&A

 

112

381

1,031

673

TNC Gross Product

623

1,477

4,283

6,295

6,020

World GFCF

2,795

5,099

8,940

12,620

13,909

13,821*

World GDP

11,963

22,121

42,275

55,885

61,232

69,711

Source: UNCTAD (2009, 2013).

Note: *2010

GFCF: Gross fixed capital formation

Table 1.2: FDI and TNCs — Select Indicators, 1980–2008/2011 (percentage)

 

1982

1990

2004

2007

2008

2011

M&A/FDI

54.1

53.6

52.1

39.7

Income/FDI Flows (%)

75.9

35.7

75.5

59.8

65.4

Income/FDI Stock (%)

5.6

3.8

5.1

6.6

7.6

FDI Inflows/GFCF (%)

2.1

4.1

8.3

15.6

12.9

11.0

TNC Gross Product/World GDP (%)

5.2

6.7

10.1

11.3

9.8

FDI Stock/World GDP (%)

6.6

8.8

26.3

32.0

25.2

29.3

Source: UNCTAD (2009, 2013).

Transnational Corporations (TNCs), the main drivers of world FDI, have intensified their relevance. According to the United Nations Conference on Trade and Development (UNCTAD), in the beginning of the 1990s there were 37,000 TNCs, which owned around 175,000 subsidiaries; in 2007, the same source suggested the existence of 79,000 TNCs, which owned 790,000 subsidiaries. In 2009, sales of subsidiaries of TNCs amounted to US$ 29.2 trillion (UNCTAD 2010). Within the group of TNCs, a small number of firms dominate. Of the 82,000 largest TNCs, the top 100 account for 10 per cent of foreign assets, 16 per cent of foreign sales and 12 per cent of the foreign employment (Serfati 2010).

The international trade between subsidiaries and parent companies represented, in 2009, 60 per cent of the world trade. TNCs also dominate most parts of private research and development (R&D) and of advanced technology available in the world. (UNCTAD 2008; ECLAC 2008). Production originated by TNCs were estimated to be around 5 per cent of the world’s total GDP in 1982 and 11.4 per cent in 2007.

Such figures demonstrate a significant increase in the degree of internationalisation of the world economy and on the importance of TNCs. Although present in the world economy for a long time, TNCs became particularly important after the end of World War II. In the 1950s and 1960s, US TNCs were dominant drivers of the inter-nationalisation of capital. The following decades were marked by an increasing presence of European and Japanese TNCs.

The influence of large TNCs in technology and innovation is even more compelling. According to information released by the European Commission, the top 2000 companies (1000 EU and 1000 non-EU) invested €372 billion in R&D in 2006/2007, which corresponds to approximately 80 per cent of global business expenditure on R&D (European Commission 2011). In the case of the United States, it is estimated that US TNCs are responsible for approximately 74 per cent of the total R&D by the nation’s private sector. Approximately 80 per cent of the 700 TNCs that most invest in R&D originate from five countries: USA, Japan, Germany, United Kingdom, and France. Their technological activities seem to be strongly concentrated on parent companies. R&D expenditures of US TNCs affiliates correspond to around 17 per cent of the expenditures of US TNCs parent companies (2007), and most of this percentage is directed to developed nations (UNCTAD 2008).

In spite of this intensive productive and especially technological concentration, some researchers argue in favour of a tendency towards technological internationalisation of developing countries, which has benefited from the partnership between foreign enterprises (FE) and local institutions and, most of all, from the increasing of TNCs’ R&D activities.

In fact, the growing importance of TNCs in the recent globalisation process has renewed an old debate. Several advocates of the liberal globalisation have stressed that attracting TNCs to developing countries may allow access to technologies of advanced countries. By facilitating the entry and stimulating investments of these enterprises, developing nations would benefit from technological innovations brought by them and, consequently, increase productivity and improve the quality of their products. For these authors, not only would the use and the acquisition of new technologies be incorporated by subsidiaries, but the generation of technological innovation in these countries would also be stimulated. Through their affiliates, these companies would increasingly perform R&D activities out of their home countries and, as a result, would start creating new products and processes locally. In such a process of ‘globalisation/internationalisation of technology’, subsidiaries would not only be responsible for an increasing share of R&D investments of TNCs, but, among all affiliates, those in developing countries would be representing a more significant role. An UNCTAD report (2005) has attempted to demonstrate the existence of a process of internationalisation of R&D by transnational enterprises, and declared that an increasing part of these activities has been performed outside the home country of parent companies. Others, although not presenting substantial data to demonstrate it, claim that as the technological function of large companies — in particular, the research and development activities — is planned and conducted on a global scale, there is an increasing participation of the subsidiary companies in the global technology effort of TNCs.

This book addresses the role of TNCs in the National System of Innovation of BRICS countries and this introduction attempts to discuss the main issues that we think are relevant. It adopts the broad version of the NSI approach. In this book, the thesis of technological globalisation is taken with more caution, refuting the idea that R&D activities would be inexorably internationalised. In particular, it considers that the complexity involved in innovative activities, like R&D, limits the occurrence of technological globalisation automatically and without significant costs, and argues that knowledge-intensive activities still tend to be concentrated in home countries.

TNCs and the Financial Dominated Accumulation Regime

The changes observed in the last 20 years in the importance of TNCs are part of the wider economic and political transformations associated with the globalisation of economic activities and the diffusion of the information and communication technology (ICT) paradigm.

As TNCs became the dominant economic power of globalisation, governments everywhere increased efforts to attract FDI. UNCTAD compiled information about regulations implemented by different governments, which were related to foreign capital either to stimulate their presence or restrict their action in the last 20 years (Figure 1.1). A noticeable trend shows that since the early 1990s till the mid-2000s, policy measures introduced by different governments towards TNCs increased substantially and were mostly directed to stimulate FDI and ease TNCs action. Also, as the level of success to attract FDI has been confined to some countries, governments have also started to implement a new kind of policy regime that integrates FDI promotion policies with innovation policy measures aiming at attracting more of higher quality FDI.

UNCTAD (2001) distinguishes three generations of FDI promotion policies since the 1980s. The first happened when countries liberalised their FDI regimes and adopted open door policies. Subsequently, policies became more proactive, countries started to use marketing techniques to attract FDI and provided tax incentives and direct subsidies. Finally, more recently, FDI policies began to include protection of intellectual property, fostering of human resources and strengthening of local research capabilities.

However, since then, the total number of policy measures was significantly reduced. Also, although policy measures geared towards encouraging FDI remain predominant, there is a clear tendency towards increasing the proportion of policy mechanisms unfavourable to FDI.

The benefits of FDI for economic development of receiving countries have been extensively discussed both by policy makers and by academic analysts. Paul Streeten (1974) pointed out that conflicts between TNCs and local governments can arise if social and private goals are inconsistent, if bargain power of conglomerates are used against national interests and if knowledge brought by TNCs are not relevant or adequate to receiving nations. Edith Penrose (1971) emphasised that FDI can strongly contribute to developing countries, but they are not able to substitute nation states in the promotion of economic development.

Stephen Hymer (1960) was the first author who tried to theorise the reasons for firms to internationalise production. During the 1950s and 1960s, foreign direct investment was essentially a phenomenon of USA’s large TNCs. Hymer’s PhD thesis studied the spread of such firms worldwide. Starting from neoclassical theories of international economics and industrial organisation — specially the discussion about entry barriers — he suggested that a TNC aiming to produce in another country should own specific assets capable of overcoming natural advantages of domestic firms (for example, a special knowledge of the local market, legislation, etc.). Such assets were associated with market power, size and economies of scale, technological capability and access to cheaper financial sources. Hymer’s contribution was seminal as it emphasised the importance of market imperfections in stimulating the internationalisation of the production.

Figure 1.1: Policy Measures Related to FDI in the World, 1992–2010

Image

Source: UNCTAD (2009, 2011).

Departing from his first seminal work (Hymer 1960), which was essentially an unconventional use of neoclassical theory about the spread of US TNCs in the post-war period, Hymer’s later works contributed significantly to the understanding of TNCs from a political economy point of view. In particular, he pointed out that a new industrial structure at world level was emerging, underlining a new international division of labour dominated by 300–500 large TNCs, and that the effective power of nation states to control their economies was being eroded given the flexibility of TNCs to react to adverse regulations and fiscal or monetary policies (Presser 1981). Also in their book, written when the phenomena of European TNCs was spreading, Stephen Hymer and Robert Rowthorn (1970) pointed out the oligopolistic behaviour of TNCs. Hymer’s works introduced in the 1960s some of the elements that still prevail nowadays in any assessment of TNCs, namely, the growing interdependence of capital from different sources under TNCs’ control and the conflict of these firms with nation states.

The subsequent work on TNCs, unfortunately, and with few exceptions (Chesnais 1988), left aside the political economy of TNCs and concentrated on how the international production was organised and materialised using the traditional neoclassical theory of the firm as a starting point. This main limitation was specifically treated through the concept of the product life cycle. In a classic text, Raymond Vernon (1966) introduced a locational dimension, explaining that as time passes by — and considering the expansion of the world market — large US companies would have had to establish production activities abroad either because they perceived the opportunity to reduce costs (of production and/or distribution) or because there was a threat to their competitive position. In the search for new markets, firms finally end up internationalising production, which would make necessary the transfer of some R&D activities related to the adaptation of products and processes. Vernon, in particular, emphasised the adaptive character of local technological efforts.

Later on, John H. Dunning (1980) tried to integrate several arguments from different theoretical approaches — neoclassical theories of the firm, industrial organisation and international trade, and locational theory — to create his eclectic theory of international production. In Dunning’s view, TNCs should not only have specific advantages, but these advantages should be such as to allow these companies to explore them by themselves, instead of selling or leasing them. In other words, a company should internationalise the use of its specific advantages.2

Dunning also suggested the existence of four types of motivations that would put a firm into the process of internationalisation: the search for and access to markets; the search for and access to raw materials; the search for efficiency; and the search for strategic assets. It is well known that the first two forms characterised the process of internationalisation of US enterprises after World War II and of the European enterprises which came after the pioneers. In the last decades, the intensification of the competition that emerged through globalisation increased the strategic importance of the last two forms of internationalisation.

The academic debate on TNCs evolved, after Hymer, with an implicit understanding that they are essentially a specific type of firm that could be treated methodologically within the boundaries of the traditional neoclassical theory of the firm. However, the evolution of TNCs in the last decades calls again for a political economy approach. The argument is that TNCs are now a totally different type of entity as compared with those of the 1970s. In fact, the increasing importance of TNCs in the last 30 years was accompanied by a global restructuring of production activities. TNCs promoted a strong displacement of productive processes, redirecting global production, investment and trade flows. The overall worldwide restructuring of production over the period has been conditioned by internationalisation strategies and management of the production value chain of large TNCs. The intensity of this process was observed in the evolution of trade and investment flows (refer Tables 1.1 and 1.2).

It is, then, necessary to take a more complex understanding of TNCs in present times. More specifically, if it is correct to point out that TNCs have been the most important actors of the globalisation process, it is also true that non-financial TNCs have also been profoundly affected by the evolution of the capitalist system in this period. In fact, the changes in strategies of TNCs, which occurred in the last 20 years, are associated with transformations in contemporary finance (Aglietta and Rébérioux 2004).

Generally, TNCs should be considered within the understanding that capitalism entered in the last 30 years into a financial-dominated accumulation regime where financial markets and, more specifically, stock exchanges are pivotal to growth-enhancing economic mechanisms (Chesnais and Sauviat 2003). Liberalisation and deregulation have been indispensible prerequisites for the regime and TNCs with institutional investors have been its most important beneficiaries.

As institutional investors, primarily in the US but also in Europe, have been more and more in control of large non-financial TNCs through financial markets (particularly the stock market), they have been able to exert pressure on them and eventually reorient their strategies towards the objective of maximising short-run value for stakeholders.

As Francois Chesnais and Catherine Sauviat (2003) pointed out, the new relationship between finance and industry is modelling the investment pattern (including R&D) of large corporations and on the basis of total freedom of entry and exit in the capital of corporations offered by stock market ‘liquidity’, and with the help of the refined financial routines of new style ‘corporate governance’, financial institutions have acquired an unprecedented power and in fact gained control over non-financial TNCs.

Even if it has been argued that the structure of the control network of TNCs are significantly affecting global market competition and financial stability, to document the extent to which a small number of financial institutions gained control of large non-financial TNCs has been an almost impossible task till recently. Stefania Vitali, James B. Glattfelder and Stefano Battiston (2011), however, produced the first complete investigation of the architecture of the international ownership network, concluding that a large portion of control flows to a small tightly-knit core of financial institutions.

Vitali, Glattfelder and Battiston started with a list of the 43,060 largest TNCs and were able to identify a network of more than a million ownership ties. Their astonishing finding is that only 737 top holders accumulate 80 per cent of the asset control over the value of all TNCs. They also uncovered that, despite its small size, the core holds collectively a large fraction of the total network control. Approximately 40 per cent of the control over the economic value of these TNCs in the world is held, via a complicated web of ownership relations, by a group of 147 TNCs in the core, which has almost full control over itself. Of these 147 TNCs, 75 per cent are financial institutions (ibid.).

The financialisation of the strategies of TNCs is, thus, this process of subordination of their strategies to the needs of valorisation of financial capital mediated by financial markets (Montalban 2009). Large industrial TNCs became, in fact, financial centres with industrial activities. Given the power they hold in international trade and production, the widespread connections through which they organise world industries and markets, and their mode of governance, TNCs nowadays represent a category of firms, based upon a centralisation of financial assets and a specific organisational structure (Serfati 2008) with the core role held by a holding company. As Claude Serfati pointed out, such groups constitute a structure in which financial control dominates industrial activities. TNCs have long developed financial activities, but they have been given further opportunity to do so in the last two decades.

As non-financial TNCs became dominated by a financial logic, these firms have been acting more as an ‘organizational modality of finance capital’ (Serfati 2010: 144). Their main competitive advantage lies in their ability to build an integrated global space, with financial and industrial operations being addressed in a combined way with hundreds of affiliates (production, R&D, financial, etc.) coordinated under the control of a central office, which manages resources and capabilities with the objective of giving coherence and efficiency to the process of valorisation of capital.

As a consequence, TNCs are characterised, in the financial dominated global accumulation regime, by a relative decline in the importance of production activities with an associated increase in importance of financial activities and the appropriation of value of intangible assets (Serfati 2008). Figure 1.2 is an example of such conduct for General Electric (GE) as published by The Economist (2009). In 2007, the most important division of GE in terms of revenue was GE Capital, its financial arm (US$ 67 billion out of US$ 180 billion). GE Capital is responsible for 55 per cent of the company’s total profits, and if it were a bank, it would rank as one of the biggest in America in 2007. But as important as the financial revenues have been the income generated from intangible assets. In particular, technology-related revenues amounted in 2008 to US$ 46.3 billion (26 per cent of total), four times as much as those accruing from its industrial activities (Figure 1.2).

Figure 1.2: GE: Total Revenues by Main Organizational Divisions, 2008 (US$ billion)

Image

Source: The Economist, 17 March 2009.

Such financialisation and the rise in the importance of intangible assets represented main transformations of TNCs’ strategies, which were particularly reflected in the governance of their global value chains. Among these assets, which lack physical substance and to some extent can be retained and traded by a firm, one finds not only R&D, but also patents and trademarks. In this sense, technological innovative activities in TNCs are transformed in relation with their financialisation as evidenced by the rise of their intangible assets.

TNCs and the Globalisation of Innovation Activities

Serfati (2008) showed that the first significant change reflecting financialisation of TNCs’ activities was the creation of Special Purpose Entities (SPEs) in fiscal paradises. According to the author, they are used by TNCs for various purposes. For one, they act as financing and holding companies on behalf of the non-resident parent company. Another category of SPEs has ownership of intellectual property rights (IPR) by their parent companies and collect income in the form of royalties or as fees on licenses. Obviously, the creation of such financial entities makes transactions in intangible assets — in particular, R&D — widely unknown from statisticians in charge of presenting national accounts. As a consequence, profits from intra-company flows of R&D services, return to capital for IP and other related services remain barely accessible.

As part of these strategic changes, TNCs have been involved in substantial modification in the management of their global value chains. Such modification reflected the fragmentation of production processes within global value chains and the growing international sourcing of intermediates. Although one important goal has been to cut down labour costs, the adjustment has been much more complex, including the abandonment of production assessed to be insufficiently value-creating or/and non-strategic. In most cases, new strategies attempted to preserve strategic activities, such as transdivisional research, technology and business intelligence, or development and design, and focused on the lower end of the value chain, the final integration of the product, which is high margins-generating. Serfati (2008) interpreted this shift in TNCs’ strategy in relation with the blurring of the frontiers between value appropriation through a direct production process and through rent capture.

Important for such strategic transformations have been two important changes that came about in the last two decades: (i) a significant broadening of private property rights to a range of intellectual activity, with TNCs becoming more oriented towards the generation of revenues based on their financial and intellectual property rights rather than on the production process itself, with rent-seeking based on IPR (patents, brands, etc.); (ii) the nature and characteristic of R&D undertaken by TNCs.

Additionally, as Chesnais and Sauviat (2003) pointed out, particularly US corporations have been able to acquire the new scientific and technological assets they require in technology-intensive industries through other means than by in-house R&D and endogenous corporate knowledge accumulation. Besides the acquisition of successful start-ups on the NASDAQ and other financial markets, new arrangements for acquiring the output of university research at a low cost relative to its use value have been used. Such arrangements are related to the fall in the public support given to university R&D in different parts of the world and a short-sighted conception of higher education and the organisation and funding of research in the universities that is market-dominated (ibid.).

Also, non-R&D intangible expenditures are now much more important than R&D expenditures for new product and process innovation. For example, Serfati (2008) quotes a study (Corrado et al. 2006) which estimated intangible investments in the United States since the late 1940s. This study showed that not only have intangible assets risen faster than tangible ones, but among them, non-traditional types of intangible capital such as non-scientific R&D, brand equity and firm-specific resources — worker training, and strategic planning and reorganisation costs — are gaining ground and scientific R&D is losing its importance.

Even taking into account that, within innovation expenditures, R&D expenditures, despite efforts for normalisation, are still ill-measured, such trend prevails particularly in the case of TNCs. Case studies support this type of finding. The Economist (2007) published figures from a survey with 750 CEOs of TNCs who ranked R&D as their eighth source of information for innovation (Figure 1.3). According to this study, information from employees, business partners, consumers, competitors, consulting firms, conferences, and the sales and services department are much more important for innovation than internal R&D (Bednarz 2006).

In short, managing intellectual assets, which includes R&D, and finding cheaper ways than R&D of performing innovation related activities seems to be at the core of TNCs’ technology strategies in the financial dominated accumulation regime. As part of such strategies, rent appropriation and reorientation of R&D expenditures towards non-scientific activities and very downstream development play a significant role. Also trying to find less expensive ways to perform the necessary scientific and technological activities has been high in the agenda of TNCs. This implied that TNCs started to decrease expensive internal R&D and use external expertise both in their own environment (universities and research institutes in the North) and abroad (either setting up R&D facilities and/or building closer relations with universities and research institutes in the South).

Figure 1.3: Sources of Information Used by Large TNCs for Innovation (percentage)

Image

Source: The Economist (2007).

All these variables influence the type of R&D performed by the TNCs and their locational pattern. A problem rarely mentioned in the discussions about locational strategies of TNCs from a technological point of view is that the concept of R&D is very broad, involving activities of different levels of complexity. An important exception is the work of Maximilian von Zedtwitz and Oliver Gassmann (2002), which analysed separately the activities of research and development of these companies. The work, based on data from 81 TNCs and 1,021 R&D units distributed in different regions, concluded that at the international level, the research activities (R) are significantly more concentrated than the development (D) ones. The authors show that 73 per cent of research done by these TNCs are concentrated in only five regions of the world: Northeastern United States (New Jersey, New York and Massachusetts), California, Great Britain, Western Europe (especially Germany), and East Asia (Japan and South Korea). In what concerns the technological development activities, although the most important development centres are located near the research centres, the study suggests that they are better distributed, being not only performed in Europe and the USA, but also in Asia, Australia, Africa, and South America. The authors conclude that only firms with significant resources to spend in R&D choose to internationalise both R and D. Such results indicate that more sophisticated technological activities, such as research, would not be performed by TNC subsidiaries, and here the role of national institutions and companies is still of paramount importance.

This multifaceted characteristic of R&D increases the analytic complexity of such processes. In fact, the concept involves relatively diverse activities, each one with different locational needs. First, there is the previously mentioned problem with measurement of R&D expenditures, despite efforts for normalisation. For example, expenditures in R&D, as collected by the UK government, were only 46 per cent of the R&D tax rebates companies claimed in 2004 (Caro and Grablowitz 2008). Also, a significant amount of R&D expenditures, as collected by statistical offices, could hardly have been classified as accounted for as research or technological development. Serfati (2010) pointed out that less than 50 per cent of the total R&D expenditures of the 25 top TNCs could be strictly considered as research and development. In fact, most of these 25 TNCs belong either to the pharmaceutical sector or the auto industry, and the bulk of their R&D spending refer to clinical testing (in the case of pharmaceuticals) or tool development for new models. In both cases, ‘it is questionable to count (them) as R&D expenditures’ (ibid.: 55)

Research activities need access to highly qualified scientific sources (university and research institutes). Development activities are related to product design and require teamwork, including a pool of qualified scientists, engineers and technicians. In most cases, this means the adaptation of new products to local conditions.

These are the reasons why most of the conceptual arguments from different theories of internationalisation, consistent with Vernon’s vision (1966), argue that R&D expenditures by affiliates result at most in the adaptation and not in the development of new products. The objective of these enterprises would be to preserve their market into host countries and, for such, only a few R&D would be needed (Bas and Sierra 2002).

Alice H. Amsden (2001) emphasises that the engagement in R&D activities by TNCs in less developed countries is small in amount and modest in complexity. Even considering that the affiliates invest in local learning in order to adapt the products sold domestically according to the preferences of the local consumers, she shows that the complete generation of a truly innovative product or process is almost inexistent. In fact, she goes further pointing out that in countries where locally-owned firms have a higher share of value added in manufacturing, such as China, India and Korea, overall R&D expenditures by firms tend to be higher than those in countries where foreign ownership of large firms prevail (such as large Latin American countries like Brazil, Argentina and Mexico).

The internationalisation of research activities close to the knowledge frontier may also be a result of the necessity of a firm to improve its knowledge base through technological advantages of the host country. According to Christian Le Bas and Christophe Sierra (2002), in this case, a firm would invest in R&D in another country not only to exploit the competitive advantages that it already has, but also to get more advantages or complementary assets in other countries, which would help to increase their competencies. The authors conclude that in reference to the technological internationalisation, two strategies are followed by these enterprises. In the most usual strategy, they tend to get internationalised in areas/sectors on which they have technological advantage in their home countries and on which, simultaneously, the host country offers a similar advantage. In these cases, the objective of firms would be to complement the competitive advantages that they already have, increasing their knowledge stock and capturing externalities generated by local institutions and enterprises. These firms tend, as well, to explore abroad the capabilities that they already have but which are not relevant in the host country, corroborating Vernon’s argument (1966).

Considering both strategies, the first tends to be followed when firms internationalise their technological activities to other developed countries. When they orientate themselves to developing nations, it is common that they act in the more dynamic sectors in which these countries are not considered competitive, mainly adopting products from developed countries. Pari Patel (1996) points out that affiliates tend to be technologically more active in areas where host countries are relatively weak, or where there is no coincidence between the sectors in which the host country has a technological advantage and a significant presence of foreign firms.

Prasada Reddy (2000) argues that R&D activities, particularly in new technologies (biotechnology, microelectronics, pharmaceuticals, chemicals, and software), are internationalised more easily as compared to conventional sectors. For such emerging technologies, R&D activities could be in split into different modules that could be performed in different places. Vital R&D activities (core), i.e., those technological efforts that are more knowledge intensive, remain concentrated in central host countries. On the other hand, peripheral (no core) R&D activities, i.e., those undertakings that are bound to commodification, began to be directed to TNC subsidiaries in developing nations, where they could be performed at lower cost. This new division of technological labour reflects the increased internationalisation of technology that, in theory, would benefit developing countries. More recently, Reddy (2011), using a broader concept of globalisation of innovation activities, suggested a growing effort by TNCs to globalise R&D activities, and studied what are the new locations of innovative activities by TNCs in emerging countries, what would be the new characteristics of such trends, and what type of R&D is being performed. In a detailed study of Brazil, India, China, and South Africa, Reddy points out that ‘at the global level the proportion of R&D conducted in developing countries by TNCs is still very marginal’ (ibid.: 251), but suggests that there are new characteristics of the world economy that are influencing innovation strategies of TNCs. Basically, new technologies permit the division of the R&D ‘labour process’ and TNCs can access cheaper R&D personnel and infrastructure in developing countries. Besides this cost-related reason, as markets in developing countries — particularly large ones such as China, India and Brazil — become more dynamic and important than markets in advanced economies, TNCs are pressed to go beyond the traditional adaptation of technologies to local markets and address ‘the needs and preferences of the (new) consumers and develop innovative products for such markets’ (ibid.). Even if the R in ‘R&D’ remains firmly in the home countries, and only the worst paid researchers located in developing countries participate in such activities, the D acquires a new meaning even though still subject to foreign control and without much impact in the overall strategy of headquarters. Even though Reddy’s analysis lacks an understanding of the impact of the financial dominated accumulation regime in ownership, control and strategies of TNCs, as pointed out earlier, his investigation is an important step forward in the discussion of R&D activities of TNCs.

In short, the non-internationalisation of technology is related to the strategic and complex nature of the system of innovation and a consequent embeddedness of TNC activities — especially R&D activities — in their own local environment (Cassiolato and Lastres 2005). The authors emphasise that only in the case of ‘technological exploitation’ (the global consumption of goods like machines, equipment, industrial inputs, and some consumption goods like domestic appliances, automobiles and computers), it is possible to talk about globalisation. Even in these cases, the access is concentrated in higher social levels in developing countries. However, the generation and diffusion of knowledge are still strongly concentrated, this concentration being a way to guarantee to large firms in the developed countries the appropriation of the results of their R&D investments.

If the arguments are correct, the question is, then, how to reconcile such a critical view with the arguments proposed by authors of the so-called ‘globalisation’ of R&D.

What the Data Actually Show: US TNCs R&D Investment

TNCs from different regions of the world present distinct behaviours, considering that they are the result of different social, cultural, political, and institutional contexts, which influence their evolution and strategies (Dicken et al. 1994). Arguing against the general belief that globalisation would suggest a blurring of corporate nationalities, Louis W. Pauly and Simon Reich pointed out the differences in National Systems of Innovation such as ‘the durability of German financial control systems, the historical drive behind Japanese technological development through tight corporate networks, and the very different time horizons that lie behind American, German and Japanese corporate planning’ that underpin the specificities of TNCs coming from each of these regions (1997: 24).

Building on this work, Peter Dicken (2003) proposed a typology on the differences between US, German and Japanese TNCs. Such typology regards their corporative governance, corporative financial systems and strategic behaviour relative to R&D, foreign direct investment and intra-firm trade. For R&D strategies, Dicken’s proposal suggests that Japanese TNCs seem to have a very limited propensity to perform R&D abroad and have been oriented to high-tech and process innovation. On the other hand, US and German TNCs show some propensity to perform R&D abroad. However they differ regarding the orientation of their strategies with German TNCs showing a more focused approach while US TNCs are more geared towards non-R&D innovation activities performed abroad.

Although we do not have comprehensive data on decentralisation of R&D activities by TNCs as a whole, it is possible to infer some general trends and qualify the idea of technological globalisation currently supported by several authors, from the specific behaviour and strategies of the US TNCs. As pointed out earlier, it was these firms that started after World War II the intense process of inter-nationalisation of capital that has marked capitalism in the last 50 years (Hymer 1960). Still today, subsidiaries of US TNCs prevail: according to UNCTAD, they represented in 2005 almost 42 per cent of the total affiliates worldwide (UNCTAD 2005). However, considering the historical context and geographic neighbourhood, US TNCs were relatively more active in Europe and South America, while Japanese firms guided themselves to Asia. Nevertheless, the increasing economic importance of this continent resulted in an expressive expansion of US TNCs’ investment in Asia.

The US Bureau of Economic Analysis (BEA) database contains statistical information about US TNCs and their affiliates worldwide, including specific data about R&D expenditures in different receiving countries. Different to other studies based on patents, which in general focus on the behaviour of the parent company and their home countries, this database permits the evaluation of TNCs’ performance from the point of view of host countries, including several developing nations. It is possible to analyse, for example, which countries have succeeded in attracting R&D investments. BEA database can, therefore, be considered a reasonable indicator of the worldwide performance of US TNCs. This database includes information from 1982 onwards. However, the referring R&D statistics are only available from 1989. Hence, our analysis is concentrated on majority-owned nonbank foreign affiliates, which is available until 2008. Unfortunately, more recent data were published only to all majority-owned foreign affiliates, which includes subsidiaries of US banking TNCs and is not the aim of this study.

The database permits also to discuss several other dimensions of the relationship between affiliates and parent companies, which helps to elucidate the role of subsidiaries in the productive and technological structure of TNCs. Figure 1.4 shows the relative importance of R&D expenditures, sales, employment and compensation (wages plus benefits) in subsidiaries of US TNCs.

First of all, the data presented in the figure suggest that R&D activities are still concentrated in the United States and that this trend is not changing, at least in a significant way. During the observed period, R&D performed abroad oscillated between 13 and 16 per cent of total R&D by US TNCs, reaching a peak of 18.6 per cent in 2008. However, it is not possible to indicate a tendency of a structural transfer of R&D expenditures from parent companies to their affiliates.3

It is also interesting to note that affiliates present a larger share in employment and sales as compared to compensation and R&D. This indicates that higher wages, such as those connected to technological development, are proportionally more concentrated in parent companies compared to the overall workforce and sales of subsidiaries.

In the 2000s, one could observe a clear tendency toward increase in the proportion of workers employed by subsidiaries in relation to workers employed in parent companies. A slight trend of growth could be observed in the 1990s, but it became stronger in the 2000s: the proportion of employment in subsidiaries, compared to parent companies, has increased from 34.2 per cent (in 2001) to 48.0 per cent (in 2008). This tendency is even stronger in the case of sales: the proportion of sales in subsidiaries, compared to parent companies, has increased from 37.1 per cent (2001) to 59.6 per cent (2008).

Figure 1.4: US TNCs: Relative Participation of Subsidiaries — R&D Performed, Sales, Employment, and Compensation, 1992–2008

Image

Source: BEA (2013).

R&D and compensation data also showed an increase in the 2000s, but much less than that of sales and employment. Therefore, these data suggest a growing importance of local markets and local employment by subsidiaries of US TNCs, but proportionally this trend affects neither their levels of remuneration nor their relative participation on R&D. In other words, the trend of R&D globalisation is much lower than the trends on globalisation of sales and employment.

This becomes even clearer when the relation between R&D expenditures and sales of US subsidiaries and US parent companies is shown (Figure 1.5). Here, it is possible to conclude that such relation also did not change significantly during the observed years. In the considered period, this percentage oscillated between 0.74 per cent and 0.86 per cent for subsidiaries. In the case of parent companies, the observed percent was significantly higher, being equal or superior to 2.0 per cent in all examined years. After 2002, it is possible to observe a slight tendency of decrease in technological effort4 of subsidiaries. This recent movement is determined by a proportional ‘transfer’ of US TNCs’ sales to its subsidiaries, which was not accompanied by R&D in the same intensity. In absolute values, the growth of affiliates’ R&D expenditures was significant during the 1990s, but was followed by a proportional growth in sales and parent expenditures, maintaining R&D/sales of subsidiaries and parent companies constant.

If it is not possible to state that the US TNCs transfer R&D from the United States to their affiliates abroad, the question should be: what happened in terms of relative performance among their subsidiaries during the studied period? Table 1.3 presents the relative share of R&D expenditures of US TNCs’ affiliates in the developed world and in different regions of the developing world during the period 1989–2007. In an attempt to detail more, it also presents the same figures for BRICS countries. The first important observation to be done is that R&D activities of US subsidiaries, when internationalised, are still primordially orientated to other developed countries. Evidently, this confirms the suggestions obtained from the literature review above. However, the data also show that the participation of R&D expenditures of US TNCs affiliates in the developed world has been considered reduced. In 1989, these countries absorbed 92.0 per cent of R&D expenditures implemented by all subsidiaries. During the period, this participation has been slowly decreased: to 87.7 per cent in 1994, 80.3 per cent in 2000, 75.8 per cent in 2004, and 73.8 per cent in 2007.

Figure 1.5: R&D Expenditures/Sales by US Parent Companies and US Subsidiaries, 1990–2008

Image

Source: BEA (2013).

Table 1.3: Share in R&D Expenditures Performed by US TNC Subsidiaries, 1989–2007 (percentage)

Region/Period

1989

1991

1994

1997

2000

2001

2002

2003

2004

2005

2006

2007

TOTAL

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

Developed Countries*

92.0

92.20

87.70

86.40

80.30

77.20

79.6

79.90

75.80

75.30

73.40

73.80

Asia and the Pacific**

1.10

1.90

3.50

2.80

9.60

12.20

9.2

8.90

9.70

9.00

11.10

11.20

Latin America

2.20

2.70

4.00

4.50

3.20

2.90

3.7

3.10

2.80

3.00

3.50

3.30

Africa

0.20

0.20

0.10

0.20

0.10

0.10

0.1

0.10

0.10

0.10

0.20

0.20

Brazil

1.28

1.59

2.00

2.99

1.24

1.01

1.45

1.46

1.35

1.46

1.94

1.80

Russian Federation

0.000

0.000

0.005

0.009

0.004

0.07

0.10

0.28

0.29

India

0.03

0.03

0.04

0.15

0.36

0.36

0.44

1.18

1.14

1.28

China

0.01

0.06

0.24

2.47

3.06

2.53

2.23

2.42

2.57

3.26

South Africa

0.13

0.13

0.12

0.15

0.10

0.12

0.10

0.09

0.11

0.18

0.15

Source: BEA (2013).

Note: *EU-15, Canada and Japan.

**Excluding Japan and Australia.

The reduction of relative participation of developed countries’ affiliates is accompanied, during the studied period, by two movements. The most important is a remarkable shift in direction towards East Asian countries. As shown in Table 1.3, the subsidiaries of the Asian and Pacific countries (excluding Japan and Australia) were responsible for 1.1 per cent of all affiliates’ R&D expenditures in 1989; this percentage increased to 2.8 per cent in 1997, 8.9 per cent in 2003 and 11.2 per cent in 2007. The other trend occurred in Latin American subsidiaries, which accounted for 2.2 per cent of all affiliates’ expenditures in R&D in 1989. In the case of these enterprises, some increase throughout the 1990s (4 per cent in 1994 and 4.5 per cent in 1997), followed by a reduction in the 2000s (3.2 per cent in 2000, 3.1 per cent in 2003 and 3.3 per cent in 2007) was observed.

The table also presents the same information for Brazil, Russia, India, China, and South Africa. It shows that Brazil and China are the main countries responsible for the mentioned tendencies. China’s participation was 0.01 per cent in 1991, reaching 2.5 per cent in 2003 and 3.2 per cent in 2007. India’s participation also presented an important increase, from 0.03 per cent in the beginning of the 1990s to 1.3 per cent in 2007. However, this amount was not relevant in comparison to the percentage spent in developed nations. In the case of Brazil, the technological efforts performed by these enterprises, after presenting a tendency of relative increase until 1997, fell again at the end of the 1990s. In 2007, Brazil reached values similar to the ones observed in the beginning of the 1990s. Subsidiaries localised in Russia and South Africa present a very small participation.

The most important change in the tendencies described above occurred from the 2000s. It is during this period that one can notice an upsurge and consolidation of transfer of R&D activities to Southeast Asia (in particular, but not only, to China) from other developed countries and also from countries like Brazil.

This information further becomes more understandable when confronted with the ones presented in Table 1.4, which shows the relative share in sales performed by US affiliates in the same regions/countries. They show a tendency of reduction in the share of developed countries’ affiliates and an increase in the share of Asian countries’ affiliates. In Latin America, since early 2000, the relative share in sales is about 11 per cent. Among the studied countries, the relevance appears once again in the case of China, whose participation was 0.003 per cent in 1989 and attains 1.68 per cent in 2003 and 2.49 per cent in 2007.

Table 1.4: Share in Sales of US TNC Subsidiaries by Country and Region, 1989–2007 (percentage)

Region/Period

1989

1991

1994

1997

2000

2001

2002

2003

2004

2005

2006

2007

TOTAL

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

100.00

Developed Countries*

74.40

73.20

70.80

67.80

66.50

65.50

64.70

64.80

66.90

65.20

63.50

62.40

Asia and the Pacific**

6.40

7.50

9.80

11.50

12.00

11.70

12.20

12.10

13.10

14.00

14.90

15.40

Latin America

8.50

8.30

9.40

10.60

11.70

12.00

12.30

11.50

10.70

11.10

11.50

11.40

Africa

1.10

1.10

1.00

1.10

1.40

1.30

1.40

1.40

1.60

1.80

1.90

1.80

Brazil

3.00

2.17

2.31

2.97

2.50

2.36

2.32

2.24

2.09

2.51

2.55

2.68

Russian Federation

 

0.07

0.16

0.12

0.20

0.24

0.28

0.32

0.36

0.44

0.59

India

0.03

0.02

0.07

0.13

0.25

0.31

0.34

0.34

0.40

0.46

0.50

0.59

China

0.00

0.08

0.22

0.62

1.05

1.29

1.64

1.68

1.87

2.05

2.30

2.49

South Africa

0.26

0.25

0.25

0.33

0.44

0.40

0.41

0.44

0.51

0.52

0.50

0.45

Source: BEA (2013).

Note: *EU-15, Canada and Japan.

**Excluding Japan and Australia.

Comparing both tables, it is interesting to note that, in the case of developed countries, the participation in R&D expenditures is larger than in sales, a tendency contrary to that observed in other regions and countries. Brazilian subsidiaries, for example, represented 2.68 per cent of all sales of US TNC subsidiaries in 2007, and only 1.80 per cent of their R&D expenditures. In 1989, these percentages were 3.00 per cent and 1.28 per cent. Among developing nations, China is an exception — in 1991, US affiliates in that country were responsible for 0.08 per cent of worldwide sales and 0.01 per cent of global R&D expenditures, whereas since 2000, this proportion has inverted. In 2007, China represented 2.49 per cent of sales and 3.26 per cent of R&D expenditures. Therefore, as in the case of subsidiaries in developed countries, in 2000 the subsidiaries in China had already a larger share in R&D expenditures than in sales.

In order to better clarify this discussion, Table 1.5 shows a technological effort indicator (R&D/sales) for the same group of selected countries and regions. This proportion has been significantly raised in Asia. In China, for example, this indicator of technological effort went up from 0.10 per cent in 1991 to 1.16 per cent in 2003. Since then, as the sales grew higher than R&D, the effort indicator decreased, reaching 0.97 per cent in 2007. However, this percentage was still higher than the R&D effort by TNC subsidiaries in advanced countries, as shown in Table 1.5. But the most impressive result can be observed in the Indian case, especially after 2005. Its technological efforts rose from 0.62 per cent in 1989 to 0.86 per cent in 2004, and reached an average of 1.7 per cent between 2005 and 2007.

In Brazil, from 1989 to 1997, the technological effort saw a steady increase. After this period, this tendency is reverted until 2001 and, since then, a partial recovery can be observed.

In the mid-1990s and in the beginning of 2000, there is an improvement in the technological effort made by subsidiaries in Southeast Asia, to the detriment of those performed in Latin America. Among developing countries, there seems to be a tendency toward transfer of technological effort performed in Latin American countries to the Asian region.

Table 1.5: R&D Expenditures/Sales (percentage) by US TNC Subsidiaries by Country and Region, 1989–2007

Region/Period

1989

1991

1994

1997

2000

2001

2002

2003

2004

2005

2006

2007

TOTAL

0.69

0.76

0.83

0.74

0.82

0.78

0.84

0.77

0.78

0.73

0.71

0.74

Developed Countries*

0.85

0.95

1.02

0.94

0.99

0.92

1.03

0.95

0.88

0.84

0.82

0.87

Asia and the Pacific**

0.12

0.19

0.29

0.18

0.65

0.81

0.63

0.57

0.58

0.47

0.53

0.54

Latin America

0.18

0.25

0.35

0.32

0.23

0.18

0.25

0.21

0.21

0.20

0.22

0.21

Africa

0.10

0.11

0.10

0.12

0.07

0.09

0.09

0.07

0.05

0.06

0.08

0.07

Brazil

0.29

0.55

0.72

0.75

0.40

0.33

0.52

0.50

0.50

0.43

0.54

0.50

Russian Federation

0.00

0.00

0.03

0.03

0.01

0.16

0.20

0.44

0.36

India

0.62

0.98

0.51

0.84

0.88

0.81

0.86

1.90

1.63

1.60

China

0.10

0.22

0.29

1.92

1.56

1.16

0.93

0.86

0.79

0.97

South Africa

0.34

0.39

0.39

0.34

0.19

0.24

0.18

0.14

0.16

0.25

0.25

Source: BEA (2013).

Note: *EU-15, Canada and Japan.

**Excluding Japan and Australia.

Table 1.6 presents the ratio of employment in R&D over total employment for US parent companies and affiliates in different regions and countries. An analysis of Table 1.5 confirms the trends previously discussed. As expected, the workforce employed in R&D is larger in parent enterprises and most of developed countries’ affiliates, even if one can notice a small tendency to reduction in both cases. In Asian and Pacific countries, this kind of employment tends to grow, but until 2004 the percentages were still lower than those observed in developed countries. In Latin America and Africa, this variable presents a small reduction during the studied period.

Table 1.6: Employment in R&D/Total Employment of US TNCs’ Parent Companies and Subsidiaries, 1994–2004 (percentage)

Region

1994

1999

2004

US Parent Companies

3.4

2.8

Total — Affiliates

1.8

1.6

1.6

Developed Countries (Europe, Canada and Japan)

2.5

2.2

2.1

Asia and the Pacific (excluding Japan and Australia)

0.6

1.0

1.0

Latin America

0.7

0.6

0.4

Africa

0.3

0.2

0.1

Brazil

1.5

1.2

Russian Federation

0.4

India

1.7

0.3

0.7

China

0.3

0.8

1.0

South Africa

0.7

0.2

0.1

Source: BEA (2013).

In what refers to some BRICS countries, in 2004 Brazil still presented a larger proportion of its workforce in R&D activities than the other countries. However, this proportion is increasing only in India and China.

Table 1.7 presents the compensation (wages plus benefits) per employee for the same group of regions/countries. The relation between the average remuneration of the affiliates in BRICS and the average remuneration paid in developed countries was similar when comparing the beginning of the 1990s to the end of the analysed period (2007), except in the cases of India and South Africa. In these countries, the average remuneration paid for the subsidiaries in the country presented an increasing trend.

Table 1.7: US TNCs: Compensation by Employee, 1989–2007 (US$ thousand)

Region/Period

1989

1991

1994

1997

2000

2001

2002

2003

2004

2005

2006

2007

TOTAL

25 .9

29 .7

32 .2

33 .8

32 .3

32 .3

32 .6

35 .4

38.3

39.6

40.7

42.5

Developed Countries*

32.3

37.6

42.5

44.1

42.6

42.2

43.1

47.9

54.1

56.8

58.5

61.9

Asia and the Pacific**

10.2

12.7

14.2

16.3

16.6

16.7

16.2

16.7

16.4

17.0

17.9

19.0

Latin America

10.4

11.4

14.3

17.7

16.4

17.3

16.2

16.0

15.8

16.6

17.7

18.4

Africa

8.5

10.0

13.1

16.2

17.0

16.0

16.9

18.2

21.7

23.6

24.9

26.1

Brazil

14.5

15.5

18.9

29.7

21.5

21.2

18.8

19.4

19.1

21.5

23.9

26.1

Russian Federation

14.5

11.1

13.1

13.4

16.6

16.5

13.3

14.3

16.2

18.9

India

3.9

3.6

4.3

5.6

8.7

8.6

8.8

9.4

11.0

11.0

12.3

13.3

China

8.9

7.2

4.5

7.8

7.7

7.9

7.7

8.2

8.4

8.5

9.3

10.1

South Africa

12.5

16.2

16.8

19.9

21.7

20.4

18.9

20.3

25.5

27.0

29.1

31.0

Source: BEA (2013).

Note: *EU-15, Canada and Japan.

**Excluding Japan and Australia.

Even compared to most developing countries, the average amount per employee paid by the subsidiaries in India and China are still relatively modest. The average remuneration of the subsidiaries in China, for example, represents half of the average remuneration paid by the Brazilian subsidiaries. In association with other characteristics of these countries, this factor can be considered a stimulus to the entry of the TNCs.

The relative loss of importance of Brazil is apparently linked to two interrelated movements. On the one hand, the currency devaluation in 1999 explains the abrupt fall that happened in that year. But the foreign exchange crisis is part of a wider process and could not explain by itself the persistence of Brazil’s relative loss, considering that at least after 2002, the local currency was again strongly appreciated. The second reason seems to be related to the stagnation of the Brazilian economy, revealed by the modest GDP growth rates achieved in the last decade. R&D investments of US MNCs abroad seem to be redirected from countries with low growth rates — actual and potential — towards large development economies which, given the very high rates of growth, represent extremely relevant internal markets. Investments in R&D in countries like China present other cost advantages related to Brazil, namely lower wages.

In summary, statistics of US MNCs reveal that the technological globalisation is a phenomenon still very limited, since R&D activities are concentrated significantly in the parent companies and, when inter-nationalised, they are mainly directed to developed countries. In this way, the developing nations should not depend on the performance of these enterprises to promote their technological improvement, because besides the low decentralisation of their R&D expenses, they tend to adapt products and processes, without creating in the more delayed countries innovations that permit these countries to develop economically. As pointed out by one observer, ‘some R&D — mostly lower-end support laboratory — has been located in a few of the newly industrializing economies’ (Dicken 2003: 284).

TNCs’ impacts on local R&D capabilities: Spillover and crowding-out effects

One of the main controversies about the role of TNCs on recipient countries is in what measure these enterprises collaborate with their economic/sectoral development. There are two contentious consequences related to TNCs’ performance, especially in the more dynamic sectors of the recipient country: the spillover effects (positive) and the crowding-out effects (negative).

A considerable literature, in part presented below, including case studies and econometric analyses, have been used in order to support the idea that spillover effects promote significant productivity gains for local enterprises. According to this literature, the technological spillovers based on FDI could occur through demonstration effects, linkages, competition, and work mobility.

Other studies cast some doubts on the hypothesis that FDI-receiving countries may substantially benefit from these technological spillovers. Some suggest that these spillovers create insignificant or even negative impacts, due to negative competitive effects. As most TNCs acquire a dominant market position in host countries, they are able to appropriate a significant part of their specific advantage, avoiding the absorption of knowledge by domestic firms.

A series of empirical studies (Kokko and Kravtsova 2008) tried to separate, for four East European countries, R&D capabilities achieved with the foreign investment related to process, product, marketing, and management technologies. The most important conclusion of these studies is that most independent affiliates — which are more diversified, orientated to local markets, established through acquisition and not through new direct investments and where the foreign TNC has only minority share — are exactly those which have stronger innovative capability in process and product technologies. For subsidiaries that are strongly linked to the parent enterprise with total shareholder control by the foreign TNC and with a higher degree of exports, the result is the opposite: these firms increased mostly local marketing and management capabilities, with a lower impact on local process and product technological development.

Several studies performed during the 1970s–1990s have demonstrated that foreign capital did not have any perceived impact upon the production capabilities of local enterprises. This was the case, for example, of Jozef Konings (2001) who analysed the case of different Eastern European countries.

Observing the experience in China, C. F. Wang (2005) emphasises an inverse effect not usually studied: how TNCs’ affiliates benefit from the technological spillovers originated in local firms. Wei and Liu (2003) present empirical evidence of reverse technological spillovers in the Chinese manufacturing sector, pinpointing the importance of local knowledge. Wang (2005) suggests that to obtain such spillovers, TNC subsidiaries should invest in R&D in host countries, since these technological spillovers are, in general, geographically restricted, especially when they involve the mobility of the labour force, as researchers and engineers tend to interact more intensively with people geographically close and culturally similar to themselves. Therefore, R&D expenditures in subsidiaries would be needed in order to facilitate this interaction. Besides, intensive competition requires that affiliates increase their capacity to market adaptation and learning.

As for crowding-out effects, Amsden (2001) suggests that in monopolistic markets, the control of capital makes a difference, since a process of industrialisation initially based on the presence of TNCs can limit the subsequent entry of domestic firms. The market power of TNC subsidiaries and their dominance over production activities inhibit the establishment of local technology and R&D activities.

Moreover, Long (2005) argues that due to the higher wages TNCs pay, subsidiaries hire more qualified workers, while local firms have to rely on a less skilled or trained workforce. This would give subsidiaries a higher competitive position and a disadvantage to domestic enterprises (DE).

Some studies suggest that the larger the presence and power of TNCs in a given market, the more limited the technological effort accomplished. Amsden (2001), for example, presents negative correlation coefficients between the participation of foreign firms in total capital formation and the investment stocks in science and technology (S&T) in different developing countries in the 1990s. This relation was tested considering different types of investment in S&T, such as R&D (–0.45), patents (–0.45), scientific publications (–0.42), or scientists and engineers involved in R&D (–0.22). Therefore, countries in which foreign investment is relatively limited tend to invest more in their own capabilities. In the same direction, Zucoloto and Toneto Júnior (2005) analysed different manufacturing sectors in Brazil and showed that a negative correlation between participation of foreign capital in a particular sector (measured by share of foreign capital in value added) and the level of technological effort implemented by these firms. The correlation between these variables, using the Spearman’s coefficient, was –0.57, equivalent to 5 per cent. In the same line, Patel (1996) also concluded that firms that spend a higher proportion of their sales in R&D are the ones which produce relatively less technology away from the home country.

To summarise, in the case of the horizontal spillovers (intra-industry) to domestic productivity, case studies and sectoral cross-sections present more positive results than the panel data analysis (Rojec 2007). The evidence of these spillovers is weak if panel data is the methodology employed. The observed results at the firm level, which indicate null or negative spillover, can be related to the effective capacity of the TNCs to protect their technological advantages, avoiding potential spillovers.

Vertical spillovers — based on forward and backward linkages — present more consistent results than horizontal analysis, confirming positive effects on domestic productivity.

In general, studies have concluded that positive spillovers are related to:

(a) Absorption capability of domestic firms: It is also argued that spillovers are only captured with any effect on productivity where the capturing firms demonstrate the capabilities to identify and utilise them. Holger Görg and Eric Strobl (2003) point out that the absorptive capacity of host country firms is an important determinant of whether or not they benefit from FDI (see also Kokko 1994; Kokko et al. 1996). That is, firms have to be able to take part of spillovers from multinationals in order to improve their productivity. Amy Glass and Kamal Saggi (1998), for example, argue that the technology gap between the host and home countries indicates the absorptive capacity of host country firms. The larger the gap, the less likely are host country firms to have the human capital and technological know-how to benefit from the technology transferred by multinationals (Görg and Strobl 2003).

Local firms are not passive receptors of spillovers. Their strategies and resources are crucial to obtain benefit from the interaction of foreign investors. FDI can contribute to the increase of domestic productivity if the gap between foreign and domestic enterprise were not high (Haddad and Harrison 1993; Kokko 1994) and, especially, when domestic enterprises present absorption capacity, which means capacity to recognise the value of the new knowledge, to integrate it in their activities and to utilise them productively.

Technological spillover depends on both firms involved, and it is not achieved automatically. Technological advanced enterprises, which invest more in R&D, tend to better benefit from the presence of foreign subsidiaries. Absorption capacity is related to the presence of human capital, size of the enterprise, infrastructure, business environment, and size of the local economy, among others.

(b) The role of headquarter and affiliates: Besides specific characteristics of domestic firms, technological spillovers also depend on the performance of headquarters and affiliates. The entry of subsidiaries via joint ventures tends to result in stronger spillovers to domestic firms, compared to totally foreign investment (Rojec 2007). But in general, the results are still ambiguous.

The analysis concluded that suppliers of intermediate goods with technological specialisation and scale economies have a certain degree of autonomy; but local suppliers whose production is based on low cost work have lower bargain power.

(c) Geographical proximity between affiliates and domestic firms: Domestic firms closer to subsidiaries are more propense to benefit from spillovers. In this sense, industrial clusters can be an opportunity of direct interaction between firms, making easy the positive spillover and productive specialisation.

It is important to emphasise the limits of these evaluations. Some problems related to data measurement can be found: as sample definition, quality of data and sample, appropriate level of aggregation, measure of productivity spillover, and endogeneity problems in cross section and panel analysis.

TNC and BRICS: What is the Evidence Presented in this Book?

The book analyses the relation between TNCs and the BRICS countries. In what follows, we want to summarise the main contributions of different chapters.

FDI: Evolution and related national policies

Boosted by national favourable policies, FDI increased strongly in BRICS countries during the 2000s. Figure 1.6 illustrates the trends in FDI inflows to BRICS during the last two decades. Over such period, China had the highest inflows among all BRICS nations. In 2008, at the peak of its FDI inflows, China recorded about US$ 108 billion. Over almost the entire period, Brazil was the second highest FDI recipient. Russia, on the other hand, has shown robust growth until 2008, reaching US$ 75 billion. The same movement can be seen in India, but in a less intense way — strong growth in FDI inflows until 2008, reaching US$ 42 billion. South Africa is at the bottom of the list of BRICS countries with less than US$ 10 billion during the entire period. In 2009, FDI inflows were reduced in all BRICS countries, but only China and Brazil recovered, in 2010, the levels of 2008.

Figure 1.6: FDI Inflows to BRICS Countries, 1990 to 2010 (US$ billion)

Image

Source: Calculated using data from UNCTAD (2011).

In the mid-1990s, deep structural change in the Brazilian economy propelled a FDI boom — the third in its history. The central government played a key role for attracting FDI, basically through the approval of constitutional amendments that ended public monopoly in sectors such as telecommunications and oil and gas, and removed earlier distinction between Brazilian firms of national and foreign capital. Such FDI boom in Brazil mostly targeted the services sector, particularly the privatised infrastructure sector (telecommunications and electricity). Also, it concentrated on operations of M&A of local firms. The share of TNC subsidiaries on overall sales of the 18 most important production chains jumped from 36 per cent in 1996 to 52 per cent in 2000. In the last years, with the end of privatisation, FDI flows have been strongly directed to the primary sector — oil and natural gas extraction and, specially, metallic minerals extraction.

In Russia, the expansion of TNCs has been encouraged by its government, which pursues a policy aimed at providing favourable investment climate and development of investment infrastructure. In order to attract FDI in Russia, the government implements a set of specific measures, with the support of a Foreign Investment Advisory Council (FIAC), where the main objective is to create attractive investment climate in Russia, and of a federal law that provides guarantees of equal rights, protection of interests and property to all investors regardless of their ownership. As a consequence of these incentives, TNCs have been rapidly increasing their presence in the Russian economy: FDI flows went from US$ 2.7 billion in 2001 to US$ 75 billion in 2008. However, the liberalisation of external economic activities was implemented without taking into account domestic economic realities, and TNCs are generally not ready for large-scale investments in the modernisation of major Russian production facilities whose equipment is mostly obsolete.

In India, since the 1990s, policy makers have perceived FDI inflows to be a major source of scarce capital, which is capable of contributing to capital formation, output and employment, and providing access to technology, managerial skills and markets. Consequently, FDI has become an important form of external financing for India. Until 1994, FDI inflows to this country were less than US$ 1 billion. After that, inflows stayed around US$ 2.6 billion per year in the second half of the 1990s and achieved an average of US$ 5.4 billion in the first half of the 2000s. In 2006, FDI inflows rose again to a level of US$ 20 billion, reaching US$ 42 billion in 2008. But after the international crisis, inflows were reduced again to US$ 24.6 billion in 2010. These include a large number of cases of foreign firms acquiring wholly Indian ones. Policy makers in India have shifted away from the focus on merely attracting a higher quantity of FDI to targeting a higher quality of FDI (UNCTAD 2005). From the mid-1990s onwards, policy makers in India even targeted to attract FDI for activities such as R&D, design, technical support centre, and education and training. FDI in sectors designated as high technology is receiving preferential treatment in terms of access to infrastructure, tax incentives and subsidies. The latest policy of FDI promotion practices, as in Brazil, the principle of no discrimination against foreign firms.

China is a dominant player amongst BRICS countries in terms of its FDI outflows. In China, on the early stage of reform and opening-up, due to policy restrictions, joint venture and cooperation ventures were the main forms of foreign investment. But with improvement of China’s investment environment, an increasing number of foreign investment projects have taken the form of solely foreign-funded enterprises. After the mid-1990s, non-financial TNCs began to invest in capital-intensive or technology-intensive areas, and started to emphasise the strategic position of subsidiary companies in China in the global business integration. However, much of China’s exports in high-technology fields still represent assemblage of electronic products based on components that are produced in other countries.

The South African economy is nowadays highly favourable to foreign investors, though few national documents currently contain specific references to FDI. At the international level, the country has committed to the majority of international and/or multilateral agreements relevant to ensure the protection of foreign direct investors and of their intellectual property. Generally, no discrimination is applied against foreign investors except in the banking sector. Besides its favourable TNC context, the country also offers a wide range of incentives to both domestic and foreign direct investors. Nevertheless, South Africa is still a small FDI recipient, and FDI inflows appear to be volatile. Sectorally, FDI has been concentrated in the primary sector, notably in mining. The country is particularly attractive in this regard, given the large stocks and variety of mineral resources on its territory.

R&D and Innovation Activities: The Role of TNCs

In general, the analyses in all chapters recognise the influence of TNCs on their economies and the efforts made by their governments in recent decades to stimulate FDI flows. But the conclusion is that, with minor exceptions, the contribution to BRICS innovation capacity and development has been very limited.

For Brazil, a comparative analysis of large (with more than 500 employees) locally-owned and TNC subsidiaries, based on the Brazilian Survey on Technological Innovation (PINTEC) revealed that, with few exceptions, R&D/net sales ratio of large local firms tends to be higher than that of large TNC subsidiaries across different sectors of manufacturing activity. Also, the ratio of R&D expenditures over total innovation expenditures of locally-owned large firms is bigger than those of TNC subsidiaries. The authors conclude that the innovative performance of large domestic enterprises is stronger than the subsidiaries. Using micro data to compare the performance of 150 TNCs worldwide with their Brazilian affiliates, it was shown that the average technological efforts (R&D/sales) of Brazilian subsidiaries were much lower (around 0.7 per cent in 2005) than what the TNC as a whole spent worldwide (5.0 per cent in 2005). Such data suggests that the technological performance of subsidiaries is comparatively still very low. Besides its limited performance, R&D activities of TNCs in Brazil are very concentrated: almost half (48.6 per cent) of the large subsidiaries’ R&D is performed by firms in the auto industry.

In Russia, nowadays the creation of R&D organisations with TNC participation, except in very few cases, does not bring to the country any outstanding result in development and promotion of advanced technologies or products. Foreign-owned companies are considered even less innovative than Russian ones. However, a relevant level of innovation activity has been shown by companies jointly owned by Russian and foreign capital, which have been twice as innovative as other types of companies. The main aspect of local expenditures that affects TNCs’ innovation activities in Russia is the low salaries of highly skilled professionals. Despite the fact that in 2001–2007 salaries of R&D personnel across all R&D sectors have increased, they still remain extremely low, which makes conducting research and development in Russia an attractive activity.

Foreign firms also reveal a lower R&D intensity compared to domestic firms in India. The post-liberalisation period has been characterised by the establishment of centres working exclusively on the objective of global R&D. This trend has spread to the fields of software engineering, chip design bioinformatics and agro-biotechnology. Recently, there has been a significant increase in the number of FDI projects through US companies for design, R&D and technical support activities for the development of global products. TNC subsidiaries in India do not focus on technology absorption, but on the customisation of the technologies originated in their headquarters. Analysis of the patterns of collaborations and patent ownership indicates that TNCs are establishing a highly unequal division of labour with the national S&T system in India. Besides using the foreign affiliates for the products under development for global markets, TNCs are actively using the instrument of ownership of IPRs to prevent the spillovers from being captured by the domestic entrepreneurs. So far there have been very few spin-offs from the foreign R&D centres. In general, MNCs use collaboration for later-stage work to avoid possible infringements. Further, major software firms such as Infosys, Wipro and TCS are under contractual obligation to transfer the ownership of IP created in the host organisation.

At present, China has become an important R&D base for TNCs, especially due to the growing pool of skilled engineers and technicians, to facilitate the reduction in research expenditure and pressure from the Chinese government. In spite of the enhancement of this process, the share of subsidiaries located in China is small compared to the TNCs’ global R&D investment. Although supportive R&D was still the mainstream of foreign R&D activities in China, many TNCs have transferred their innovative R&D facilities to China. Wholly-owned affiliates are the main ownership mode of foreign R&D centres. Foreign R&D organisations established by transnational firms are highly concentrated in the ICT industries (including software, telecommunication, semiconductors, and other IT products), but equipment and components, biotechnology and drugs as well as automotive industries also attract a significant amount of this investment. Beijing and Shanghai are the preferred locations, but more recently Guangdong, Jiangsu and Tianjin have appeared on the map of foreign R&D investors.

A comprehensive analysis of foreign R&D in China’s manufacturing industries was made by Sun (2010). The results of the study shows, first, that foreign firms are committing less R&D resources than China’s domestic enterprises. Chinese domestic enterprises spend about 0.63 per cent of their sales on R&D, while foreign-owned subsidiaries spend about 0.37 per cent on R&D. Chinese domestic firms also use more human resources on R&D (1.44 per cent of total) than foreign-owned firms (0.92 per cent).

The study also shows that foreign R&D activities concentrate in a few sectors, which include medical and pharmaceutical products, transport equipments, electronics and telecommunication, instruments/meters/culture and office machinery, electric equipment and machinery, general machinery, metal products, and chemical fibres. It also shows that foreign firms are less likely to conduct R&D in sectors where they possess strong advantages.

Particularly in hi-tech sectors, Chinese domestic enterprises are contributing more resources to R&D than foreign enterprises. In sectors such as electronics and telecommunication, office machinery, and electric equipment and machinery, differences between local firms and TNC subsidiaries are particularly high. For example, Sun’s data show that Chinese-owned enterprises in the electronics and telecommunication industry spend 3.49 per cent of their sales in R&D compared to only 0.64 per cent by foreign-owned subsidiaries.

Finally, in sectors where foreign firms target the local market with strong competition from Chinese-owned firms, foreign firms are ‘forced to make R&D investments in order to be successful’ (ibid.: 359) and ‘if they want to achieve success in China’s domestic market, they need to customise their technologies, and they cannot simply rely on technologies generated elsewhere’ (ibid.: 360).

Sun’s conclusion is that most foreign R&D in China is minor and adaptive in nature and that ‘Chinese governments and domestic firms should not expect to benefit too much from foreign R&D activities in China. Instead they should focus on building up indigenous innovative capabilities: the majority of foreign firms will invest in R&D when they feel the competition from domestic firms’ (ibid.: 360).

In South Africa, 48 per cent of subsidiaries of foreign firms performing R&D reported collaborating with other local firms. Health care and aerospace deserve attention in this topic — aerospace has been developed through large defence budget acquisitions in South Africa and a long history of telemetry (Kahn 2007). R&D is concentrated in two main South African provinces: Gauteng, which incorporates Johannesburg and adjacent Pretoria.

Spillover and crowding-out effects on domestic enterprises

Analysing the effects of TNCs on domestic enterprises of BRICS countries, the studies shows that vertical productivity spillovers have been present in some countries and sectoral contexts, but it has been harder to find horizontal productivity spillovers or technological spillovers. Some crowding-out effects also have been found in specific situations.

The Brazilian study concluded for the occurrence of vertical spillovers; positive horizontal effects are found only when locally-owned firms already acquired higher levels of innovative capabilities. Market seeking strategies by TNCs, particularly when combined with high levels of effective protection, have a negative impact in locally-owned firms including those with higher levels of relative efficiency (Laplane et al. 2004).

In Russia, foreign TNCs have established training centres to ensure Russian personnel’s skills match the required level and transfer knowledge necessary to use or implement specific technological solutions. Practically all IT companies support training programmes to promote corporate standards for business solutions. In India, the contribution of foreign firms to the activities connected with the processes of upgrading of the NSI was found to be insignificant. The main gainers have been TNCs and their affiliates, which have better access to technology and other intangible assets. In the case of domestic firms, those who have adopted a strategy of relying on the non-equity route for technology imports against royalty payments are alone reported to have done well. The other domestic firms that have no networking or non-equity strategic alliances have not done well. Further, only when their technology and productivity gap was small in relation to multinational enterprises (MNEs) have domestic firms done well under liberalisation.

The chapter on India shows that the gains made by the domestic firms in sectors such as pharmaceuticals and automobiles cannot be attributed to the third generation policies of promotion of FDI and innovation. On the contrary, domestic firms could extract better results from the systems of innovation because the government chose to delay external liberalisation in these sectors. However, the analysis suggests that it is possible, with the use of appropriate obli-gations and restrictions, to develop the connections of domestic STI system with the emerging global institutions in a favourable way. Domestic firms and national-level S&T organisations would need to step on to the paths of proactive learning to harness the spillovers and linkages for the benefit of indigenous innovation. But in an actual scenario, indigenous R&D undertaken to assimilate foreign technology and exploit technology spillovers still has not improved in a significant way.

The Chinese analysis reveals that foreign investment has failed to promote an effective improvement in local companies’ innovation abilities. Due to the lack of apparent technology spillover from TNCs to local businesses, the role of TNCs remains controversial in the country. Researchers have found that there are positive productivity spillovers from foreign firms to their local suppliers in upstream sectors, but when it comes to the effect on domestic innovative technological development, the study was not as optimistic, pointing out the existence of insufficient spillover effect. Once more, this result was not exclusively caused by the TNCs’ strategies — it is also attributed to the poor absorption abilities of local firms and the industrial structure of the country.

In South Africa, there has been a very mixed experience with the role of TNCs in domestic companies. In many sectors, such as iron and steel, telecommunications, pharmaceuticals, transport equipment, and consumer goods, TNCs have been said to abuse their power position to the detriment of competitors or consumers, crowding out local development. However, some positive impacts can be seen in the automotive sector, as productivity gains from domestic firms through linkages with TNCs.

Domestic TNCs of BRICS Countries

BRICS countries also benefit from the enhancement of FDI worldwide. Their enterprises have presented a relevant degree of inter-nationalisation in recent years, improving their importance to the world economy.

Outward foreign direct investment (OFDI) of Brazilian enterprises presented an important growth in the recent period, achieving US$ 180 billion in 2010 (UNCTAD 2011). Many companies have increased their investments abroad to diversify the risk associated with operations in the domestic market. Essentially, the main driver of such expansion has been market access (e.g., Marcopolo, Embraer). Some firms (e.g., Petrobras, Vale) have also invested abroad seeking access to natural resources, while others (e.g., Gerdau, CUTRALE) have sought to avoid trade barriers or to improve the logistics infrastructure for their exports (UNCTAD 2004). The internationalisation of Brazilian large firms got momentum after the Brazilian Development Bank (BNDES) began to provide specific supporting mechanisms. In particular, BNDES assessed financing schemes abroad and redirected them to potential Brazilian TNCs under very favourable conditions with very long repayment periods and very low spreads. In the last two years, BNDES increased substantially its role as it started to use its investment arm, BNDESPar (BNDES Participations) to become a shareholder of these firms.

Russia was the 15th largest foreign direct investor in 2005, according to UNCTAD. Its OFDI increased strongly in the 2000s, from US$ 20.1 billion in 2000 to US$ 433 billion in 2010. To some extent, this phenomenon can be attributed to the emergence of Russian TNCs in the fuel and energy sector that took place over recent years. Significant FDI also has been made by Russian telecommunications companies. This internationalisation movement was strongly promoted by the State — about 30 per cent of Russian TNCs’ accumulated foreign assets are government-owned. Nevertheless, in recent years most of the OFDI has been boosted by private companies.

In India, since the early 1990s, firms have been induced to expand their multinational operations. The motives for investing abroad are not only market-seeking, but have also expanded to include access to strategic assets and skills overseas, enhancing non-price segment of global competitiveness through establishing trade-supporting infrastructure, and circumventing the effects of emerging trading blocs on a regional basis by gaining insider status. Indian multinationals draw their ownership advantages from their accumulated production experience, cost-effectiveness of their production processes and other adaptations to imported technologies made with their technological effort, and sometimes with their ability to differentiate products. Since the onset of the latest phase of external liberalisation, the dynamics of the processes of learning, competence building and innovation-making is now getting increasingly grounded in the multinational operations of Indian firms. However, analyses of the emerging patterns of alliances, acquisitions and collaborations being entered into by the Indian multinationals clearly show that through the FDI-based relationships not many resources could be leveraged by them from the acquisitions and strategic alliances for the upgrading of national processes of technological accumulation. At large, efforts of Indian multinationals have not yet increased the capabilities of development of new products in a significant way. There exists little encouragement from FDI-based operations for the development of products and systems needed for facing the challenges of socio-technical transitions to be undertaken by the country. The NSI is thus experiencing a liability in the form of distortion in the goals of innovation-making at all levels including public sector research organisations.

China’s OFDI reached US$ 297.6 billion in 2010. Most part of this overseas expansion involves investment in other developing and transition economies, which are the main destinations of Chinese TNCs. The first generation of Chinese TNCs was mainly driven by large State-owned enterprises. The second generation, which emerged after the early 1990s, has diverse ownership structures, including private ownership and foreign participation, and has been presented in competitive manufacturing industries, in particular those related to electronics and information and communication technologies. Hong Kong (China) was usually their first stop along the path to internationalisation since the first generation, and it remains the major location for their ‘overseas’ operations. The main activities attracting Chinese investments are business activities, trade and natural resources. In recent years, FDI in manufacturing and mining has grown especially fast, accounting for 60 per cent of total Chinese FDI outflows in 2005. Because of a lack of core technology, many Chinese firms mainly compete by low value-added products.

Outward FDI from South Africa reached more than US$ 81 billion in 2010. FDI outflows started to accelerate between 1997 and 1998 — given South Africa’s democratic dispensation installed in 1994, and the opening up of markets after the dismantling of apartheid, its companies were afforded the opportunity to invest in economies previously closed to them for political reasons. Most TNCs from South Africa can be categorised into five key categories: mining and energy; transport (aviation and road transport); retail; telecommunications; and financial services. In the industrial sectors, minerals and energy TNCs dominate, including former State enterprise, Sasol (petrochemicals and chemical products), and the many mining giants. Although spread globally, the core of South African TNC investments are concentrated in Africa.

Figure 1.7: OFDI of BRICS Countries, 2000–2010 (US$ billion)

Image

Source: Calculated using data from UNCTAD (2011).

TNCs from BRICS have not only grown in numbers but also become much more active in innovation and technological development. Tables 1.8 and 1.9 present some innovation-related figures for BRICS TNCs that are among the top 1000 non-EU firms in terms of R&D investment in 2005 and 2010, respectively.

Table 1.8: BRICS TNCs among the Top 1,000 Non-EU Investors in R&D, 2010

 

 

 

 

R&D Investment

Net Sales

Employees

R&D/Net Sales Ratio

R&D per Employee

No.

Company

Rank

ICB Sector

2010 €m

2010 €m

2010 #

2010 %

2009 %

2010 €K

2009 €K

Brazil

 

 

 

 

 

 

 

 

 

 

 

1

Petroleo Brasiliero

90

Oil and Gas Producers (53)

740.20

89,489

80,492

0.8

0.7

9.2

6.6

 

2

Vale

99

Mining (177)

654.48

33,762

70,785

1.9

4.2

9.2

12.2

 

3

Gerdau

459

Industrial Metals and Mining (175)

96.41

14,097

41,290

0.7

0.5

2.3

1.5

 

4

CPFL Energia

529

Gas, Water and Multi-utilities (757)

80.38

5,399

7,924

1.5

1.0

10.1

9.4

 

5

Totvs

602

Software (9537)

67.32

507

13.3

12.8

 

6

Embraer

714

Aerospace and Defence (271)

53.75

3,998

18,884

1.3

2.6

2.8

5.8

 

7

Randon S.A. Implementos E

793

Automobiles and Parts (335)

46.55

1,670

2.8

 

8

WEG

810

Industrial Machinery (2757)

45.27

1,972

2.3

2.0

 

9

Braskem

953

Chemicals (135)

35.38

11,449

4,638

0.3

0.4

7.6

5.6

China

 

 

 

 

 

 

 

 

 

 

 

1

Huawei Technologies

39

Telecommunications Equipment (9578)

1,805.76

20,947

110,000

8.6

8.8

16.4

15.6

 

2

PetroChina

51

Oil and Gas Producers (53)

1,339.36

165,770

552,698

0.8

1.0

2.4

2.1

 

3

China Railway Construction

64

Construction and Materials (235)

1,062.47

51,622

229,070

2.1

1.5

4.6

2.8

 

4

ZTE

74

Telecommunications Equipment (9578)

896.90

7,948

85,232

11.3

10.2

10.5

9.8

 

5

China Petroleum and Chemicals

114

Oil and Gas Producers (53)

546.94

216,423

373,375

0.3

0.3

1.5

1.2

 

6

CSR China

209

Commercial Vehicles and Trucks (2753)

276.44

7,230

80,000

3.8

3.7

3.5

 

7

China Railway

238

Construction and Materials (235)

236.20

51,595

285,054

0.5

0.2

0.8

0.3

 

8

Metallurgical Corporation of China

269

General Industrials (272)

202.94

23,348

126,987

0.9

0.9

1.6

1.4

 

9

BYD

272

Electronic Equipment (2737)

198.48

5,281

180,000

3.8

2.9

1.1

0.8

 

10

China Communications Construction

294

Construction and Materials (235)

178.17

30,852

101,030

0.6

0.8

1.8

2.0

 

11

China Coal Energy

303

Mining (177)

169.68

7,953

56,013

2.1

2.4

3.0

2.6

 

12

SAIC Motor

314

Automobiles and Parts (335)

161.54

15,796

4,373

1.0

2.6

36.9

 

13

Guangzhou Automobile

399

Automobiles and Parts (335)

116.85

6,770

29,361

1.7

1.1

4.0

 

14

Dongfang Electric

420

Industrial Machinery (2757)

110.56

4,254

19,990

2.6

1.9

5.5

3.7

 

15

Weichai Power

445

Automobiles and Parts (335)

100.41

7,089

1.4

1.3

 

16

Harbin Power Equipment

565

Industrial Machinery (2757)

73.56

3,260

18,485

2.3

1.6

4.0

2.8

 

17

China Telecom

646

Fixed Line Telecommunications (653)

61.09

24,871

312,322

0.2

0.3

0.2

0.2

 

18

China National Materials

681

Construction and Materials (235)

57.06

5,005

46,419

1.1

1.5

1.2

1.3

 

19

TravelSky Technology

913

Telecommunications Equipment (9578)

37.34

346

4,324

10.8

11.2

8.6

8.1

China (Hong Kong)

 

 

 

 

 

 

 

 

 

 

1

Dongfeng Motor

199

Automobiles and Parts (335)

296.38

13,846

96,255

2.1

2.3

3.1

2.5

 

2

Lenovo

246

Computer Hardware (9572)

226.17

16,097

27,039

1.4

1.3

8.4

7.2

 

3

Shanghai Electric

302

Industrial Machinery (2757)

169.77

7,122

28,836

2.4

1.9

5.9

4.2

 

4

CNOOC

469

Oil and Gas Producers (53)

93.15

20,707

4,650

0.4

0.5

20.0

15.2

 

5

Techtronic Industries

501

Electrical Components and Equipment (2733)

86.90

2,530

18,440

3.4

3.8

4.7

5.3

 

6

Geely Automobile

668

Automobiles and Parts (335)

58.41

2,274

17,102

2.6

3.0

3.4

3.8

 

7

Great Wall Motor

752

Automobiles and Parts (335)

50.61

2,508

38,268

2.0

2.7

1.3

1.5

 

8

VTech

841

Telecommunications Equipment (9578)

42.34

1,277

32,300

3.3

3.7

1.3

1.6

India

 

 

 

 

 

 

 

 

 

 

 

1

Tata Motors

191

Automobiles and Parts (335)

311.92

20,527

1.5

1.3

 

2

Prithvi Information Solutions

276

Computer Services (9533)

193.14

319

2,050

60.5

77.3

94.2

95.0

 

3

Polaris Software Lab

293

Software (9537)

178.78

264

10,974

67.6

64.3

16.3

15.2

 

4

Bharat Heavy Electricals

344

Industrial Machinery (2757)

138.25

5,527

46,274

2.5

2.6

3.0

2.5

 

5

Mahindra & Mahindra

383

Automobiles and Parts (335)

123.24

4,953

2.5

2.9

 

6

KPIT Cummins Infosystems

421

Computer Services (9533)

110.02

171

6,514

64.5

55.9

16.9

13.9

 

7

Zylog Systems

433

Software (9537)

104.93

163

3,394

64.2

71.9

30.9

 

8

Dr Reddy’s Laboratories

452

Pharmaceuticals (4577)

98.66

1,206

14,900

8.2

5.8

6.6

5.1

 

9

Lupin

486

Pharmaceuticals (4577)

88.37

951

11,000

9.3

8.7

8.0

6.5

 

10

Infosys

493

Software (9537)

87.86

4,585

130,820

1.9

1.8

0.7

0.7

 

11

Reliance Industries

506

Oil and Gas Producers (53)

86.22

44,313

22661

0.2

0.2

3.8

2.5

 

12

Core Projects and Technologies

554

Support Services (279)

75.45

141

53.4

58.8

 

13

Bharat Electronics

723

Electrical Components and Equipment (2733)

52.67

894

11,545

5.9

5.1

4.6

3.4

 

14

Ashok Leyland

726

Commercial Vehicles and Trucks (2753)

52.12

1,853

15,812

2.8

3.2

3.3

2.9

 

15

Cipla

781

Pharmaceuticals (4577)

47.48

1,022

4.6

4.5

 

16

Sun Pharmaceutical Industries

911

Pharmaceuticals (4577)

37.38

651

8,000

5.7

7.8

4.7

6.9

 

17

Oil and Natural Gas

928

Oil Equipment, Services and Distribution (57)

36.67

16,963

32,826

0.2

0.2

1.1

1.0

 

18

FCS Software Solutions

990

Computer services (9533)

33.07

45

73.2

76.4

Russia

 

 

 

 

 

 

 

 

 

 

 

1

Gazprom

108

Oil and Gas Producers (53)

589.92

87,837

393,000

0.7

1.0

1.5

1.8

 

2

Lukoil

482

Oil and Gas Producers (53)

89.45

64,164

130,000

0.1

0.1

0.7

0.4

South Africa

 

 

 

 

 

 

 

 

 

 

1

Sasol

442

Oil and Gas Producers (53)

102.31

13,775

33,339

0.7

0.7

3.1

3.1

Source: European Commission (2011).

Note: ICB: Industry Classification Benchmark.

Table 1.9: BRICS TNCs among the Top 1,000 Non-EU Investors in R&D, 2005

 

 

 

 

R&D Investment

Net Sales

Employees

R&D/Net Sales Ratio

R&D per Employee

No.

Company

Rank

ICB Sector

2005 €m

2005 €m

2005 #

2005 %

2004 %

2005 €K

2004 €K

Brazil

 

 

 

 

 

 

 

 

 

 

 

1

Petroleo Brasiliero

125

Oil and Gas Producers (53)

338.25

47,748

53,904

0.7

0.7

6.3

4.0

 

2

Vale Do Rio Doce

186

Mining (177)

234.82

10,844

38,560

2.2

1.6

6.1

4.4

 

3

Embraer

457

Aerospace and Defence (271)

78.98

3,247

16,953

2.4

1.3

4.7

2.6

China

 

 

 

 

 

 

 

 

 

 

 

1

PetroChina

127

Oil and Gas Producers (53)

335.63

58,011

439,220

0.6

0.8

0.8

0.7

 

2

China Petroleum & Chemical

184

Oil and Gas Producers (53)

235.63

86,468

364,528

0.3

0.3

0.6

0.4

 

3

ZTE

215

Telecommunications Equipment (9578)

205.85

2,267

30,811

9.1

10.7

6.7

9.3

 

4

Semiconductor Manufacturing

523

Semiconductors (9576)

66.86

993

9,096

6.7

8.0

7.4

8.7

 

5

CNOOC

717

Oil and Gas Producers (53)

42.19

7,296

2,696

0.6

0.5

15.6

11.2

 

6

China Telecom

944

Fixed Line Telecommunications (653)

27.42

17,786

244,867

0.2

0.1

0.1

0.1

China (Hong Kong)

 

 

 

 

 

 

 

 

 

 

1

Lenovo

258

Computer Hardware (9572)

162.91

11,322

1.4

1.7

4.3

 

2

Yue Yuen Industrial

453

Personal Goods (376)

79.75

2,674

265,000

3.0

3.3

0.3

0.3

 

3

Techtronic Industries

603

Electrical Components and Equipment (2733)

53.82

2,445

22,053

2.2

2.1

2.4

1.7

 

4

TCL Communication Technology

786

Telecommunications Equipment (9578)

37.92

619

5,172

6.1

2.9

7.3

2.9

India

 

 

 

 

 

 

 

 

 

 

 

1

Ranbaxy Laboratories

399

Pharmaceuticals (4577)

92.76

1,006

9.2

7.3

8.3

 

2

Tata Motors

415

Automobiles and Parts (335)

89.68

4,513

29,606

2.0

1.9

3.0

2.5

 

3

Dr Reddy’s Laboratories

699

Pharmaceuticals (4577)

43.27

346

6,000

12.5

9.4

7.2

 

4

Sun Pharmaceutical Industries

954

Pharmaceuticals (4577)

27.12

232

11.7

11.3

Russia

 

 

 

 

 

 

 

 

 

 

 

1

Gazprom

224

Gas, Water and Multiutilities (757)

193.02

40,809

397,000

0.5

0.6

0.5

South Africa

 

 

 

 

 

 

 

 

 

 

1

Sasol

890

Oil and Gas Producers (53)

30.34

9,255

30,004

0.3

0.7

1.0

1.7

Source: European Commission (2006).

Note: ICB: Industry Classification Benchmark.

From the data presented in these tables, it is interesting to note, first, the significant increase in the number of BRICS TNCs among these top 1000 non-EU firms in such a short period. In fact, in 2005 there were only 19 TNCs from BRICS among the top 1000: three from Brazil, 10 from China (including those based in Hong Kong), four from India, and one each from Russia and South Africa. Also, not a single BRICS firm was among the first 100 of these firms. In 2010, however, the number of BRICS TNCs amongst the top 1000 non-EU firms increased to 57 (nine from Brazil, 27 from China, 18 from India, two from Russia, and one from South Africa). In 2010, six of these firms (four from China and two from Brazil) were among the first 100 non-European TNCs that most invest globally in R&D.

Also worth noting is that, with the exception of the Brazilian aircraft producer Embraer (which ranked 457th in 2005 and 714th in 2010), all other BRICS TNCs increased their relative position in the overall top 1000 rankings. The implication is that the 2007–2008 crisis, which affected negatively most Western TNCs, did not have a similar impact in BRICS TNCs, with the exception of a firm (Embraer) that has relied mostly on the dynamism of markets in Europe, North America and Japan.

Data of these tables also suggest a pattern of specialisation among BRICS countries related to the importance of these 57 TNCs from BRICS that are amongst the top 1000 non-EU firms that most invest in R&D worldwide. At one extreme, one finds that the only two Russian and sole South African TNCs all belong to the oil and gas sector, which suggests a total dependence on the specialisation in these resource-intensive activities. At the other extreme is China with its 27 TNCs covering a wide spectrum of activities but with an important emphasis on ICT technologies, particularly telecom equipment — Huawei ranked 39th and ZTE ranked 74th in 2010. Other important activities where Chinese TNCs have established in terms of R&D investment are automobiles and parts (seven TNCs), industrial machinery (three TNCs), oil and gas (PetroChina, ranked 51st, and China Petroleum, ranked 114th), mining, electrical equipment, etc. India showed an expected specialisation in pharmaceuticals, auto and parts, and computer services and software, while Brazil remained with Petrobras in oil and gas, Vale in mining, Embraer in aircraft, a large software firm, and individual positive performance in industrial metals, agricultural implements, electrical energy utilities, and chemicals.

Conclusion: Implications for Innovation Policy

In this final section, conclusions drawn from the analysis of studies undertaken in respect of the experience of BRICS are compared with the results of past investigations undertaken into the impact of policies of FDI promotion that late industrialising countries followed. During the pre-globalisation phase, obligations and restrictions placed by governments in respect of access to market, local content and exports played an important role in persuading foreign investors to contribute to innovation processes, technological transformation and structural change in late industrialising countries.

Scholars have investigated the contribution of FDI vis-à-vis the other channels of knowledge and technology transfer. In Asia, Akira Goto and Hiroyuki Odagiri point out that Japan acquired advanced foreign technology through all channels except for inward FDI (2003: 89). The absence of FDI as a channel for knowledge transfer is also typical of some other Asian catching-up countries that followed suit after Japan, such as Korea (Kim 1997, 2003) and Taiwan (Aw 2003).

Although to a lesser extent the importance of this factor is also confirmed by the experience of BRICS countries, the achievements of Indian success in pharmaceuticals and Chinese success in telecommunications and electronics shows that governments of these countries still require a policy space to advance the processes of technological accumulation at home.

Innovation-making for the process of technological upgrading is still contingent on active efforts being made for technological accumulation by domestic firms and for improving the NSI through the enhancement of investment in human resource development, strengthening of the linkages of national-level S&T institutions with domestic firms, protection of innovation-making processes by maintaining the IPR regime opened for indigenous innovation and home market protection. However, today, policy regimes in developing countries are certainly characterised by a mix that offers more advantage to TNCs as compared to domestic firms. The analysis made in the different chapters of this book shows that the balance of advantages being offered has varied and is not the same in all emerging economies. Achievements and limitations of the technological upgrading process are now much more dependent on the degree of discipline shown by domestic enterprises and the success of a country in the implementation and coordination of policies of creation of national S&T capacity, development of effective demand for indigenous innovation and home market protection (Cimoli et al. 2009).

Studies reported in this book on the experience of upgrading of the systems of innovation in the BRICS countries during the last two to three decades also confirm that the channel of FDI was not a major international source of knowledge and technology transfer at least for sectors that have ultimately proved to be somewhat dynamic in respect of innovation-making. It is shown that the main burden of competence building had to be largely borne by national S&T institutions. There is also confirmation that the upgrading of technology had to be carried out mostly through the investment of domestic enterprises. Achievements and limitations of this process have depended on the degree of success of a country in the coordinated implementation of policies of creation of national S&T capacity, development of effective demand for indigenous innovation and home market protection. Investigations into the experience of BRICS countries also point out that the governments had to make their domestic enterprises to submit to a policy of conditional access to foreign sources of knowledge and technology and to bring the required discipline to recipient firms for the development of national absorptive capacity.

However, studies also confirm that there is now a greater influence of the third generation policy regime of FDI promotion in the BRICS countries. This policy regime allows a very different set of policy mixes that give total freedom to foreign investors to establish their operations in the domestic space. Foreign investors are allowed to use the national economic and technological space without being subject to any kind of restrictions and obligations. While the balance of advantages being offered to the TNCs is certainly not the same in all countries, definitely the new policy mixes offer greater access to the national knowledge base and markets. Today, in many countries foreign subsidiaries receive almost the same treatment as what the domestic enterprises got in earlier times from the policy makers. Arguably, it has been suggested that changes in the system of governance of the global economy may have influenced the policies of FDI promotion in this new direction. Earlier catching-up paths are believed to be no more open to countries on account of the new regime of trade and development as enshrined in the rules of the World Trade Organization (WTO).

Policy makers have chosen to encourage domestic firms and S&T organisations to actively participate in the global production and innovation networks (GPINs). Focus has been on encouraging domestic firms and S&T organisations to establish close linkages with foreign firms that choose host locations for seeking the supply of cheap talent and advanced skills. Recently, as factor seeking investments originating from the TNCs of US and Europe have moved into knowledge-intensive activities in a big way, this tendency has been consciously allowed to grow in the emerging economies through the new policy mixes of FDI promotion and supportive innovation policy measures. Even the policies promoting OFDI from BRICS countries also aim to tap the possibilities that can arise from the OFDI in respect of the reverse flows from host economies to foreign subsidiaries.

Studies reported in this book also cover the results arising out of policies promoting OFDI in the BRICS countries. While only a small amount of OFDI is being undertaken with the aim of tapping the possibilities arising from it due to the reverse flows from host economies to TNCs, it appears that BRICS TNCs have not been able to realise the impact of reverse flows from host locations through even these investments. Since the implications from investing abroad by TNCs of BRICS countries are embedded in firms’ strategies as well as in government policies that have problems in their systems of innovations at both corporate and national level, the gains and liabilities being accumulated in host economies must be kept in view.

As pointed out in all chapters of this book, experience of BRICS countries does not confirm the emergence of too many spin-offs from European and US TNCs’ investments. For instance, it appears that the finance required for the new start-ups and spin-offs is still not available in most BRICS countries. Private equity (PE) and venture capital (VC) firms are not interested to support the processes of innovation-making by such firms. Even in the case of OFDI, the reverse flows from countries of Europe and the United States to the BRICS economies have not been possible because the emerging economies’ TNCs are apparently still overstretched and short on resource, and in very few cases their existing established strategies allowed them to tap into the national systems of host locations for the benefit of innovation-making and technological capability building at home. Most tie-ups and investments are directed towards the objectives of taking over production facilities and establishing marketing and distribution networks. Processes of competition faced by TNCs arising out of BRICS are capable of overstretching and draining them of resources. Consequently, there are now many examples of takeover of these new BRICS TNCs by TNCs originating from developed countries.

Although the implications of this experience are slowly making an impact on the options of policy makers of BRICS countries, it is also apparent that they are not yet ready to move to a policy regime in which the innovation policy would be used in a non-neutral manner and positively discriminate the measures of innovation policy in favour of indigenous innovation. It seems that the logic of achievement of higher growth rates is still driving the national states of these countries to practice more of the same pathways of greater integration with the emerging global economy. There is an uncertainty in respect of the path that they should take to grow in the near future. There is also a lack of clarity regarding costs and benefits of taking to the new pathways for growth. Consequently, competition in respect of both inward as well as outward FDI continues to rise in the case of BRICS countries. Most of them now measure the level of success in competition by the amount of FDI their respective governments are able to attract in respect of knowledge-intensive activities. In most of the BRICS countries, governments are now in competition to attract FDI for activities such as research and development, design, development and testing, technical support centre, education and training, etc. FDI in sectors designated as high technology is receiving preferential treatment in terms of access to infrastructure, tax incentives and subsidies in these countries. Governments have become liberal in their approach with regards to encouraging FDI in the sectors connected with IT, software development, biotechnology, pharmaceuticals, and so on.

The thrust of new policy mixes includes the introduction of measures providing for: (a) stronger protection of IP, preferential access to infrastructure, both technological and physical, through the formation of special economic zones (SEZs); (b) supply of cheaper R&D services from publicly funded S&T institutions; (c) availability of cheaper talent for scientific and engineering work; (d) development of educational institutions that are capable of offering well trained professionals who are fully familiar with international management and accounting practices; (e) easy access to domestic market; (f ) elimination of export and technology transfer obligations; (g) removal of controls over monopolies and restrictive business practices; (h) dilution of environmental controls; and so on.

Being aware that TNCs can offer new production facilities, managerial practices and also technology transfer to host countries, it is necessary that in the new context, policy makers must formulate the policy mixes of FDI promotion and innovation policy measures to succeed in the process of building national capabilities. After the experience of the global financial crisis, certainly there is again a renewal of interest in dealing with the implications of financial liberalisation for the domestic economies in both developed and developing countries. In the emerging economies, policy makers are engaged in rethinking the policies that were responsible for transmission of the impacts of the global crisis into their economies. In this context, the role of private equity and venture capital is also required to be reconstituted keeping in view the specific experiences of transmission of the impacts through the instruments of finance on innovation in the emerging economies. Solutions to the problem of how the governments must constitute the mix of policies of FDI promotion and innovation policy measures need to be evolved keeping in view that the systems of innovation can have varying mitigation and transformational capacities due to the existence of their systemic connections with the pathways of growth chosen during the last two decades.

New directions

Since the new measures under implementation also belong to the sphere of innovation policy, in the recent period scholars of innovation have begun to actively study the impact of the policy changes on FDI promotion on the National Systems of Innovation. In the field of innovation studies, focus is back on the study of contribution of FDI to the processes of technological change and innovation making (Fagerberg and Srholec 2007). Policy challenges that developing countries face in respect of monitoring and evaluation of the impact of interventions being put in place by governments to deal with the interplay between innovation policy and FDI promotion have recently come under investigation (Narula 2009, Costa and Filippov 2008, Filippov 2009, Filippov and Guimón 2009). José Guimón and Sergey Filippov (2010) suggest that the challenge of present times requires a different approach than policies focused on the ‘quantity’ of FDI inflows, a shift from a mindset that prioritises attraction of greenfield investments towards one where the focus is on ‘subsidiary development’ and on changes in the policy mix and in the approach to performance measurement.

To the contrary, studies reported in this volume show that domestic enterprises and efforts of national-level S&T institutions seem to matter more in the sectors that have proven to be dynamic in terms of innovation-making. Experience of the implementation of the third generation policies of FDI promotion and innovation-making is clear that the pathways of growth constituted during the period of liberalisation were by themselves certainly insufficient for the introduction of major innovations. By shaping the institutions and incentives in the same direction for market and non-market actors, the narrowly defined pathways of growth were instrumental in not allowing their processes of competence building and innovation-making to go beyond outsourcing activities and exports to regulated markets in select product segments. Demand-side signals for the activities of innovation of both non-market and market actors were not helpful for the efforts to be undertaken for the benefit of indigenous innovation. In such a situation, the NSI of BRICS countries have been shown to be getting harnessed less for major innovation of the indigenous kind and far more by S&T asset-seeking and outsourcing markets-related FDI for minor innovations.

It is apparent that policy coordination would need to appropriately focus on the management of the interplay of global push and domestic pull factors. Policy makers need to keep in mind that foreign capital is collectively in a better position to forge a new international division of labour in which FDI is their most important instrument for the incorporation of domestic private capital and publicly funded S&T infrastructure. It cannot be ruled out that in the absence of suitable policy coordination, domestically developed expertise may get used far more for the development of global networks of production and innovation for the benefit of the world market. Alliance building and interactions of domestic and foreign firms need regular monitoring with the aim of not only undertaking programmes and policies to take benefit of the possible realisation of spillover, linkage, competition, and demonstration effects, but also to prevent and minimise the liabilities and distortions being experienced by the systems of innovation in the presence of greater FDI.

In terms of the onus of directing FDI and guiding domestic firms and national-level S&T structures to leverage the local factors for the development of the appropriate kind of relationships, the government must bear the responsibility of formulating the relevant elements of policy coordination in respect of technology transition management and the development of systems of innovation. Policy coordination is required especially in respect of those policies that shape the management of the dynamics of emerging networks, the nature of specialisation, the development and implementation of appropriate technologies, and the development of long- or short-term relationships of domestic firms and national-level S&T organisations. As far as the area of innovation policy is concerned, policy coordination would need to target especially the areas of policy interventions capable of providing opportunities to the national-level S&T organisations, the young start-ups and the domestic firms to harness the spillovers, competition and demonstration effects at home for the benefit of indigenous innovation. It is clear that the fundamental political arrangements, which structure a country’s domestic institutions and international linkages in the policy regime under implementation, are what ultimately determine a country’s propensity to undertake indigenous innovation.

FDI cannot play the role of network organiser with the aim of benefitting the processes of competence building and innovations needed by the local productive structures. Policy coordination should take care of the changes to be made with regard to the direction and promotion of foreign direct investment. Policy space exists in abundance in respect of the determination of policies of investment, competition, procurement, demand articulation, R&D subsidies, and standards-making. The government has to determine the goals of development of NSI. The host government must take responsibility, put the politics in command and undertake the policy coordination. In order to meet the challenge of development of the pathways of growth for undertaking inclusive development, the government can get the relevant domestic actors to initiate and develop innovation-making programmes for the benefit of self-reliant development.

Since the pathways of growth accompanying the new policy of FDI promotion have to bear a significant part of the responsibility for the institutions and capabilities of NSI evolving in a myopic way during the period of liberalisation, foreign subsidiary development cannot be the aim of the third generation policies of FDI promotion and innovation-making. Specific aims of the government of any latecomer country, in respect of the policy coordination, have to flow from the developmental needs of the people and the upgrading requirements arising out of the need to alleviate the constraints facing the National System of Innovation with regard to the management of technology transitions. Analysis shows that the domestic market is still the main attraction for foreign firms.

Image

Notes

1. Using gross fixed capital formation (GFCF) as a proxy of investment.

2. Dunning considered three types of advantages related to internationalisation of firms: (i) Property advantages: assets — intangible or tangible — that confer market power to transnational enterprises; (ii) Internalisation advantages: capability of firms to add value to its assets, internalising instead of selling them on the market; (iii) Localisation advantages: related to the institutional aspects, government policies and market structures demanded by transnational firms. Moreover, there should be locational factors that make its exploration in foreign locations still much more lucrative.

3. All data about North American affiliates are classified as Majority-Owned Nonbank Foreign Affiliates of Nonbank US Parent, that is, the parent ownership must be larger than 50 per cent. However, parent data are included in Nonbank Foreign Affiliates of Nonbank US Parents, that is, enterprises with less than 10 per cent of voting capital. The number of affiliates of the first group corresponds to 92 per cent of the second group, while the relation between sales made by affiliates of first and second groups is 85 per cent (2003).

4. Technological effort means R&D expenditures/sales.

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2

Transnational Corporations and the Brazilian National System of Innovation

José E. Cassiolato, Graziela Zucoloto, Rosiléia Milagres, and Fabio Stallivieri


As a colony of a lesser power, Brazil has a long tradition of relying on foreign direct investment (FDI). During colonisation (1500–1808), the Portuguese forbade any local economic activity that could in any way harm its interests. Local elite and bourgeoisie grew from the exploit of such a subordinate role and, after independence, commerce and extractive activities kept being at the core of the economy for a long time. Foreign capital, basically British, was important to the Brazilian economy of the 19th century in mining and in railways. In the 1920s, several key TNCs of the emerging technological paradigm, such as Ford, General Motors, Philips, and Rhone Poulenc, set up subsidiaries in Brazil to assemble their products. Such subsidiaries mostly organised imports, distributed their goods and were responsible for maintenance and technical assistance in the local market. In fact, throughout the 19th century and the first half of the 20th century, relying on FDI was a key part of economic policies as they were vital to the setting up of infrastructure needed for exports of sugar and coffee and to the urbanisation process that accompanied the growth of the economy evolution (energy, telephony, etc).

This chapter aims at analysing the role of TNCs in the Brazilian National System of Innovation (NSI). It is organised as follows: first, it discusses the historical evolution of FDI in Brazil after the end of World War II, when the Brazilian industrialisation process was set into motion. Next, the chapter presents evidence regarding the role of TNC subsidiaries in the Brazilian NSI, followed by a discussion of the present trends regarding outflows of FDI from Brazil. The last section summarises the conclusions.

The Evolution of TNC Investment in Brazil

From the 1950s to the late 1970s

Up to the early 1950s, the vast majority of TNC subsidiaries in Brazil were responsible for activities in the energy, transport and communications infrastructure. In 1955, 95 per cent of the FDI stock registered in Sumoc (predecessor to the Central Bank) belonged to the energy sector. But the amount of FDI was not significant — FDI stock was only about 2 per cent of GDP (Faro and Silva 2002).

The government under President Kubstichek (1956–1960) set up a development strategy that brought the Second Industrial Revolution to Brazil and was responsible for a new boom of FDI. During such period, yearly flows of FDI were multiplied by 35 times as compared to the previous five years (ibid.). Through the import substitution industrialisation, Brazil set up internal production of cars, chemicals, industrial machinery, and electrical goods and materials — the core of the industrial pattern of developed countries since the end of the 19th century — and this was made primarily with the support of FDI.

The second boom of FDI to Brazil after World War II happened in 1968–1973, during the so-called economic miracle (Brazilian economy was growing 9.5 per cent per year). Throughout this period, the average yearly inflow of FDI was more than twice of what was achieved during the Target Plan of 1955–1960. The expansion of TNC subsidiaries in Brazil was so impressive that in 1974, 50 per cent of all FDI directed to the developing world (or 6.4 per cent of all FDI) came to Brazil (Figure 2.1). The importance of Brazil for foreign direct investment throughout this period can be confirmed by the relative importance it acquired in the 1950s–1970s wave of internationalisation of capital. Data from UNCTAD shown in Figure 2.1 suggest that during the 1970s, Brazil alone was responsible for around 20–30 per cent of all FDI to developing countries and 7–8 per cent of world FDI. By the end of the 1970s, 80 per cent of FDI in Brazil was concentrated in the manufacturing sector. Capital from USA and Germany were responsible for more than 50 per cent of the FDI stock in Brazil (Lago 1990). All of this was achieved with the support of a very liberal legislation, a permissive foreign exchange regime and expressive fiscal advantages.

Figure 2.1: Brazil: FDI Inflows — Total (US$ million), Percentage of World Total and as a Percentage of Total Inflows to Developing and Transition Economies, 1970–1989

Image

Source: UNCTAD (2005, 2008).

The Brazilian industrialisation process relied heavily on FDI. In fact, one may argue that such a process that occurred from the 1950s to the late 1970s was a typical example of import substitution led by the State with strong participation of foreign capital and technology. The State had a key role through (a) the definition, articulation and financing support of large investment blocks, and (b) the creation of an infrastructure and the direct production of inputs necessary for heavy industrialisation. From a political point of view, the State was capable of putting together diverging private motivations and broader public (in the sense of social interests) rationales. These different but not conflicting interests made the combination of market actions and planning possible (Furtado 1985).

This role was of a facilitating type, giving favourable conditions for foreign capital to be attracted and providing the necessary infrastructure. Public investment had then only a supporting role to the private sector, particularly foreign investment. According to Maria da Conceição Tavares and José Serra (1973), the main element guaranteeing the economic dynamism of the period was a high degree of organic solidarity between the productive activities of the State and TNCs: the State supplied the internal market with basic inputs and external economies at low cost; TNCs used these facilities to expand in the internal and external markets.

Particularly after the 1964 military coup, the dynamic axis of the economic strategy followed was based on the internal expansion of TNC subsidiaries. Data suggest that the share of TNC subsidiaries in the total net value of the 5,000 largest Brazilian firms was 29 per cent in 1974 and 27 per cent in 1976 (Cassiolato 1992). The connection between ‘dynamism’ and foreign control is more evident if only the larger firms are singled out: in 1974, 40 per cent of the total net value of the 318 largest firms was foreign-owned (von Doellinger et al. 1974).

Maria da Conceição Tavares and Otávio Façanha (1980) gave another estimate of the degree of the internationalisation of the Brazilian industrial structure in the early 1970s. Using census data of the 1,261 largest firms (38 per cent of total industrial output) in 1970, they found that the share of foreign-owned TNCs was 50 per cent of the value of production, with 33 per cent for private–national firms and 17 per cent for government-owned firms. If only the group of 272 leading firms is considered, the respective figures were 57 per cent of the value of production by foreign-owned TNCs, 21 per cent national private and 21 per cent government. Out of such 272 firms, 149 were foreign-owned, 110 belonged to national groups and 13 were public firms. The 272 largest firms were responsible for 30 per cent of the total value of industrial production, revealing a high degree of concentration.

This was directly linked to the policy regime towards FDI. In fact, Brazil has had one of the most favourable policies among developing countries towards foreign investment. Richard Robinson (1976), for example, compared the national policies towards foreign capital, investment and technology of fifteen developing countries and concluded that Brazil had the lowest level of restriction. Brazil has been a traditional receiver of foreign investment and there has not been, since 1964, any significant official restriction on foreign direct investment. In fact, Brazil has had an open-door policy vis-à-vis foreign capital, after Law 4390 was passed in August 1964 immediately after the military coup. Law 4930 amended the fundamental law governing foreign capital in Brazil, Law 4131 of September 1962, passed during the nationalist government of João Goulart, which was a very restrictive one. The amendment provided by Law 4390 radically changed its nature.

The few activities that had restrictions to foreign control and participation, up to the mid-1990s, were exploration, extraction and refining of oil, domestic airlines, communications, publishing, and coastal shipping (which were restricted to 100 per cent Brazilian-owned enterprises), while only partial minority foreign participation was permitted in mining, fishing, hydroelectric power, banking, and insurance (Fung and Cassiolato 1976: 4). From the late 1970s until the early 1990s, foreign-owned firms were also prohibited to manufacture some products in the IT sector, namely small computers and peripherals. The open-door policy vis-à-vis foreign capital, and a large and expanding domestic industry and market made Brazil the most attractive host country for direct foreign investment in the Third World during the 1960s and 1970s.

In short, the upsurge of FDI to Brazil during the import substitution industrialisation did not play a dramatically important role in the economic evolution of the period: (a) FDI played a minor role in overall investment. Its share of gross fixed capital formation (GFCF) fluctuated around 5 per cent from the early 1970s to the mid-1990s (Figure 2.2); (b) the stock of FDI as a percentage of GDP grew significantly: from 2 per cent in the 1950s, it oscillated from 7 to 12 per cent from 1980 to 1996 (Figure 2.3); (c) FDI inflows as a share of exports were not so high, ranging from 10 per cent to 20 per cent in the 1970s and 1980s (Figure 2.4); (d) per capita inflows of FDI were almost insignificant (Figure 2.5).

The Present Wave of FDI in Brazil — 1996 to 2011

Ricardo Bielschowsky (1992) estimated that, at the beginning of the 1980s, foreign-owned subsidiaries accounted for 38 per cent of sales of the manufacturing sector as a whole. In the same study, the author pointed out the negative effect on FDI of the economic instability that characterised the period, which resulted in a decrease in that participation to 32.6 per cent in 1990. During the 1980s, Brazil went through a severe crisis and new flows of FDI were hardly noticed. According to Reinaldo Gonçalves (1994), during the 1980s, TNCs set up in Brazil implemented strategies of gradual retrenchment, marked by a decrease in investment flows and by the adoption of defensive strategies both in their financial and production activities, searching basically to preserve profitability without increasing their involvement with the local economy.

Figure 2.2: Brazil: FDI Flows as a Percentage of GFCF, 1970–2007

Image

Source: UNCTAD (2008).

Figure 2.3: Brazil: Stock of FDI as a Percentage of GDP, 1980–2007

Image

Source: UNCTAD (2008).

Figure 2.4: Brazil: FDI Inflows as a Percentage of Exports

Image

Source: UNCTAD (2005, 2008).

Figure 2.5: Brazil: Per Capita FDI in US$, 1970–2007

Image

Source: UNCTAD (2008).

The revitalisation of FDI, which occurred during the 1990s, meant the return of more aggressive expansionary strategies of TNCs in the Brazilian economy. Impelled by deep changes in the economic scenery, TNCs increased again their presence in the Brazilian economy. In fact, in the mid-1990s, deep structural change in the Brazilian economy — deregulation, privatisation and liberalisation — which was followed by an increase in the demand for consumer goods, propelled a third FDI boom in Brazil.

The intensification of FDI inflows is obviously related to the international context, which was taking place since the early 1990s, that witnessed a globalisation characterised by an increasing importance of FDI at a world level. But this process has been particularly stimulated in Brazil and was the result of the previously mentioned three other connected processes and by some further changes in the regulation regarding foreign capital, which was part of a trade liberalisation strategy. In fact, it could be argued that TNCs were the main agents of such processes.

Here again, the Central government played a key role in attracting FDI. Basically, two main policy measures were used. First, the approval of constitutional amendments that terminated public monopoly in sectors such as telecommunications and oil and gas (allowing almost unrestricted participation of foreign capital in the new privatised ventures) and removed earlier distinction between Brazilian firms of local capital and of international capital. Foreign-owned firms were given the same status of locally-owned firms, therefore equalling the access to financial credits from official development agencies and to government incentives and grants. Equally important were measures that liberalised profit remittances and abandoned the control regarding payments for imported technology, particularly the allowance for subsidiaries to send payments to their parent firms for technology, which was forbidden since 1971. Also restrictions to foreign investment were lifted in the few sectors where they existed in the past, such as banking and parts of the IT complex. Another main policy measure adopted was the removal of the old industrial property code that was replaced by a liberal industrial property legislation. The key points in this change were: (a) the elimination of control of remittances between subsidiaries and parent TNCs for profit and technology payments (licences, patents, etc.); and (b) new patent protection.

Differently from the previous wave of FDI — which concentrated in the manufacturing industry — this new FDI by TNCs in Brazil mostly targeted the services sector, particularly the privatised infrastructure sector (telecommunications and electricity). Also, it concentrated on operations of M&A of local firms with an insignificant amount representing new greenfield investments. Another key difference is that while the previous flows of FDI (from the 1950s to the 1970s) concentrated on import substitution, the new foreign investment cycle, which started in the 1990s, has been marked by market access strategies.

As a result of deregulation and liberalisation in Brazil and as part of a globalisation with a global financial market with increasing liquidity and availability of capital, from 1995 onwards FDI flows reached an unprecedented level: from 1996 to 1999, these flows amounted US$ 80 billion, while the total FDI accumulated in Brazil up to 1996 amounted to US$ 45 billion (Gonçalves 1999). Figure 2.6 shows the increase in Brazilian FDI inflows from virtually nothing in the first years of the 1990s to US$ 66 billion in 2011. However, in the first half of the 2000s, the relative importance of FDI inflows to Brazil as related to total FDI inflows in the developing world was reduced, if compared with the previous period. Brazil’s share got a peak of 15 per cent of FDI to developing countries in 1998, but with the upsurge of China, this share started to reduce until 2006, achieving 4.4 per cent. After that, the country achieved a relative recovery, reaching 9.7 per cent in 2011.

FDI inflows to Brazil were affected by the 2008 economic crisis exclusively in the following year, 2009, when the amount of resources to the country was reduced not only in absolute terms, but also as a share on total and developing countries’ FDI. As early as 2010, these effects were reverted and FDI inflows increased in both absolute and relative terms. As the exposition of the Brazilian banking system to the international financial crises and export dependency were very low, and economic growth based on an increasing domestic market proceeded, FDI inflows returned to high levels. In fact, the Brazilian performance was mainly responsible for the massive FDI inflows to Latin America as compared to other developing countries such as Mexico, where FDI inflows presented a 20 per cent fall between 2007 and 2008, given its strong dependency on North American economy (ECLAC 2008).

Figure 2.6: Brazil: FDI Inflows — Total (US$ million), Percentage of World Total and Percentage of FDI to Developing and Transition Economies, 1990–2010

Image

Source: UNCTAD (2012).

As the FDI of the 1970s complemented the setting up and enlargement of the Brazilian productive base, the FDI of the 1990s was strongly related to a mere patrimonial change. It heavily concentrated on acquisition of local assets in the privatised state-owned firms in public services — such as telecommunications and electrical energy — and in other services such as banking. Even a small amount of FDI in manufacturing consisted basically of acquisitions of local firms in sectors such as auto parts, IT, etc. After privatisation subsided, FDI inflows were drastically reduced. In the first half of the 2000s, the relative flow of foreign investments declined, being kept at approximately 2 per cent of total world FDI. This suggests that Brazil was becoming less attractive to productive FDI, especially in sub-systems of high technological intensity. In the second half, the FDI in Brazil did not result in the structural modifications in the productive base and especially was not successful in motivating technological and innovative efforts by foreign firms as expected in the 1990s.

In general, the expectation of the government was that new FDI flows would stimulate technological upgrading of the Brazilian industry and reduce the commercial deficit through the increase of exports. However, empirical evidence uncovered by several documents (Cassiolato and Lastres 1999a; Gonçalves 1999; and Laplane and Sarti 1998) shows that new investment was mostly market-seeking, directed to explore opportunities offered by the internal market (including Mercosur) and concentrated on the acquisition of local firms, with very few greenfield investments occurring. As a matter of fact, privatisation of infrastructure sectors and M&A of national firms facing survival difficulties in the face of uncertainties of the economy had great influence in the decision of investing in Brazil during the latter half of the 1990s. The net outcome of these processes was a significant growth in imports both of intermediary and finished (particularly, capital) goods. Due to the increasing participation of imports, domestic production lost ground in several important sectors and a structural commercial deficit emerged from 1997 onwards (Laplane and Sarti 1997).

The effects of this new upsurge of FDI on the Brazilian productive structure were immediate. Even if we refer only to the manufacturing industry, the share of TNC subsidiaries on overall sales of the 18 most important production chains jumped from 36 per cent in 1996 to 52 per cent in 2000. More than that, the combination of an over-valued local currency with sharp reductions in tariffs and an unstable internal market implied that TNC subsidiaries increased their share of imports and significantly reduced their exports, at least from 1995 to the devaluation of the Brazilian currency Real in 1999.

During the latter half of the 1990s, new FDI acquired a very important role for capital formation, whereas in the previous booms, FDI had never acquired pre-eminence in capital formation. Figure 2.2 showed FDI inflows to Brazil from 1970 to 2007 as a percentage of GFCF. Through the 1970s to the early 1990s, it fluctuated around 5 per cent of GFCF. But in the latter half of the 1990s, it jumped to almost 30 per cent.

This FDI boom had a lasting impact on the relation of the Brazilian economy with foreign capital, as the share of FDI on GDP jumped dramatically from the historical rate of 10 per cent to around 25 per cent since the late 1990s (Figure 2.3). However, since then, new FDI receded both in absolute terms and as far as its share of world FDI is concerned (Figure 2.6).

Compared to the 1990s, during the 2000s the participation of M&A in FDI flow presented a significant reduction, despite it being still high. Figure 2.7 shows that recently most FDI were directed to new investments, and not just to acquisition of local enterprises.

In the recent period, it is also possible to observe an expressive growth in Brazilian M&A by Chinese firms. Even if China emerged as the most important investor in previous years, developed countries such as USA, France and Japan continue to be among the main buyers of Brazilian companies (Figure 2.8).

Sectorally, during the 2000s, we can observe an increase of FDI inflows to primary and secondary sectors, instead of services. Table 2.1 shows FDI inflows during 1996–2009 to three main sectors of the economy — primary, secondary and tertiary, and their most important subsectors. From the table, it is possible to point out the growth of inflows to the primary sector, especially petroleum and metallic mineral extraction. We also observe an increase in industrial sectors’ investments from the 2000s, especially in the metallurgy sector. The services sector achieved 80.8 per cent share during the period of privatisation of State firms (until 2000), but lost participation after that.

Figure 2.7: M&A Share on FDI Flow, 1995–2008*

Image

Source: UNCTAD (2011).

Elaboration: NEIT-IE-UNICAMP.

Note: *Horizontal lines represent the average percentage in the selected years.

Figure 2.8: Brazil: M&A by Country of Origin, 2005–2012

Image

Source: CGEE (2013).

Table 2.1: Brazil: FDI Inflows by Select Sectors, 1996–2009 (percentage)

Sector/Period

1996–2002

2003–2006

2007

2008

2009

Agriculture and Mining

2.7

8.0

14.8

29.6

14.7

Extraction of Oil and Correlated Services

1.8

3.0

1.9

3.1

8.3

Extraction of Metallic Minerals

0.5

3.7

9.6

24.3

4.3

Manufacturing Industry

22.7

39.5

36.1

31.9

39.2

Food Processing and Beverages

3.6

11.1

5.4

5.1

1.8

Paper and Pulp

0.1

3.2

0.8

0.5

2.5

Chemicals

4.4

5.4

2.2

2.5

3.6

Metallurgy

0.7

4.1

13.9

11.4

12.4

Machinery

1.3

1.6

1.3

1.2

1.3

IT Goods, Electronics and Communication, and Optics

3.0

2.2

0.5

0.3

1.1

Auto

5.4

3.9

2.6

2.2

7.1

Other Transport Equipment

0.3

1.1

0.0

0.1

0.2

Services

74.7

52.6

49.1

38.5

46.1

TOTAL (US$ million)

21,210

19,230

33,705

43,886

30,444

Source: BCB (2013). Authors’ own elaboration.

However, until 2008, FDI inflows continued to be increasingly directed to the primary sector — oil and natural gas extraction and, specially, metallic minerals extraction — where participation resulted in 24.3 per cent of all FDI flow to Brazil in 2008. This significant growth resulted in a reduction of secondary and tertiary sectors in FDI inflows to Brazil. In 2009, this tendency was reverted, but this was an atypical year because of the effects of the world crisis.

In fact, a similar trend can be observed in other South America countries, such as Argentina, Chile and Colombia, which received strong investments in natural resources segments such as mining, petroleum and hydrocarbons (ECLAC 2010). As a matter of fact, natural resource-seeking investment is less sensitive to changes in economic circumstances than efficiency or market-seeking FDI, since the results of these investments tend to focus on the long term.

In the mining sector, this trend can be exemplified by the acquisition of a 40 per cent stake in the mining arm of Companhia Siderúrgica Nacional (CSN) by a consortium of Japanese and South Korean enterprises and by the acquisition of Iron X from the Brazilian company Mineração e Metálicos (MMX) by the UK firm Anglo American. In such cases, the goal was to attain economies of scale and scope and to ensure availability of, and access to, the minerals that constitute the basis of their net worth (ECLAC 2010).

In the hydrocarbon sector, FDI is also increasing, but is less than in mining, due to the strong presence of Petrobras, the State-owned Brazilian oil giant. In renewable energies, Brazil has sparked interest thanks to its agro-climatic conditions and its leading position in the renewable energy sector, especially in the production of liquid biofuels. The biofuels market is expected to grow fast thanks to government policies. Its development is one of the key strategies of the energy giant Petrobras. In the renewable energies segment, some important Brazilian firms such as Destilaria Guaricanga, Venatia, Koblitz, Santa Elisa, and Glep Energias Renováveis were recently sold to firms from the United Kingdom, Portugal, France, and the United States. However, investment in this sector may be affected by the drop in the oil price, as one of the main limitations on the development of renewable energies in the last few decades has been their cost-effectiveness.

Table 2.2 allows for examining this process in a more detailed way. It shows that in the first half of the 2000s, the large TNCs1 dominated Brazilian industries of high and medium technologies, including electronics, pharmaceuticals, machinery, and the auto industry. In activities of low technological intensity sectors such as, for example, textiles and clothing, their participation remained very modest.

Parallel to the recent growth in FDI and as a consequence of the 2007–2008 world financial crisis and of the liberalised control of foreign exchanges, remittance of profits and dividends by subsidiaries to parent companies soared. The share of this kind of remittance on Brazilian exports increased from 7.6 per cent in 2006 to 15.0 per cent in 2012. It implies an increasing commitment of Brazilian exports to balance this remittance and, consequently, to cover the balance of payment deficits (Figure 2.9). In absolute terms, remittance of profits and dividends increased from US$ 7.3 billion in 2004 to a peak of US$ 38.2 billion in 2011, contributing to the increase of deficit in service account from US$ 25.2 billion to US$ 85.2 billion in the same period (Figure 2.10).

Table 2.2: Brazil: TNC Subsidiaries — Relative Share on Sector, Total Net Sales (percentage)

 

TNC Subsidiaries/Total

Sectors

1998–2000

2001–2003

2003–2005

Food and Beverage

32.9

37.3

34.7

Textiles

16.5

12.1

7.9

Clothing

9.0

9.3

NA

Leather and Shoes

NA

8.3

11.6

Wood Products

11.4

15.8

12.3

Paper and Pulp

34.3

26.1

32.3

Chemicals

57.0

50.6

52.8

Pharmaceuticals

75.5

65.3

65.0

Rubber and Plastic

48.0

60.6

58.3

Non-Metallic Minerals

56.6

23.8

41.9

Basic Metallurgy

47.4

35.4

33.6

Metal Products

35.0

38.5

36.8

Machinery and Equipment

80.0

78.5

78.6

IT and Office Equipment

NA

NA

64.0

Electric Goods

88.9

74.1

73.5

Electronics and Communication Equipment

81.2

86.7

79.2

Instrumentation

46.5

81.9

81.0

Auto Industry

87.7

89.8

89.0

Other Transport Equipment

33.6

37.2

13.3

Furniture

37.8

42.6

34.9

TOTAL

47.1

43.3

44.0

Source: IBGE (2003, 2005, 2008). Authors’ own elaboration.

Note: NA: Not available (data not disclosed by the Brazilian Institute of Geography and Statistics [IBGE]).

Figure 2.9: Brazil: Remittance of Profits and Dividends/Exports (percentage)

Image

Source: CGEE (2013).

Figure 2.10: Brazil: Remittance of Profits and Dividends, and Deficit on Service Account (US$ billion)

Image

Source: CGEE (2013).

R&D Activities of TNC Subsidiaries in Brazil

Giving such historical importance to FDI inflows to the Brazilian economy, the main question addressed by this chapter relates to the role of a TNC in the Brazilian National System of Innovation. This section will address the issue through two interconnected analyses. The first one is a discussion based on Brazilian Innovation Survey data (PINTEC), published by IBGE, and in-depth interviews about TNC subsidiaries’ investment in R&D in Brazil. The second is a bibliographical review of different studies that addressed in what measure TNCs collaborated with economic/sectoral development of Brazil recently, i.e., the spillover effects (positive) and the crowding-out effects (negative).

TNC investment in R&D

This section intends to show the results of some statistical analysis regarding R&D investments by TNC subsidiaries in Brazil. Initially, an analysis of R&D and related expenditures by 1,493 large firms (with more than 500 employees), both TNC subsidiaries (294 firms) and locally-owned firms (1,196 firms) using data from the Brazilian Innovation Survey 2005 (IBGE 2005), published in 2007, will be presented. Later on, a comparison between a set of 150 pairs of large TNCs and their subsidiaries in Brazil, for R&D and innovation-related expenditures, using data published by the European Union and the Brazilian Innovation Survey will be offered. Finally, the result of in-depth interviews with six subsidiaries of TNCs regarding their R&D strategies in Brazil carried out in 2009 will also be shown in the last part of the section.

R&D by TNC Subsidiaries: A Brief Statistical Analysis Based on the 2005 Brazilian Innovation Survey

Although one may not underestimate the problems with indicators based on innovation surveys, it is possible, with caution, to derive some trends using such information. The analysis here is based on special tabulations processed from the Brazilian Innovation Survey — PINTEC — of 2005. Table 2.3 presents the number of Brazilian manufacturing firms with more than 500 employees by control of capital as informed by PINTEC 2005, which are those firms that will be analysed in this item. According to the survey, there were 1,490 firms with more than 500 employees in Brazil in 2005 — 1,135 of those firms were locally owned and 355 were subsidiaries of TNCs. Of the locally owned firms, 873 introduced a new or modified product or process in the 2002–2004 period, while 323 of the TNC subsidiaries did the same.

Table 2.3: Brazil: Manufacturing Firms with more than 500 Employees by Control of Capital, 2005

 

Did Not Innovate

Innovated

Total

Locally Owned

262

873

1,135

TNC Subsidiary

32

323

355

TOTAL

294

1,196

1,490

Source: IBGE (2008). Authors’ own elaboration.

Table 2.4 presents two other variables that are important for the analysis — R&D expenditures, in US$ and percentage, and the R&D/ net sales ratio — of Brazilian manufacturing firms with more than 500 employees by origin of capital. R&D expenditures of large (both locally owned and TNC subsidiaries) firms in Brazil represented, in 2005, approximately 73 per cent of total R&D expenditures in the manufacturing and mining industries (US$ 2,201 million out of a total of US$ 3,022 million).

This significant concentration of R&D expenditures in large firms is accompanied by a similar concentration in terms of sector of activity. In fact, regarding the sectoral distribution of R&D expenditures, it is possible to conclude that almost half (48.6 per cent) of all R&D performed by large TNC subsidiaries is concentrated in the firms of the auto industry alone. Only four other sectors are significantly represented: electric materials and equipment (9.9 per cent), chemicals (8.5 per cent), electronic and communications equipment (6.1 per cent), and auto parts (5.2 per cent). All the other 28 sectors (or 87 per cent of firms) were responsible for only 20.8 per cent of all R&D expenditures of large TNC subsidiaries in Brazil in 2005. It is true that the same concentration is found in large Brazilian locally owned large firms: 33.9 per cent of all R&D by large locally owned firms is related to oil refining and products (basically the large state-owned oil firm, Petrobras) and 25.4 per cent to the ‘other transport equipment’ sector (also basically, Embraer, the large Brazilian aircraft producer). Of the remaining 31 sectors, only three spent at least 3 per cent of total R&D by large locally owned firms: chemicals (6.2 per cent), basic metallurgy (3.2 per cent), and electric (3.2 per cent) and electronic (3.3 per cent) products.

Table 2.4: Brazil: R&D Expenditures and R&D over Net Sales Ratio of the Innovative Firms with more than 500 Employees (Manufacturing Sector) by Sector and Ownership, 2003–2005

 

R&D Expenditures and Percentages

R&D/Net Sales Ratio

 

Locally Owned Firms

TNC Subsidiaries

Locally Owned Firms

TNC Subsidiaries

Sector

US$ million

(%)

US$ million

(%)

(%)

(%)

Mining

32.5

2.7

0.0

0.0

0.34

0.00

Food

27.3

2.3

29.9

3.0

0.09

0.17

Beverages

3.5

0.3

0.5

0.1

0.11

0.02

Tobacco

0.0

0.0

8.7

0.9

0.00

0.32

Textiles

14.3

1.2

0.6

0.1

0.38

0.20

Clothing and Apparel

9.3

0.8

2.8

0.3

0.69

3.12

Leather Goods

24.2

2.0

0.0

0.0

0.79

0.00

Wood

6.8

0.6

0.0

0.0

0.44

0.00

Paper

18.4

1.5

9.2

0.9

0.32

0.30

Pulp and Cellulose

6.3

0.5

0.2

0.0

0.56

0.04

Printing and Recording Industry

1.9

0.2

0.3

0.0

0.06

0.21

Alcohol Production

0.4

0.0

0.0

0.0

0.03

0.00

Oil Refining and Products

407.5

33.9

0.0

0.0

0.87

0.00

Chemicals

74.8

6.2

84.6

8.5

0.52

0.62

Pharmaceuticals

27.1

2.3

29.6

3.0

1.00

0.62

Rubber and Plastics

11.3

0.9

26.7

2.7

0.33

0.66

Non-metal (Minerals)

17.5

1.5

12.2

1.2

0.55

0.67

Basic metallurgy

40.0

3.3

10.6

1.1

0.23

0.27

Non-ferrous metals

2.0

0.2

2.9

0.3

0.05

0.14

Metal products

6.4

0.5

4.5

0.5

0.27

0.35

Machinery and equipment

30.4

2.5

43.4

4.3

1.02

0.42

Office and IT machinery

15.0

1.2

20.2

2.0

1.53

1.12

Electric materials and equipment

37.9

3.1

99.2

9.9

2.02

2.09

Electronic and communications

38.0

3.2

60.8

6.1

1.73

0.73

equipment

 

 

 

 

 

 

Basic electronic materials

0.6

0.0

3.1

0.3

0.87

0.43

Medical instruments

0.2

0.0

0.4

0.0

0.18

0.06

Auto industry

0.0

0.0

485.2

48.6

0.00

2.02

Trucks (including cabin)

9.6

0.8

0.0

0.0

0.50

0.00

Auto parts

19.9

1.7

52.0

5.2

0.63

0.45

Other transport equipment

305.5

25.4

8.7

0.9

4.38

1.38

Furniture

13.4

1.1

0.5

0.1

1.39

0.20

Others

1.4

0.1

1.3

0.1

0.30

0.43

Recycling

0.0

0.0

0.0

0.0

0.00

0.00

TOTAL

1,203.5

100.0

998.2

100.0

0.62

0.75

Source: IBGE (2008).

In fact, large firms in only five sectors are responsible for around 50 per cent of all R&D expenditures in Brazilian manufacturing and mining sectors. Firms in the auto industry (all TNC subsidiaries) are responsible for 16 per cent, locally owned firms in the oil industry (basically, Petrobras) are responsible for 13.5 per cent, locally owned firms in the ‘other transport equipment’ sector (basically, Embraer) are responsible for 10.6 per cent, and firms in the chemicals sector and electrical energy equipment sector — evenly distributed between local and foreign control — are responsible for 5.3 per cent and 4.6 per cent, respectively, of all R&D expenditures of the Brazilian manufacturing and mining sectors.

The same table also presents the R&D intensity (R&D expenditures over net sales ratio) by sector and ownership. The most interesting results derived from the information provided by Table 2.4 are as follows. Regarding firms in the three sectors that are responsible for the bulk of R&D expenditures where TNCs play a significant role, R&D intensity is relatively high in comparison with other sectors in Brazil but arguably not very high in an international comparison. In the auto industry, R&D intensity was 2.0 per cent in 2005; in chemicals, it was 0.6 per cent; and in the electrical equipment sector, it was 2.1 per cent. This last sector was perhaps the one where a significant R&D effort by TNC subsidiaries is found. In all other sectors, with one important exception, the R&D intensity of large TNC subsidiaries was almost insignificant. In all technology intensive sectors where production in Brazil is dominated by foreign capital, R&D intensity of TNC subsidiaries was insignificant: pharmaceuticals (0.6 per cent), electronic and communications equipment (0.7 per cent), basic electronic materials (0.4 per cent), and medical instruments (0.06 per cent). The only significant exception to this pattern is found in the clothing and apparel industry, where R&D intensity of TNC subsidiaries was 3.1 per cent, the highest of all sectors. This is an interesting example because the bulk of the Brazilian industry has historically been dominated by local capital, with the exception of the underwear segment, where some large TNCs have set up subsidiaries in Brazil. It seems that very large TNCs in this segment have set up important local R&D programmes in Brazil. Such general evaluation will be further elaborated with the information provided in this chapter.

Table 2.5 presents total R&D and innovation expenditures of Brazilian manufacturing firms with more than 500 employees by origin of capital for 2005. A first general conclusion derived from this table is that the relative weight of R&D expenditures in total innovation expenditures is significantly higher for locally owned firms as compared with TNC subsidiaries. For the industry as a whole, locally owned large firms spent 30.3 per cent of their innovation expenditures in R&D while TNC subsidiaries spent 23.5 per cent in 2005. This picture is repeated in practically all sectors where local firms and TNC subsidiaries co-exist — which does not necessarily mean that they compete with each other, as the analysis here is done on a very aggregate level — with a single exception, once more, of the clothing and apparel industry where TNC subsidiaries spent 37.4 per cent of all their innovation expenditures in R&D in 2005, while locally owned large firms spent only 18.2 per cent. Again, the underwear effect plays an important role in explaining such discrepancy.

In order to explore further this discussion, Table 2.6 provides information regarding the amount of R&D spent per employee (in US$) for Brazilian manufacturing firms with more than 500 employees by origin of capital in 2005. As one might expect, such relationship is significantly different from one sector to another and higher in technology-intensive sectors and in those sectors where most of R&D is spent, such as the auto industry, the oil industry and the ‘other transport equipment’ sector. In ‘electric materials and equipment’, TNC subsidiaries spent twice as much per employee as compared to locally owned large firms, while in the chemicals industry the relationship is almost the same. In sectors where innovative capabilities by large Brazilian firms is recognised, such as pulp, large locally owned firms spent much more per employee than TNC subsidiaries (US$ 1,520 against US$ 123), while in some other sectors such as ‘metal products’, TNC subsidiaries spent much more in 2005 than locally owned firms (US$ 1,096 against US$ 257).

The analysis above was based on a set of special tabulations developed by the Brazilian Institute of Geography and Statistics for firms with more than 500 employees by origin of capital, either foreign or local. Based on such division of the sample, some variables were estimated, with which it was possible to characterise the behaviour of firms in each sub-sample in terms of innovative firms, sectoral distribution of firms, share of sectoral expenditures in innovation activities and R&D, and R&D intensity (R&D over net sales) and R&D by employee. The general picture that emerges from the analysis is that:

Table 2.5: Brazilian Manufacturing Firms with more than 500 Employees by Origin of Capital — Total R&D and Innovation Expenditures, 2003–2005 (US$ million)

 

Locally Owned

TNC Subsidiary

Sector

R&D (A)

Innovation (B)

R&D/Innovation (A)/(B)

R&D (C)

Innovation (D)

R&D/Innovation (C)/(D)

Mining

32.5

122.3

26.58

0.0

0.0

10.00

Food

27.3

611.9

4.46

29.9

285.7

10.46

Beverages

3.5

61.8

5.61

0.5

4.8

9.90

Tobacco

0.0

0.0

0.00

8.7

29.8

29.05

Textiles

14.3

68.2

20.99

0.6

2.6

22.99

Clothing and Apparel

9.3

51.0

18.17

2.8

7.5

37.40

Leather Goods

24.2

110.0

21.96

0.0

0.0

0.00

Wood

6.8

41.8

16.27

0.0

0.0

0.00

Paper

18.4

174.5

10.53

9.2

102.9

8.90

Pulp and Cellulose

6.3

85.7

7.40

0.2

2.4

9.51

Printing and Recording Industry

1.9

71.5

2.65

0.3

5.8

5.88

Alcohol Production

0.4

53.7

0.79

0.0

0.0

0.00

Oil Refining and Products

407.5

645.0

63.17

0.0

0.0

0.00

Chemicals

74.8

214.7

34.86

84.6

353.4

23.95

Pharmaceuticals

27.1

118.0

22.99

29.6

247.9

11.95

Rubber and Plastics

11.3

83.1

13.56

26.7

141.8

18.82

Non-metal (minerals)

17.5

54.0

32.42

12.2

53.4

22.93

Basic Metallurgy

40.0

328.2

12.20

10.6

118.2

8.99

Non-ferrous Metals

2.0

38.6

5.29

2.9

184.7

1.58

Metal Products

6.4

42.6

14.99

4.5

77.7

5.82

Machinery and Equipment

30.4

85.7

35.53

43.4

173.9

24.99

Office and IT Machinery

15.0

50.1

29.97

20.2

42.4

47.58

Electric Materials and Equipment

37.9

63.5

59.71

99.2

256.8

38.62

Electronic and Communications

38.0

87.4

43.51

60.8

247.5

24.55

Equipment

 

 

 

 

 

 

Basic Electronic Materials

0.6

1.3

47.11

3.1

11.2

28.08

Medical Instruments

0.2

4.4

4.88

0.4

13.1

2.83

Auto Industry

0.0

0.0

0

485.2

1,478.7

32.81

Trucks (including cabin)

9.6

49.0

19.56

0.0

0.0

0

Auto Parts

19.9

68.5

29.09

52.0

341.3

15.25

Other Transport Equipment

305.5

531.8

57.45

8.7

43.6

20.05

Furniture

13.4

47.7

28.05

0.5

3.0

15.23

Others

1.4

7.4

18.97

1.3

8.3

16.03

Recycling

0.0

0.6

 

0.0

0.0

0

TOTAL

1,203.5

3,974.0

30.29

998.2

4,238.5

23.55

Source: IBGE (2008).

Table 2.6: Brazilian Manufacturing Firms with more than 500 Employees by Origin of Capital — R&D/Employee, 2003–2005 (US$)

 

Locally Owned

TNC Subsidiary

Mining

360.14

2.98

Food

72.97

296.84

Beverages

81.86

110.57

Tobacco

802.89

Textiles

150.72

123.18

Clothing and Apparel

106.87

877.35

Leather Goods

227.70

Wood

82.84

Paper

365.42

798.89

Pulp and Cellulose

1,520.38

123.34

Printing and Recording Industry

70.70

124.97

Alcohol Production

19.30

Oil Refining and Products

3,582.91

Chemicals

1,899.76

2,043.85

Pharmaceuticals

1,334.64

1,496.20

Rubber and Plastics

255.61

795.09

Non-metal (Minerals)

407.26

988.38

Basic Metallurgy

504.71

630.58

Non-ferrous Metals

64.37

637.72

Metal Products

257.23

1,096.47

Machinery and Equipment

586.78

591.70

Office and IT Machinery

2,780.05

3,082.29

Electrical Materials and Equipment

640.74

1,320.62

Electronic and Communications

3,044.82

3,067.89

Equipment

 

 

Basic Electronic Materials

827.29

676.30

Medical Instruments

65.89

38.90

Auto Industry

4,889.20

Trucks, including Cabin

489.75

Auto Parts

579.05

1,024.66

Other Transport Equipment

3,269.24

1,442.52

Furniture

384.82

287.32

Others

173.47

563.35

Recycling

Source: IBGE (2008).

(a) With few exceptions, in all sectors, R&D expenditures over total innovation expenditures of locally owned large firms (with more than 500 employees) are larger than those of TNC subsidiaries;

(b) There is a huge concentration of R&D expenditures of large TNC subsidiaries in one sector — the auto sector TNCs are responsible for 48 per cent of total R&D expenditures of large TNC subsidiaries;

(c) With few exceptions, the R&D/net sales ratio of large local firms tend to be higher than R&D/net sales ratio of large TNC subsidiaries;

(d) The R&D/employees ratio of subsidiaries of TNC tends to be higher than those of locally owned large firms in half of the sectors.

Although the analysis above seems to suggest that in the vast majority of cases R&D expenditures of large TNC subsidiaries are not very significant and their strategies do not in general contemplate performing R&D activities in Brazil beyond those necessary for ‘adaptation’, the information provided by IBGE seems insufficient to prove such behaviour. In order to make the evaluation more robust, another analysis was performed.

It is interesting to note that if we take into consideration industrial property data, a similar picture emerges. Table 2.7 presents the number of applications for patents and industrial design by capital control in the period 1991–2004. Considering only Brazilian firms (locally-owned and subsidiaries of TNCs), the bulk of applications for patents and industrial design remain concentrated in locally-owned firms (approximately 85 per cent of all applications of Brazilian firms in 1999–2004), even if the share of TNCs subsidiaries has been slightly growing. However, if we compare the total application by Brazilian firms with foreign firms,2 it is noticeable that the share of Brazilian enterprises remains very modest in all periods. It is also worth pointing out that the Brazilian compliance with the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement in the mid-1990s had precisely the reverse effect to what was expected by policy makers and supporters of the agreement. In fact, two outcomes were predicted: one was the increase of patenting by Brazilian firms, both in absolute and relative terms; the other was a substantial increase in cooperative agreements. The figures presented in the table show that the absolute increase in applications by Brazilian firms increased only in a very modest way, while the relative share fell significantly from 29 per cent in 1991–1995, before the agreement was signed, to 19 per cent after the agreement was signed in 1999–2004. On the other hand, the number of applications of cooperative arrangements remained constant before and after the TRIPS agreement was signed by Brazil.

Table 2.7: Brazil: Number of Patent and Industrial Design Applications by Capital Control, 1991–2004 (Yearly Average)

 

Brazilian Firms

Foreign Firms

Year

Locally Owned

TNC Subsidiaries

Cooperative Arrangements

 

1991–1995

1,718

141

22

6,482

1996–1998

1,683

172

15

13,154

1999–2004

2,456

389

23

14,959

Source: Industrial Property National Institute and Central Bank of Brazil, in Zucoloto (2009). Authors’ own elaboration.

One of the authors, Graziela Ferrero Zucoloto (2009), compared the propensity (a) to perform R&D activities and (b) to file patents and industrial design (Table 2.7) of locally-owned and large TNC subsidiaries in Brazil, using panel data econometric models. The study concluded that, in both cases, national propensity to patent and deposit industrial design is higher for locally owned firms than for subsidiaries of TNCs.

In order to examine such trends in a more detailed way, a second set of special tabulations was performed. This refers to the use of two distinct data sets, the EU Industrial R&D Investment Scoreboard and the Brazilian innovation survey, PINTEC, both of 2005. This analysis was based in the intersection of large TNCs included in the EU Industrial R&D Investment Scoreboard — the 2,000 largest TNCs — with firms owned by foreign capital included in PINTEC. This analysis refers to 150 large TNCs (present in the EU scoreboard) and their subsidiaries in Brazil, in 19 different productive activities. With caution, as the databases follow slight different methodologies, it was possible to compare strategies of parent companies in the world and their Brazilian subsidiaries regarding R&D activities.

The importance of this analysis is that it is possible to compare pairs of firms — parent companies and subsidiaries. Tables 2.8 to 2.10 present the results of this comparison. Table 2.8 shows the R&D intensity (R&D/net sales) of these 150 TNCs and their subsidiaries in Brazil. What is remarkable in the information provided by Table 2.8 is that with a single exception, the R&D intensity of parent companies is enormously higher than that of their subsidiaries in Brazil. Take the case of the auto sector, where firms are responsible for 48 per cent of all R&D expenditures of TNC subsidiaries, and for 16 per cent of all R&D expenditures of the Brazilian manufacturing sector. Eleven companies in the world spent 4.18 per cent of their sales in R&D in 2005, while their subsidiaries in Brazil spent 1.34 per cent. In pharmaceuticals, while companies spent on average 13.80 per cent of their sales on R&D in the world, their subsidiaries in Brazil spent 1.08 per cent. In all other technology intensive sectors, the situation is repeated: in office and IT equipment (4.73 per cent by companies in the world and 0.56 per cent by Brazilian subsidiaries); electronic and communications equipment (2.95 per cent and 0.33 per cent); medical instruments (5.39 per cent and 0.08 per cent); and chemicals (3.39 per cent and 0.41 per cent). The only exception was found in ‘non-metal (minerals)’, where the companies spent 0.69 per cent of sales in R&D in the world while their subsidiaries in Brazil spent 1.04 per cent. This situation is most probably the one in the aluminium sector where proximity of natural resources combined with implicit subsidies might have induced TNCs to set up R&D activities in Brazil.

Table 2.8: R&D/Net Sales — 150 TNCs and their Subsidiaries in Brazil, 2003–2005 (percentage)

R&D/Net Sales

TNC World (%)

TNC Subsidiary in Brazil (%)

TNC: Brazilian Subsidiary/World

Mining Industries

1.15

0.00

0.00

Food Industry

2.00

0.30

14.75

Tobacco

0.84

0.41

49.22

Paper and Pulp

1.00

0.35

34.77

Chemicals

3.39

0.41

12.00

Pharmaceuticals

13.80

1.08

7.81

Rubber and Plastics

1.39

0.54

39.28

Non-metal (Minerals)

0.69

1.04

150.97

Basic Metallurgy

1.93

0.88

45.54

Non-ferrous Metallurgy

0.75

0.02

2.42

Metal Products

1.08

0.22

20.19

Machinery and Equipment

2.14

0.62

28.91

Office and IT Equipment

4.73

0.56

11.85

Electric Materials and Equipment

2.95

0.33

11.29

Electronic and Communications Equipment

8.91

1.29

14.51

Medical Instruments

5.39

0.08

1.41

Auto Industry

4.18

1.34

31.99

Auto Parts

4.11

0.68

16.54

Others

2.08

0.04

2.01

Total 150 TNCs and their subsidiaries

5.00

0.69

13.76

Source: PIB project for data on Brazilian subsidiaries and EU for TNCs parent companies; in Cassiolato et al. (2010).

This analysis is further enhanced by information provided in Table 2.9, which presents R&D expenditures by total number of employees for the same 150 TNCs and their subsidiaries in Brazil. The results are astounding as it is shown that in all sectors R&D per employee is much higher in the world than in subsidiaries in Brazil. The least difference is found in non-metal (minerals) where R&D per employee is 84.82 per cent of R&D per employee in their subsidiaries. In all other cases, the same ratio is less than 45 per cent: in pharmaceuticals, it is 5.62 per cent; medical instruments, 0.40 per cent; auto industry, 21.78 per cent; auto parts, 16.88 per cent; and in electronic and communications equipment, the ratio is 14.01 per cent.

Finally, another analysis for the same pairs of firms in 2005 was done with regards to the ratio of net sales to total number of employees (Table 2.10). Here, it is shown that although parent companies spent much more in total R&D and in R&D per employee than their subsidiaries in Brazil, the sales per employee is much more levelled between these two groups of firms. On average, sales per employee of these 150 subsidiaries was around 76.09 per cent of the same ratio as their parent companies. In some sectors, such as non-metal (minerals), metal products, and electronic and communications equipment, the sales per employee were higher in subsidiaries than in parent companies (102.31 per cent, 185.04 per cent and 104.09 per cent, respectively).

Table 2.9: R&D/Total Number of Employees — 150 TNCs and their Subsidiaries in Brazil, 2003–2005 (US$ million)

R&D/Employees

TNC World

TNC Subsidiary in Brazil

TNC: Brazilian Subsidiary/World

Mining Industries

2,286.78

0.00

0.00

Food Industry

4,752.06

393.12

8.27

Tobacco

3,412.30

1,454.75

42.63

Paper and Pulp

2,941.80

946.67

32.18

Chemicals

14,714.95

1,851.12

12.58

Pharmaceuticals

55,494.79

3,118.62

5.62

Rubber and Plastics

2,698.63

675.94

25.05

Non-metal (Minerals)

1,444.40

1,225.13

84.82

Basic Metallurgy

5,613.40

1,517.50

27.03

Non-ferrous Metallurgy

4,321.22

62.23

1.44

Metal products

2,079.39

336.52

16.18

Machinery and Equipment

5,613.64

948.75

16.90

Office and IT Equipment

14,925.06

2,407.45

16.13

Electric Materials and Equipment

6,489.12

311.82

4.81

Electronic and Communications Equipment

33,933.25

4,755.64

14.01

Medical Instruments

13,329.55

53.03

0.40

Auto Industry

17,950.11

3,910.29

21.78

Auto Parts

8,333.47

1,406.78

16.88

Others

6,806.61

89.97

1.32

Average for 150 TNCs and their Brazilian subsidiaries

17,510.34

1,816.29

10.37

Source: PIB project for data on Brazilian subsidiaries and EU for TNCs parent companies; in Cassiolato et al. (2010).

Table 2.10: Net Sales/Total Number of Employees — 150 TNCs and their Subsidiaries in Brazil, 2003–2005 (US$ million)

Net Sales/Employees

TNC World

TNC Subsidiary in Brazil

TNC: Brazilian Subsidiary/World

Mining Industries

199,196.50

156,741.07

78.69

Food Industry

232,952.65

145,940.68

62.65

Tobacco

392,707.43

320,049.82

81.50

Paper and Pulp

315,056.44

301,516.25

95.70

Chemicals

447,403.27

436,899.25

97.65

Pharmaceuticals

367,346.50

234,069.35

63.72

Rubber and Plastics

187,665.97

122,198.36

65.11

Non-metal (minerals)

215,010.65

219,985.57

102.31

Basic Metallurgy

223,696.48

204,442.19

91.39

Non-ferrous Metallurgy

577,745.68

343,299.77

59.42

Metal Products

211,087.01

390,597.81

185.04

Machinery and Equipment

260,524.24

196,208.01

75.31

Office and IT Equipment

410,678.04

281,238.92

68.48

Electric Materials and Equipment

227,143.56

137,358.79

60.47

Electronic and Communications Equipment

347,996.15

362,224.15

104.09

Medical Instruments

235,604.58

60,122.16

25.52

Auto Industry

438,090.27

292,082.30

66.67

Auto Parts

212,997.68

166,420.62

78.13

Others

275,237.52

196,717.52

71.47

Average for 150 TNCs and their Brazilian Subsidiaries

312,098.52

237,477.50

76.09

Source: PIB project for data on Brazilian subsidiaries and EU for TNCs parent companies; in Cassiolato et al. (2010).

In short, the analysis for the 150 pairs of parent companies/subsidiaries in Brazil showed that:

(a) With the exception of non-metal (minerals) (where one TNC set up one key R&D lab in Brazil), the R&D/net sales ratio of Brazilian subsidiaries are immensely smaller than that of the TNCs worldwide — on average, in 2005 these 150 subsidiaries spent 0.59 per cent of their sales on R&D while their parent companies spent 5 per cent;

(b) R&D per employee of subsidiaries in Brazil is much lower than R&D per employee of the TNCs in the world for all firms in the sample — on average, subsidiaries’ R&D expenditures per employee is about 10.37 per cent of what parent companies spend;

(c) However, the ratio of net sales/employee is not significantly different when Brazilian subsidiaries are compared to their parent companies worldwide — on average, this ratio for Brazilian subsidiaries is 76 per cent of the same ratio of parent companies.

In addition to the quantitative analyses presented here, and in order to illustrate this analysis with some case studies, this paper also made use of some qualitative information and questionnaires were sent to a sample of TNC subsidiaries in selected sectors. As discussed above, differing interpretations characterise the literature on R&D strategies of TNCs. Some advocate that TNCs concentrate their investments at their headquarters, while others claim that despite globalisation R&D investments of these companies are still concentrated in the central countries, and some claim that one already could observe a dispersion of these investments throughout global networks. In line with the general objective of the paper, the questionnaire was structured in order to verify these different interpretations regarding TNCs that set up facilities in Brazil and that introduced innovations in the country. The analysis below refers to five TNC subsidiaries that answered the questionnaire, two of the chemicals sector, one of the paper and pulp sector, one of the pharmaceuticals sector, and one of the IT sector.

The aim of the questionnaire was initially to compare R&D expenditures in the Brazilian subsidiary with those in the parent company. One question was devised: what is the percentage of R&D on sales in the Brazilian subsidiary and what is the same percentage in the parent company? Bearing in mind the fact that a TNC can have various R&D facilities, it was asked where they were located and what the respective percentages of investment for each one of these were. With the aim of investigating the allocation of R&D expenditures by different categories in the Brazilian subsidiary and in the parent company, another question was included regarding the share of R&D resources devoted to (i) innovation for local market,3 (ii) incremental innovation,4 (iii) radical innovation,5 and (iv) basic research performed in Brazil6 (Table 2.11).

Table 2.11 summarises the answers to these questions. R&D intensity in the world is usually larger than what was informed about the Brazilian subsidiary. But the difference is not only in the amount of R&D spent; the type of investment is also significantly different. Firms A, B and C concentrate their investments in R&D in Brazil in incremental innovations. However, firm C, of the chemical sector, invests significantly in radical innovation (30 per cent of total expenditures in R&D in Brazil). The reasons presented by the interviewee refer to the fact that what is produced in Brazil is not produced elsewhere by the group. This is a very interesting case as the parent company has only five R&D centres in the world — two in Europe, one in the USA, one in China, and one in Brazil. This is the firm where there is the lowest difference between R&D expenditures over sales in the parent company and in the Brazilian subsidiary. However, such radical innovations are more connected to the specificities of the local market rather than being connected to global strategies.

Another remarkable finding refers to firm B, in the pulp and paper industry, which claims to invest 15 per cent of its R&D expenditures in Brazil in basic research. Firm D of the pharmaceutical sector, and firm E of the IT sector do not make any R&D investments in Brazil. Firm E explicitly stated the following: we are a global firm that invests 15 per cent (or US$ 2 billion) of sales in R&D. Such investment, however, is heavily concentrated in the Silicon Valley and in India, China and the Czech Republic. Unfortunately, our R&D investment in Brazil is close to nothing. We analyse such possibility but concluded that several factors, including the exchange rate, reduced the appeal of such investment in Brazil.

Table 2.11: Select TNC Subsidiaries — R&D over Sales and Percentage Distribution of R&D Expenditures by Selected Topics of Subsidiary in Brazil (Sub) and Parent Company (PC)

 

Firm A

Firm B

Firm C

Firm D

Firm E

 

Chemicals

Paper and Pulp

Chemicals

Pharmaceuticals

IT

Firm/Sector

Sub

PC

Sub

PC

Sub

PC

Sub

PC

Sub

PC

R&D/Sales (%)

1.0

2.0

0.3

2.5

1.5

2.0

0.0

10.0

0.0

15.0

R&D Expenditures (%) in:

 

 

 

 

 

 

 

 

 

 

 

(a) Innovation for Local Market

20

20

25

NA

30

40

30

40

0

NA

 

(b) Adaptation of Product Process

70

40

60

NA

40

30

40

30

0

NA

 

(c) Radical Innovation

5

10

0

NA

30

25

30

25

0

NA

 

(d) Basic Research

5

30

15

NA

0

5

0

5

0

NA

Source: Authors’ own calculation based on data from questionnaire.

A question was included in order to justify the differences between allocation of R&D expenditures in the Brazilian subsidiary, in the parent company or in any other subsidiary. The interviewee presented the following suggestions: (a) lack of adequate policies in Brazil; (b) lack of qualified human resources in Brazil; (c) lack of knowledge base in Brazil; (d) the strategy of parent company when setting up a subsidiary in Brazil was primarily in market access or strategic resources of Brazil and not to develop new product/process; (e) parent company considers that there are gains in concentrating R&D activities in the home country; or, finally, (f) as radical innovations occur basically in partnership with other firms, universities, etc., Brazil lacks adequate partners.

Table 2.12 presents the reasons given by four of these TNC subsidiaries for not investing in R&D in Brazil. According to interviews, the most important reason is that as the parent company strategy for setting up a subsidiary in Brazil was the size of the market, only adaptation of technology and innovation to the local market was necessary (three scores of 5). Other important reasons given were: (a) parent company’s strategy is based only on access to local strategic resources (basically natural resources) with one score of 5, one of 4.5, and one score of 4; (b) there are significant gains in concentrating R&D activities in the home country, principally when dealing with radical innovation (two scores of 5); and (c) Brazil does not have adequate partners, nor does it have policies that create incentives for cooperative arrangement — this is important as radical innovations take place in partnerships (one score of 5, and one of 4).

Table 2.12: Select TNC Subsidiaries: Reasons for not Investing in R&D in Brazil (5 — Most Important; 1 — No Importance)

Reasons for Not Investing in R&D in Brazil

A

B

C

D

Gains in concentrating R&D activities in the home country, principally when dealing with radical innovation.

3

5

3

5.0

Brazilian public policies are inadequate for attracting investment in radical innovation.

2

3

2

4.5

Brazil does not have personnel with training at a level that would justify investment in radical innovation.

1

2

1

2.5

Brazil does not have a knowledge base necessary for investment in radical innovation.

2

3

2

2.5

Headquarters strategy for setting up subsidiaries in Brazil is based on opportunities connected with the size of the market.

5

5

5

5.0

Headquarters strategy for setting up subsidiaries in Brazil is based on opportunities tied to local strategic resources.

4

5

4

4.5

Radical innovations take place in partnerships. Brazil has neither adequate partners, nor policies that create incentives for this type of cooperative arrangement.

4

5

4

2.5

Source: Authors’ calculation based on data from questionnaire.

It is interesting to note that Brazilian policies to stimulate TNC subsidiaries to invest in R&D in Brazil seem not to affect their behaviour according to the evidence presented in this item. As discussed before, Brazilian policy does not discriminate foreign capital, generating the same privileges to national and subsidiary companies. More than that, industrial and science, technology and innovation (STI) policies implemented in the last 10 years have specifically addressed incentives of various kinds to stimulate R&D investment. Although one would not find presently any policy mechanism directed exclusively to TNCs’ R&D investments, arguably, one would expect that the instruments available to companies independently of their origin of capital, would have at least some impact on their technology strategies. In particular, Brazil has a complex mix of fiscal and financing incentives to R&D. Fiscal incentives include similar measures to developed countries as, for example, tax allowance on R&D expenditures. Financing incentives are also available, including direct economic subvention — which can cover 100 per cent of R&D costs to selected areas.

There are few studies that addressed this issue. Mariana Zanatta (2006) examined the Brazilian policies for attracting R&D by TNC subsidiaries and for stimulating innovation activities by these firms. Her conclusion was that available policies in mid-2000 were insufficient and pointed out that novel policy measures that were introduced by that time — such as those included in the new Innovation Law, which provide stimulus for pre-competitive R&D arrangements and university–industry relationships — could be more effective.

Zucoloto (2009) analysed the use of selected policy instruments (fiscal incentives to R&D, credit and grants) to support private sector’s innovation, particularly how much TNC subsidiaries in Brazil have utilised them. The conclusions were as follows: (a) only a minority of firms — both locally-owned and TNC subsidiaries — use these instruments; (b) among the analysed instruments, TNCs’ share was significant just on fiscal incentives, achieving 34.5 per cent of benefited enterprises in 2007; (c) for the other incentives, TNC subsidiaries’ share has been insignificant — 98 per cent of subvention (in 2008) and 88 per cent of credit (between 2006–2009) were directed to national enterprises.

It is true that in general terms it is not possible yet to determine if these novel incentives are positively affecting private investment in R&D, as no innovation survey was accomplished after their introduction. However, the previous analysis seems to suggest also that at least they are not having any significant impact as far as stimulating TNC subsidiaries that did not invest in R&D before. Zucoloto’s data show that sectoral data suggest that approximately 60 per cent of all fiscal incentives used by TNC subsidiaries are concentrated in the auto industry. This is an industry that historically has performed such activities in Brazil as strong adaptation to local market is an important part of activities of auto firms in Brazil.

In summary, this information suggests that TNCs’ R&D expenditures do not depend on incentives. Those that use them seem to be only rewarded for something they already would have done anyway as part of their adaptation strategy.

Consequences of the presence of TNCs for local R&D capacities: Spillover effect versus crowding-out effect

In what measure may TNCs collaborate with economic/sectoral development of a country? There are two controversial consequences related to the performance of TNCs, especially in the more dynamic sectors of a country: the spillover effects (positive) and the crowding-out effects (negative).

Analysing Brazilian data between 1992 and 1995, Johnson (cited in Araujo 2005) showed that R&D by TNC subsidiaries has no significant impact on R&D and licence expenditures of local firms. Shing Fung and José Cassiolato (1976) collected data from 49 local firms and joint ventures which licensed technology from TNCs in the mid-1970s and concluded that although production capabilities improved, there was no discernible positive outcome as far as technological and innovative capabilities were concerned. The striking result of both studies was that, on the absence of a more comprehensive policy package, relying on licensing did not encourage local firms to perform R&D locally.

Mariano Laplane et al. (2004) addressed specifically the incidence of horizontal and vertical spillovers from TNCs investment in Brazil during the 1990s and early 2000s. The study showed that when locally-owned firms are treated as a whole, it is not possible to demonstrate the occurrence of significant impacts, either positive or negative, of the presence of TNCs. In other words, horizontal spillovers were not found for the whole set of locally-owned firms.

However, it was found that the capacity of local firms to react conditions the result. Firms with higher level of capabilities — those with smaller productivity gaps — suffered negative impacts from the presence of TNC subsidiaries in their sector. In other words, when the analysis is controlled by sector of activity and by level of productivity, local firms with higher capabilities suffered a negative impact of the presence of TNC subsidiaries in their sectors, or negative horizontal spillovers. According to the authors, such result could be attributed to the fact that TNC subsidiaries target the Brazilian domestic market. Their presence in Brazil resulted in the reduction of the scale of production of relatively more efficient local firms and, consequently, in the decrease of their productivity levels. This interpretation is supported by the proposal that market seeking strategies of TNC subsidiaries have a negative effect on the productivity of local firms. The study also concluded that there are positive spillover effects between TNC subsidiaries and their suppliers. Finally, the study suggested that local firms tend to invest more in R&D when they are in the few sectors where TNC subsidiaries invest significantly in R&D in Brazil (Laplane et al. 2004).

Such findings suggest that TNC subsidiaries make a relatively less significant R&D effort in Brazil. They also imply that even if the fact that the complementarities between performing internal R&D and the use of other sources of innovation by subsidiaries are relatively small do not indicate that subsidiaries are less innovative than local firms, spillover effects by means of local technological development are almost insignificant. Their results suggest that locals firms tend to increase their R&D expenditures as a response to the presence of TNC subsidiaries when and if such firms invest in R&D. There are evidences in other papers (Zucoloto and Toneto Júnior 2005) that R&D expenditure of local firms competing in the same market of TNC subsidiaries are limited by the relatively low level of R&D expenditures of TNC subsidiaries and by the weak stimulation power of other sources of innovation in R&D activities developed by subsidiaries.

These results have at least three important implications for policies: first is the occurrence of vertical spillovers; second, that horizontal effects tend to be positive only when locally-owned firms already acquired higher levels of innovative capabilities; third, market seeking strategies by TNCs, particularly when combined with high levels of effective protection, have a negative impact in locally-owned firms including those with higher levels of relative efficiency (Laplane et al. 2004).

Several empirical works confirm this pattern. One specific case is the telecommunications industry, where Brazil developed significant technological capabilities from the 1970s to the 1990s (Box 2.1).

A more general evaluation in the same direction has been provided by several empirical studies. Celio Hiratuka (2003), for example, points out that domestic firms achieved higher rates of productivity growth in this period as compared to TNC subsidiaries in Brazil. This and other studies suggest that external investments were concentrated in the production structure of service provision to the detriment of manufacturing activities. Thus, the positive effects observed in domestic firms were localised on a small group of firms which, in general, operated within some market niches. Furthermore, trade balance was also negatively affected by the strategy of FDI. Foreign companies exported, in average, 70 per cent more than domestic firms; imports, conversely, are 290 per cent higher.

Box 2.1: The Innovation System of Telecommunications in Brazil

Since the 1970s, a sophisticated telecommunications innovation system in Brazil evolved around Telebras (the government-owned telecom conglomerate) R&D Center (CPqD), which was responsible for carrying out research and development aiming at both introducing specific technologies for the production of equipment and component parts for the telecommunications network, and training human resources. After the privatisation of Telebras, in the mid-1990s, this system was restructured and the production underwent a process of de-nationalisation and internationalisation, thus significantly reducing the local value added. The process of privatisation has privileged the financial side associated with the entry of foreign capital, to the detriment of a strategic solution based on technological development. Such a restructuring model initially had the purpose of promoting competition; however, what happened in fact was a transition from a state monopoly towards a private monopoly, especially regarding fixed telephony. With respect to mobile telephony, the rapid technological evolution promoted the constitution of oligopolies for services provision, making prices stay high. The telecommunications innovation system underwent deep changes: CPqD was transformed into a private foundation and began to invest in short-term R&D (mostly D) to the detriment of medium and long term projects, with the sole purpose of surviving within an environment of high competition. Therefore, the telecommunications system restructuring process experienced a downgrade of innovative and productive efforts; a detachment of the decisions centres towards outside the country occurred, especially regarding R&D efforts that started to be performed in the laboratories of the headquarters of TNCs. Data of the Brazilian Innovation Surveys of 2000, 2003 and 2005 reinforce this evidence, showing an expressive reduction of investments in innovative activities by telecommunications equipment manufacturers. Still, according to the surveys, although the innovation rates either in product or in productive process of telecommunications services was relatively high (45.87 per cent, between 2003–2005), expenditures with innovative activities were little more than 3 per cent of net sales, whereas the R&D internal activities represented nearly 0.5 per cent of net sales, an extremely low figure for the telecommunications services sector.

Source: Szapiro (2005).

Hiratuka’s research concludes that foreign-owned subsidiaries of MNCs still keep using knowledge mostly developed by their R&D laboratories located in their headquarters and tend only to adapt the technologies to local conditions. Such finding is in line with others. Zucoloto and Toneto Júnior (2005) compared the technological behaviour and strategies of local firms with those of MNCs’ subsidiaries (Figure 2.11). They found a negative correlation between the relative technological effort (measured by the average R&D intensity in each sector in Brazil over the average R&D intensity in the sector in advanced countries) and the foreign participation in the Brazilian manufacturing industry.

The authors demonstrated that, generally, the larger the foreign control over a particular sector, the smaller the relative technological effort developed by that sector. For example, in a sector like pharmaceuticals where MNC subsidiaries control 75 per cent of net revenues, the R&D intensity is just 8 per cent of the EU average. In contrast, sector like airplanes, wood products and paper and pulp where there is little influence of foreign capital (MNCs’ subsidiaries control only zero, nine and 21 per cent), the relative technological effort is much higher, sometimes higher than the EU average (130, 116 and 85 per cent, respectively). Out of the 17 sectors studied, the authors note that if the relative technological effort is higher (lower) than the average of the manufacturing industry, then the foreign dominance in operating income is lower (higher) than that average.

Outward FDI and Domestic TNCs

As part of the import substitution industrialisation, Brazil experienced during the 1970s and early 1980 its first wave of outward investment (Figure 2.12). This first wave was constituted essentially by the government-owned oil firm Petrobras, as part of its resource-seeking strategies. During such period, a series of government sponsored initiatives to support exports also took place in areas such as distribution and marketing. But these were essential isolated initiatives in a period where FDI by large firms of developing countries were an exception in an expansion of FDI dominated by TNCs from advanced economies.

Figure 2.11: Brazil: Relative Technological Effort and Foreign Control by Sector, 2000

Image

Source: Zucoloto and Toneto Júnior (2005).

Note: *Relative Technological Effort is the R&D intensity of the sector in Brazil over the average R&D intensity of EU countries.

**Foreign Control is the percentage of net revenues by MNC subsidiaries in different sectors.

Figure 2.12: Brazil: OFDI — Share of World Total and Share of Developing and Transition Economies, 1970–2007

Image

Source: UNCTAD (2008).

The 1980s and early 1990s were a period marked by economic and political turmoil inside Brazil and only few large local firms attempted to expand internationally. Besides some banks and engineering companies, the most significant local TNC that ventured to invest abroad was CVRD (Companhia Vale do Rio Doce) the government-owned exporter of iron ore which, in order to secure foreign market, was obliged to seek partnerships and set up joint ventures. At the end of the 1980s, there was also a wave of outward FDI to Argentina, in the auto parts and electrical appliances industries (Metal Leve, COFAP), in the context of the bilateral economic integration agreement signed at the time (UNCTAD 2004a).

Although in a relatively timid way, this has stated to change in the present decade. In the early years of the present decade, macroeconomic instability and economic and political uncertainty led many companies to increase their investments abroad. What drove investment flows in this new phase was the desire to diversify the risk associated with operations in the domestic market.

In 2004, investment flows from Brazil to other countries totalled some US$ 9.5 billion, although a single transaction, the merger between Interbrew and AmBev, accounted for about US$ 4.5 billion of this. The stock of outward FDI that year was estimated at some US$ 69 billion, the highest figure in Latin America and the Caribbean. Most of the companies that have internationalised have invested in Latin America and FDI remained concentrated in the oil industry, metal processing, aircraft (Embraer, the third largest producer of aircrafts in the world) and civil construction. However, Brazil was still one of the large countries with the smaller number of TNCs: according to UNCTAD, in the mid-2000s there were only 165 Brazilian firms with some level of internationalisation.

It is also interesting to note, since 1990, the increase in share of developing countries in total FDI outward stock. However, the Brazilian share in total and in developing countries’ investment presented a significant reduction in the period, although the amount of outward stock increased (Figure 2.13).

Besides the low international share, outward FDI of Brazilian enterprises presented an important growth in the last decade, although volatile. These investments, which reached an annual average of US$ 2.5 billion between 2000 and 2005, achieved US$ 18.6 billion between 2006 and 2008 (UNCTAD 2012). The international crisis of 2008 was responsible for the strongest decline of Brazilian investments abroad in 2009 (10.1 billion), but in 2010 these investments recovered to US$ 11.5 billion (UNCTAD 2012) (Figure 2.14).

There were three very large Brazilian firms, which were important players in the globalisation process at that time. The first was Companhia Vale do Rio Doce, the mining and metal processing giant that was privatised in the 1990s. Vale was the 11th largest TNC in the world in 2006. In 2008, Vale, which is the largest mining company in Latin America, bought some enterprises abroad to improve its position in coal and copper extraction. The other was Petrobras, the state-owned oil giant, and the 12th largest TNC in 2006 with investment in several Latin American countries, the US, Europe, and Asia. In 2008, its international investments reached US$ 6.1 trillion, or 12 per cent of its total investment (ECLAC 2008). Petrobras is also expanding its investments in biofuels, financing projects in partnership with China and USA (UNCTAD 2008). The other was Embraer, the aircraft producer that was also privatised in the 1990s.

Figure 2.13: Brazil: OFDI — FDI Outward Stock — Developing Countries and Brazil, 1990–2011

Image

Source: UNCTAD (2012b). Authors’ own elaboration.

Figure 2.14: Brazil Net Outflow of FDI, 1990–2011 (US$ million)

Image

Source: UNCTAD (2012b). Authors’ own elaboration.

The internationalisation of Brazilian large firms got momentum after BNDES, the Brazilian National Socio-economic Development Bank, began to provide specific supporting mechanisms. In 2005, BNDES set up specific financing mechanisms for Brazilian firms which attempt to internationalise (Além and Cavalcanti 2005: 71). In particular, BNDES assessed financing schemes abroad and redirected them to potential Brazilian TNCs under very favourable conditions with very long repayment periods and very low spreads. In the last two years, BNDES increased substantially its role as it started to use its investment arm, BNDESPar to become a shareholder of these firms.

BNDES is the main company responsible for the evolution of Brazilian investments abroad. Considering the top 30 Brazilian transnational companies, almost all have received financial support from BNDES, and nowadays the government has a stakeholder participation in 20 of them (Table 2.13). If one includes indirect relationships (as for example, when Petrobras or the State participates in firms that control them) this number grows to 25 among the top 30 Brazilian TNCs. (Almeida Jr. 2009).

The result is striking, as even if the total number of Brazilian TNCs remains small, several of these firms became very rapidly important players in the global economy (Table 2.14). This is particularly true in the meat processing sector where JBS Friboi is now the largest meat processor in the world. It began its internationalisation in 2005 and after a series of acquisitions in Argentina, Europe, US, and Australia, is now responsible for at least 125,000 jobs worldwide, 55 per cent of all meat exports from Argentina, 60 per cent from Australia, and 38 per cent from the US with an overall sales volume of around US$ 40 billion. Another example is Bertin conglomerate, which represented the most important financial operation of BNDES in any industrial group in 2008 (Table 2.15). There are other examples such as Fibria, which is the result of the merger of VCP and Aracruz Celulose, the largest world producer of cellulose, and the Globo conglomerate is among the most important media groups of the world.

Besides these companies, the process can be exemplified by others, which have intensified the internationalisation of Brazilian production in recent years (see Table 2.14):

Table 2.13: Brazil: 30 Largest TNCs — Relationship with Government, 2008

Brazilian TNC

Relationship with Government

Petrobras

State-owned

Petrobrás Distrib

State-owned

Vale

BNDESPar and Pension funds of state firms are shareholders

AMBEV

No relationship

Ipiranga

Petrobras is partner

Braskem

BNDESPar is shareholder

CSN

BNDESPar is shareholder

Gerdau Aços Longos

BNDESPar is shareholder

Usiminas

Previ is shareholder

Sadia

Previ is shareholder

Eletrobrás

State-owned

TAM Airlines

No relationship

Embraer

BNDESPar is shareholder

CEMIG Distrib.

State of Minas Gerais owns

Perdigão

Pension funds of state firms are shareholders

Gerdau Açominas

Indirect state association

Bertin

BNDESPar is shareholder

Globo

No relationship

JBS

BNDESPar is shareholder

Fibria

BNDESPar is shareholder

VotorantimCimentos

Indirect state association

Norbert Odebrecht

Petrobras is partner in Braskem

Suzano

Petrobras is partner in Rio Polímeros

Copersucar

No relationship

Natura

No relationship

Camargo Correa

 

Transpetro

State-owned

Gerdau Com. Aços

Indirect state association

Klabin

BNDESPar is shareholder

Dist. Ipiranga

Petrobras is partner

Source: Almeida Jr. (2009).

(a) Transportation industry (including the production of buses): Marcopolo’s internationalisation strategy involves partnership with companies from India (Tata), Egypt (GB Auto SAE) — to be present at European, African and Middle East markets — and Russia (Ruspromauto). Marcopolo also has its own facilities in Argentina, Colombia, India, Mexico, Russia, and Portugal.

Table 2.14: Brazilian TNCs — Select Variables, 2009

Enterprise

Sector

Sales 2009 (US$ million)

Employees 2009

No. of Countries with Subsidiaries

Sales Abroad/Total Sales (%)

Investment Abroad/Total Investment (%)

Employees Abroad/Total Employees (%)

Grupo JBS (Friboi)

Food

20,547

55,019

11

85.2

85.0

76.5

Vale

Mining

27,852

62,500

34

35.0

46.5

20.0

Gerdau

Steel

15,242

40,000

14

53.0

58.2

46.3

Const. Norberto Odebrecht

Engineering

4,800

82,159

34

68.8

56.0

49.0

Petrobras

Oil

101,948

74,240

28

29.0

33.6

10.0

Marfrig

Food

5,316

40,000

13

39.3

40.0

35.0

Camargo CôrreaCimentos

Cement

1,500

3,900

4

48.0

67.0

60.8

Embraer

Airspace

6,812

16,853

5

86.0

45.0

12.6

Grupo Camargo Côrrea

Engineering

6,950

54,400

14

22.2

46.9

28.2

Weg

Machinery

2,055

19,105

47

34.3

26.0

10.3

Votorantim

Cement

3,110

11,000

3

36.0

48.0

34.9

Sadia

Food

5,577

60,580

13

47.0

10.0

80.0

Itaú-Unibanco

Financial

44,242

110,000

11

10.5

2.5

10.0

Andrade Gutierrez

Engineering

4,500

4,844

17

15.4

9.8

5.2

Aracruz

Celulose

1,800

5

40.0

27.0

2.0

TAM Airlines

Aviation

5,780

24,164

10

30.8

5.0

5.6

DuasRodas

Food

450

24

4.0

39.0

8.9

Lupatech

Engineering

244

2,950

3

28.3

36.0

25.3

Sabó

Auto Parts

300

8

42.1

20.1

28.0

CSN

Steel

6,305

15,629

3

22.6

12.9

6.0

Metalfrio

White Goods

369

5

21.0

19.6

45.0

Marcopolo

Auto Parts

1,181

13,364

8

23.5

13.6

20.6

Natura

Cosmetics

2,359

5,698

9

6.9

4.9

23.0

Tigre

Construction Materials

815

9

15.0

28.0

18.3

Artecola

Chemicals

450

6

17.0

29.0

18.7

Source: América Economia, n. 386, April 2010.

Table 2.15: Brazilian TNCs in the Meat Processing Sector — BNDES Support, 2008

Brazilian TNC

Largest Direct Operations by BNDES (US$ million)

BNDES Share in Capital (%)

Bertin S.A.

1,072.9

26.9

JBS S.A.

476.1

13.0

Marfrig Frigoríficos

300.4

14.7

Independência

193.1

13.9

Source: Almeida Jr. (2009).

(b) Steel industry: Gerdau’s expansion aims at reducing costs and improving its influence on suppliers. Its recent acquisitions aimed at searching for vertical integration to guarantee the availability of inputs due to increase in global demand for natural resources.

(c) Sugar and ethanol industry: Cosan bought distribution and services centres from ExxonMobil to guarantee a distributions channel for its ethanol production.

(d) Mineral industry: Votorantim acquired companies from USA, Peru and Chile and made investments in Argentina and Colombia.

Essentially, the main driver of such expansion has been market access, as for example, Marcopolo and Embraer. Some firms have also invested abroad seeking access to natural resources (Petrobras, Vale), while others have sought to avoid trade barriers or to improve the logistics infrastructure for their exports (Gerdau, CUTRALE). (UNCTAD 2004b). As most of these firms expanded through a strategy centred on exports, they faced different types of difficulties for entering novel sophisticated markets. The acquisition strategy was based on the need to use local well-known brands as an easier way to access local markets in South America, Europe and USA. Nevertheless, future prospects seem to be still limited by the extension of conglomeration of local companies. Brazil still has a small number of large firms capable of playing a major role in international business.

As expected, the internationalisation process has been based on competitive enterprises of Brazilian market, which consolidates its leadership in the national economy. According to Victor Prochnik and Rogério Araujo (2005), the level of internationalisation of Brazilian firms varies according to its productivity. Internationalised national firms present higher productivity levels than similar enterprises that just export, and these present higher productivity levels than firms that do not invest abroad or export. The authors also verified that besides productivity other variables are positively correlated to the level of internationalisation of Brazilian industrial firms: size, average schooling of workers, average income of workers, R&D expenditures over sales, innovation expenditures, and number of postgraduate workers on R&D activities.

So the internationalisation process involves high competitive and innovative firms. Supported by the State financing and active policies, national firms that accumulated such capabilities were able to invest abroad and achieved a new competitive degree at the international level.

Finally, a large part of outward capital movements from Brazil has taken place for financial reasons rather than for international production. A significant share of outward FDI involves capital flows seeking shelter from taxation or undertaking currency transactions rather than establishing production affiliates. In 2011, Austria headed the list of host countries for Brazil’s equity capital direct investment abroad, followed by the Cayman Islands and the British Virgin Islands (Table 2.16).

Table 2.16: Direct Investment Abroad: Equity Capital by Major Destination, 2011 (US$ million)

TOTAL

192.933

Austria

47.390

Cayman Islands

32.138

Netherlands

20.819

British Virgin Islands

16.231

Bahamas

12.921

Spain

11.187

United States

10.291

Denmark

9.831

Luxembourg

5.425

Argentina

5.143

Others

21.557

Source: BCB (2013). Authors’ own elaboration.

Brazilian equity capital investments are mostly concentrated in service activities (60.1 per cent). This concentration strongly reflects the large investments in financial products, which represented 63.0 per cent of services’ outward investment. FDI in primary activities is composed mainly of mining of metal ores, while in manufacturing it is concentrated in manufacture of food products, other non-metallic mineral products and metallurgy (Table 2.17).

Table 2.17: Direct Investment Abroad: Equity Capital by Sector — Average, 2010–2011 (US$ million)

TOTAL

180.999

Agriculture, Forestry, Fishing, Mining, and Quarrying

59.979

Mining of Metal Ores

48.867

Manufacturing

12.158

Manufacture of Food Products

3.982

Manufacture of other Non-metallic Mineral Products

2.825

Metallurgy

2.690

Services

108.863

Financial Service Activities, except Insurance and Pension Funding

68.556

Source: BCB (2013). Authors’ own elaboration.

Conclusion

The analysis attempts to show, first of all, that the arguments in favour of globalisation of R&D have to be made with caution. One has to specify the meaning of R&D as in the concept there are so many different activities with different levels of technological complexity. Also, and in a related way, as TNCs have become the main drivers of globalisation and got more and more involved in activities in the financial sector, the management and control of intangible assets, of which R&D is part, got pre-eminence in their strategies. Then what is normally included under ‘globalisation of R&D’ may be either a not complex technical activity or simply an attempt to maximise financial returns from hard to define conducts that are even difficult to account for.

In general, since the 1990s, while countries like China and India have obtained relative success as receivers of foreign technological investment, Brazil seems to be losing its share. This fact results, among several factors, from the different role fulfilled by TNCs in the economic development of these nations. The Brazilian industrial structure was generated with a strong support of TNC subsidiaries. The role of foreign companies was favoured because of historical reasons, interests of specific groups and international pressures, determinants that limited the development of domestic private firms (Amsden 2001). The Brazilian industrialisation model (and the whole Latin American model) was significantly different from the Asian one, where leadership in industries like automobile, chemistry and the capital goods — where technical progress is usually created — were mainly taken by local enterprises (Fajnzylber 2000).

Based on a model in which the multinational enterprises (MNEs) would assume the central role to industrial development, Brazil, in the latter part of the 1950s, adopted a policy to attract foreign capital, which transformed it into the most attractive country for FDI during the 1960s and the 1970s (Cassiolato and Lastres 2005). Robinson (1976) observed that in the 1970s, among 15 developing countries, including the Asian tigers, Brazil presented the lowest restrictive policies related to capital, investment and foreign technologies. Until the beginning of the 1990s, there were no restrictions to foreign capital inflow in Brazil, excepting the petroleum industry, domestic aviation, communication sector, and coastal navigation. These sectors were restricted to domestic enterprises. In the case of mining, fishing, hydroelectric energy, and the financial sector, a minor share was permitted (Fung and Cassiolato 1976; Cassiolato et al. 1998).

As a consequence of these liberal policies, Brazil became one of the main hosts of direct foreign investment until the 1980s. In that decade, the ‘Informatics Law’ imposed some restriction to FDI inflow in some segments of this sector, as in high and medium sized computer industry. The economic crisis of the 1980s, associated with the reduction of dynamism of the internal market, recessive economic environment and a structural inflationary process, together with the instability of the international scene, contributed to the Brazilian loss of position as receptor of foreign investment, from first place in 1980 to the 14th position in 1993 among the developing countries.

In the 1990s, FDI flourished again in Brazil, as it went through rapid processes of liberalisation, privatisation and deregulation. However, the type of FDI was different from the previous period, as it concentrated in the acquisition of already existent firms, while only 18 per cent represented new industrial investments. In the beginning of the decade, important institutional changes were implemented aiming at increasing the FDI inflow. The few existing restrictions to foreign capital were scrapped. Among them were the end of market reserve to domestic enterprises in the informatics industry, the reduction of taxation to profits remittance, the end of differentiation between national and foreign enterprises in the access of public credits and subsidies, and deregulation of the financial market (Cassiolato et al. 1998).

The adoption of such policies was based in the hypothesis that TNCs, if established in Brazil, would bring advanced technologies, perform R&D locally and stimulate domestic enterprises to adopt similar behaviour. As the information analysed in this paper suggests, policies implemented were not adequate to stimulate an innovative behaviour by foreign enterprises in the national territory. Offering different types of incentives, considering it was counterproductive to impose whatever type of restriction to their performance, did not stimulate TNCs to develop sophisticated activities, like R&D, in Brazil.

Instead of liberalising the functioning of TNC subsidiaries on the domestic markets, avoiding imposing restrictions on them, the countries that succeeded in attracting investments in R&D by subsidiaries of multinational firms in the 1990s adopted different measures. The most important of them was to strengthen its NSI. A country that simply opens its economy for international trade and investments and waits passively for the entry of new knowledge and technology from abroad is in competitive disadvantage in relation to those that strengthened their policies and institutions (UNCTAD 2005).

The analysis of this chapter tends to confirm that adaptive R&D — basically adaptation of technologies to local conditions — is a dominant form of activity performed by subsidiaries in Brazil (as it is in Latin America and Africa). On the other hand, innovative R&D goes together with the existence of a national system of innovation that is more balanced and structured. The difficulties in attracting R&D by TNC subsidiaries is perhaps much more connected with the general problems of the Brazilian NSI and with the hands-off approach of Brazilian industrial policy, which does not try to negotiate with foreign capital the conditions for market access as the government of other countries such as China does. Giving TNCs a wide array of incentives does not seem to be enough.

Image

Notes

1. Above 500 employees.

2. As TNCs’ headquarters.

3. Defined by the IBGE as: ‘implementation of technologically new or refined products (good or services) or processes within the market under consideration’ (IBGE 2003: 19).

4. Defined by IBGE as ‘existing product or process whose performance has been considerably improved in the market being analyzed’ (ibid.: 20).

5. Defined by IBGE as ‘the product or process whose characteristics, attributes or use differ significantly, when compared with other products or processes already created in other companies/subsidiaries of the group’ (ibid.: 20).

6. Defined as ‘expenditures in basic research that supports the future development of new products or processes’ (ibid.: 21).

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3

Transnational Corporations and Russia’s National Innovation System

Alexander Sokolov and Pavel Rudnik


During the last 20 years, the Russian economy has undergone significant structural changes. First, transnational corporations (TNCs) came to the Russian market, which is no longer cut off from the rest of the world by the Iron Curtain. Second, large Russian property holdings — which not so long ago have been fully integrated into the powerful nationwide tough top-down administration system — now provide the basis for the emerging Russian TNCs, mainly in the mining industry and aerospace.

Expansion of international TNCs into Russia is encouraged by the country’s government, which pursues a policy aimed at providing favourable investment climate and development of investment infrastructure. The following milestones should be noted: in 1999, federal laws ‘On Investment Activities in the Form of Capital Investments in the RF’ and ‘On Foreign Investments in the RF’ were adopted; in 2005, the federal law ‘On Special Economic Zones in the Russian Federation’, and in 2008, the federal law ‘On Procedures for Foreign Investment in Commercial Organizations of Strategic Importance to the RF National Security’ were adopted. This legislation promotes direct foreign investments in the Russian economy.

In turn, Russian TNCs also make serious foreign direct investments (FDI) abroad. The total amount of accumulated FDI by Russian TNCs is estimated at US$ 35–37 billion. The leading recipient of Russian TNCs’ FDI is the European Union (35–40 per cent). The countries with the largest accumulated Russian investments include the UK, Italy and Germany, followed by Austria, France, the Netherlands, Finland, Poland, the Czech Republic, and the Baltic countries. Noteworthy trends include further reduction in public sector TNCs’ share of total Russian investments abroad.

Despite their relatively small number — against the background of more than 4 million organisations, about 20,000 foreign companies look like a drop in the ocean — international TNCs make a significant contribution to the Russian economy. Approximately 40 per cent of the returns of companies doing business in Russia is earned by firms with foreign interests. The share of companies fully or partially owned by foreigners in the country’s total workforce (about 68 million) amounts to about 3 million people. Foreign companies are best represented in real estate, wholesale and retail trade, and manufacturing.

Outward Russian FDI in other BRICS countries (and vice versa) remains very low. In particular, in 2007 FDI from China and India — the largest BRICS countries — and Hong Kong in the Russian economy amounted to US$ 123 million in absolute figures or about 21 million in USD,1 while direct Russian investments into China and India totalled at just US$ 61 million in absolute figures or about 110 million in USD.

Foreign TNCs are engaged in innovation activities in Russia, including joint projects with Russian R&D organisations. During the last 15 years, leading international TNCs such as Boeing, Motorola, Intel, Hewlett-Packard, United Technologies (USA), Nortel Networks (Canada), Schlumberger (France), and Siemens (Germany) have established a lot of new research facilities in Russia (R&D centres, design bureaus, research laboratories, etc.). Leading higher education institutions performing R&D commissioned by foreign TNCs include the Lomonosov Moscow State University and Moscow Institute of Physics and Technology. From the innovation activities perspective, international TNCs are primarily attracted to Russia by low research personnel costs and highly developed R&D infrastructure.

Between 2001 and 2007, the number of foreign-owned companies engaged in R&D remained at about 60, or approximately 1.5 per cent of the total number of organisations performing R&D, including universities and public research institutes. Innovation activity of Russian-owned organisations was much higher. However, the highest innovation activity is shown by jointly Russian–foreign-owned companies (twice that of other enterprises). Regarding the number of innovative companies, joint Russian–foreign firms are also much more numerous than purely foreign-owned ones. In 2006, the share of innovative companies among all foreign-owned firms was 15 times higher than the share of companies engaged in R&D, while for joint Russian–foreign companies this ratio was approximately 6 to 1.

Two recent STI policy initiatives of the Russian government could be of great importance with respect to foreign TNCs’ presence in Russian innovation system. First, in August 2010 the Russian Government Commission on High Technology and Innovation made a decision to enforce 47 largest Russian state-owned companies to develop their own Programmes of Innovation Development (PIDs). According to government recommendations, PIDs should include measures to increase export of innovative products and to build linkages with foreign companies. Pushing domestic companies to establish partnerships and international collaboration in STI with foreign TNCs could influence activities of foreign TNCs in Russia. Second, parallel to the PIDs’ development initiative, the Commission launched a wide campaign to create a number of national Technology Platforms (TPs). They are aimed at bringing together stakeholders in the most promising technological areas in order to bridge the gap between science and industry. Foreign players are also invited to join the TPs that create a background for deeper integration of TNCs into the Russian economy.

TNCs in Russia: The Past and the Present

There are two major trends that characterise TNCs’ activities in the post-Soviet area. On the one hand, during the 1990s Russian corporate structures were gradually becoming transnational on the former USSR territory, notably financial-industrial groups (Kovaleva 2006). On the other hand, many experts point at the negative effect of foreign TNCs operations on the Russian market: liberalisation of external economic activity led to the arrival of foreign TNCs in the Russian market, which in turn undermined competitiveness of Russian companies in the domestic markets.

In 2006–2008, the import of goods was steadily and quickly growing in absolute figures (at about 30 per cent annually), but in USD the growth was not so fast (Figure 3.1). The imported goods’ share in retail turnover in 2006 has reached 40 per cent (ibid.).

Figure 3.1: Imports (US$ billion, percentage of the previous year)

Image

Source: The Central Bank of the Russian Federation.2

The structure of the markets normally leaves Russian companies in segments with the most basic, primitive manufacturing technologies and sales techniques, while the segments requiring more advanced technologies are usually taken by foreign manufacturers.

Many Russian economists believe that liberalisation of external economic activity was implemented without taking into account domestic economic realities; the Russian market was opened to Western competition, which in effect contributed to the growth of foreign economies. Opening of the markets was strictly unilateral: Russian exporters were never reciprocated with similar concessions by their foreign partners. On the contrary, during the years of reforms, discrimination against Russian goods abroad became considerably more pronounced (Oreshkin 2000).

The Russian markets’ appeal to foreign TNCs is explained by, among other things, comparatively lenient legislation. In particular, this applies to environment protection, which encourages bringing in high-pollution production from developed countries. Quite frequently Russian law doesn’t limit activities of foreign companies in any way but grants various benefits to them, which translates into a competitive edge over Russian companies.

Most of the TNCs present in the Russian retail markets work in fuel and energy, raw materials, food industry, and trade. Lately Western retail chains have been showing a high level of activity, trying to penetrate the Russian market (IKEA, Spar, Metro Cash & Carry, etc.). At the same time, TNCs are rather under-represented in manufacturing. Foreign TNCs are generally not ready for large-scale investments in modernisation of major Russian production facilities whose equipment is mostly physically worn out and/or obsolete.

Distribution of TNCs’ investments in Russia is highly irregular. Investments in restructuring and modernisation of mechanical engineering are relatively small. Creation of joint R&D organisations with TNC participation, except in very few cases, doesn’t bring Russia any outstanding results in development and promotion of advanced technologies or products. Accordingly, to many foreign TNCs, development of Russian-based production facilities is not a priority investment area; their main motive when it comes to the Russian market is selling products manufactured abroad. Investment resources are channelled primarily into distribution where TNCs’ share is steadily growing.

For some of the TNCs, their presence in the Russian economy supports their status as a global player in appropriate markets. For example, Shell openly announced that the company’s investment policy in Russia depends on the prospects of gaining access to the country’s raw materials reserves, and that an international company cannot afford to ignore large-scale projects on the Russian territory (Ignatova and Kravchenko 2003). From a perspective of internal motives, the TNCs’ activities in Russia should be seen in the context of their ambitions to develop and pursue comprehensive global development strategies.

Foreign TNCs often compete on Russian markets not just with the local companies but among themselves. For example, two biggest global rivals collided when trying to penetrate the Russian soft drinks market — Coca-Cola and PepsiCo (even before the beginning of foreign companies’ active penetration of the Russian economy, Pepsi was manufactured at several production facilities in large Russian cities). Coca-Cola offered seven of the Pepsi makers better terms: in 1995 they were given a chance to lease syrup-making equipment. This step allowed the company to secure a bridgehead on the Russian market, and then to significantly increase its market share. Later on, the factories’ management was given an option not to buy the costly machinery for cash but instead hand over some of their companies’ shares to Coca-Cola. In many cases, the management had to agree, especially bearing in mind Coca-Cola’s declared intention to build its own factories in the vicinity.

International TNCs often headhunt for the most highly skilled Russian professionals. They offer much higher salaries than their Russian competitors. Especially in demand by TNCs are applied researchers and IT professionals. TNCs actively participate in setting up R&D centres and departments. However, there is not much data about TNCs’ use of Russian scientists. The reason is often mutual unwillingness of TNCs and Russian researchers to disclose information about their cooperation.

In many cases, Russian professionals prefer working for foreign corporations, despite the highly demanding environment and corporate standards. This is explained by their generous social benefits packages (amounting to 10–15 per cent of the basic salary), precise job descriptions, corporate code of conduct, unified and structured management system, real prospects to develop one’s skills and get training at the company’s expense (corporations are willing to pay up to 100 per cent of MBA training costs), and the chance to fully implement one’s professional qualities and make a career. Many of the Russian professionals are already included in international personnel reserves and work at TNCs’ foreign-based headquarters. Also, there is a trend where professionals with work experience with international TNCs are enticed to work for Russian employers interested in implementing best international practices. Russian professionals seek employment specifically at foreign corporations. According to a rating composed by Russian national yearbook Golden Steps to Making a Career, by the beginning of 2006 Samsung Electronics was considered to be the most attractive potential employer in Russia.

To summarise, TNCs do affect the overall development of the national economy and have various specific effects over individual industries and regions, and play a role in the development of Russian human capital.

Inbound FDI into the Russian Economy

In the recent years, TNCs have been rapidly increasing their presence in the Russian economy. Currently, almost all leading TNCs are present on the territory of the Russian Federation (RF) in one form or another (fully foreign-owned companies or joint enterprises with Russian firms) (see Figure 3.2).

Figure 3.2: FDI into the Russian Economy, 2001–2009 (assets, US$ million)

Image

Source: The Central Bank of the Russian Federation.3

In particular, during 2001–2008, FDI into the Russian economy grew from US$ 93,627 million to US$ 881,670 million. In the first months of the current economic crisis, the volume of FDI into Russian economy decreased to US$ 320,211 million, but in 2009, in accordance with the Rosstat data, the volume of FDI that entered the Russian economy amounted to US$ 15,000 million.

Breakdown of FDI by country of origin (see Table 3.1) didn’t really change during the recent years: European countries remain the leaders, headed by Cyprus, Great Britain and the Netherlands. The share of the USA in the total amount of FDI was low during the last three years. The Asian and Pacific countries are also absent among the big investors.

Table 3.1: Foreign Investments by Country of Origin (US$ million)

 

2005

2006

2007

2008

Cyprus

12,064

20,598

37,070

29,749

Great Britain

20,256

14,683

47,254

22,383

Netherlands

20,987

13,790

33,655

21,786

Germany

7,099

10,459

9,073

16,053

Luxembourg

32,645

12,353

20,669

10,597

France

3,368

6,354

12,018

9,224

Virgin Islands

2,856

4,295

3,841

5,287

Switzerland

4,750

4,280

9,584

4,587

Ireland

1,403

2,049

9,288

4,349

USA

3,665

3,429

5,095

4,154

Source: The Federal State Statistics Service.4

TNCs’ Presence in the Russian Economy

Depending on the type of activity, the following forms of international companies’ presence in Russia can be identified:

(a) A contract with an existing Russian company to act as an agent and promote/market the foreign company’s goods/services in Russia. Under this arrangement, the foreign company doesn’t need any kind of registration with Russian authorities, but the Russian company can sign export/import contracts on its behalf. This form is especially convenient for exporting services into Russia, for consulting companies, and for trade operations where a Russian firm acts as the recipient or supplier of goods responsible for customs clearance.

(b) Opening a hard currency account of the ‘I’ type at a Russian bank, exclusively to trade in securities or make other kinds of investments in Russia. This form of foreign investor’s presence involves registration with tax authorities at the locality where the account was created. Accreditation of an office is the most expensive form of doing business in Russia; currently, it is most commonly used because of prestige considerations. Some breaks and benefits are still provided to foreign citizens employed at foreign companies’ Russian offices.

(c) Opening an office of a foreign company without obtaining a licence to conduct business operations on Russian territory. Specific features of this form are discussed in this chapter.

(d) Opening an office of a foreign company to perform all or part of the company’s functions including representation, but not registering it as a legal entity according to the Russian law.

(e) Creating a new company — a legal entity according to the Russian law, fully or partially foreign-owned. Such a company would be practically no different from other Russian firms in terms of accounting requirements and business opportunities, except for the right to freely transfer the net (after tax) profits to foreign accounts of the parent company.

Since the last 40 years, foreign TNCs have been present in the Russian economy. During this period, several of the world’s largest TNCs implemented projects in Russia. Some of the most important projects and their results are as follows:5

(a) E.ON (power generation), Germany; year of arrival: 1998. In December 1998, Ruhrgas AG acquired 2.5 per cent of Gazprom’s shares, and subsequently increased the holding to 6.43 per cent. Currently it owns 3.5 per cent of the company. In July 2004, with Russian President Vladimir Putin and the then Chancellor of Germany, Gerhard Schroeder in attendance, a Memorandum of Understanding (MoU) was signed — a comprehensive document describing plans for strategic cooperation in production of natural gas and power generation sphere. In August 2006, E.ON Ruhrgas and Gazprom prolonged the existing contracts and signed new contracts to supply natural gas (400 billion cubic metres) to Germany until 2036. On 15 October 2007, E.ON’s head, Wolf Bernotat, and chairman of the Board of Russian Unified Energy Systems, Anatoly Chubais, in the presence of Russian President Vladimir Putin and German Chancellor Angela Merkel, signed the memorandum on completing the acquisition of 69.43 per cent of the Fourth Generation Company (GK-4) shares by E.ON for €4.1 billion. Currently, the company owns 76 per cent of GK-4 shares. E.ON AG is Gazprom’s partner in such large-scale projects as Nord Stream and in the development of South Russian gas condensate field. In July 2008, E.ON Russia Power began construction of two new combined-cycle plants at the Surgut-2 Power Station with combined power of 800 MW. The project was completed in 2011.

(b) Boeing (aircraft construction), USA; year of arrival: 1992. Boeing closely cooperates with Russian airspace enterprises since 1992, including such projects as International Space Station (ISS) and Sea Launch. Between 1991 and 2008, Boeing had successfully carried out a number of contracts to the total amount of US$ 3.5 billion. In the next 30 years, the company will invest US$ 27 billion more; out of that, US$ 18 billion will be spent on purchasing titanium products, US$ 5 billion on design services and US$ 4 billion on other products and services, including for Sea Launch and ISS. In 1993, Boeing opened its own R&D centre in Moscow to oversee all the company’s Russian projects involving development of new materials, technologies, prototypes, testing, aerodynamics and noise research, IT, etc. Today, more than 700 researchers and IT professionals from 20 various Russian research institutions are taking part in the Centre’s projects. In 1998, Boeing opened the Design Center in Moscow, which initially employed 12 engineers from the S. V. Ilyushin Design Bureau. Today, more than 1,000 engineers have contracts with the Boeing Design Centre — employees of leading Russian design bureaus and engineering services companies. The centre also directly employs 150 people including project managers and leading engineers. Boeing Design Centre has implemented more than 250 projects, including participation in such large-scale ones as 737–900ER, 777–200LR, 767–200SF, 747–8, 787 and 747 Dreamlifter, as well as several other engineering projects. VSMPO-AVISMA Corporation, Russian titanium producer, is Boeing’s partner and supplier. In August 2007, Boeing and VSMPO announced the creation of a joint venture, Ural Boeing Manufacturing (UBM), to specialise in processing of titanium press formings. The firm, equally owned by the two parent companies, will be making parts for the Boeing 787 Dreamliner. Boeing airliners, in particular 717, 737, 747, and 767, appeared in Russian airlines’ fleets more than 15 years ago. By now, Russian airlines are using 175 Boeing aircrafts. In 2007, Aeroflot ordered 22 Boeing 787 liners, while S7 Airlines ordered 15 more airliners of the same model.

(c) Alcoa (aluminium and alloys), USA; year of arrival: 1993. In February 2005, Alcoa completed acquisition of Samara Metallurgical Plant (SMZ) and Belokalitvinsky Metallurgical Production Association (BMPA) from RUSAL for US$ 257.5 million. In July 2007, BMPA was renamed Alcoa Metallurg Rus (AMR). The total of Alcoa’s investments in Russia during 2005–2012 (including acquisitions) exceeded US$ 800 million. The two enterprises employ more than 7,500 people. In 2011, Alcoa’s sales in the domestic market grew by 30 per cent compared to 2010 — from US$ 584 million to US$ 761 million. Alcoa also signed an MoU with the United Aircraft Corporation (UAC) to start joint work on developing advanced technologies for Russian aviation. Alcoa is a member of the consortium developing the Sukhoi Superjet 100.

(d) British Petroleum (power generation), Great Britain; year of arrival: 1990. BP’s main investment in Russia is a 50 per cent share of TNK-BP, an integrated oil company with assets in Russia and the Ukraine. The company was created in August 2003, on the basis of Russian firms TNK, SIDANKO, ONAKO and BP’s main Russian assets. TNK-BP is owned by BP (50 per cent) and the AAR consortium comprising Alpha Group, Access Industries and Renova. TNK-BP also owns 50 per cent of Slavneft. TNK-BP’s main oil production assets are located in Western Siberia and the Volga–Urals regions; new projects are also under way in Eastern and Western Siberia. TNK-BP owns five refineries in Russia and the Ukraine; the company’s retail network of 1,600 petrol stations operates under the TNK and BP brands. The company employs 65,000 people. TNK-BP extracts about 1.6 million barrels of oil per day. Gross revenues in 2007 amounted to US$ 38.7 billion, net profits to UD$ 5.3 billion, capital investments to US$ 3.5 billion. In 2007, TNK-BP paid US$ 20 billion in taxes (to all levels of government); while accumulated tax, duty, etc., payments since 2003 exceed US$ 80 billion. TNK-BP increased capital investments from US$ 0.8 billion in 2003 to US$ 4.1 billion in 2008. During the last five years, TNK-BP had the highest reserves of replacement coefficient in Russia (138 per cent). TNK-BP also boasts the lowest average costs of prospecting and developing new carbohydrates reserves: US$ 2.20 per barrel, one of the best results in the world. TNK-BP’s oil production grew by 25 per cent to almost 35 million tonnes in 2008 thanks to major renovation of refineries, modernisation of equipment and application of the most advanced operational and technological solutions. In terms of marketing, BP petrol stations show significant growth of sales due to increased operational efficiency, growing trust to the brand and introduction of the new advanced product, Ultimate fuels.

(e) Coca-Cola (soft drinks), USA; year of arrival: 1994. Coca-Cola became available in Russia for the first time in 1980 as part of preparations for the Moscow Summer Olympics. The first Coca-Cola plant in the country was opened in Moscow in 1994. Currently, there are 14 Coca-Cola production facilities in Russia (including the Multon and Aquavision factories) in Moscow, St. Petersburg, Stavropol, Vladivostok, Nizhniy Novgorod, Samara, Volgograd, Yekaterinburg, Orel, Novosibirsk and Krasnoyarsk, and more than 60 sales and distribution centres in large Russian cities. In addition to the popular Coca-Cola soft drink, the company makes and sells in Russia the best-known non-alcoholic drinks and juices in the world. About 120 varieties and flavours of soft drinks sold under 23 brand names are currently available in Russia. Coca-Cola’s business in Russia is a partnership of Coca-Cola and Coca-Cola Hellenic companies; their accumulated investments in the Russian economy exceed US$ 1.8 billion. Coca-Cola provides work to over 12,000 highly skilled Russian professionals. Note that every job in the Coca-Cola system creates about eight more jobs in related industries, including a wide range of suppliers and retailers. Russian companies supply more than 70 per cent of raw materials required to manufacture and sell the company’s products.

(f) Deutsche Bank (banking), Germany; year of arrival: 1998. Deutsche Bank Russia is now one of the biggest foreign-owned banks in Russia. Since 2001, Deutsche Bank Russia participated in restructuring the Norilsk Nickel group of companies, as well as in Eurobond issues by Gazprom, Magnitogorsk Metallurgical Works and Sistema Financial Corporation. Deutsche Bank Moscow’s depositary department serves Russia’s Unified Energy Systems, Aeroflot, Wimm Bill Dann Foodstuffs and Bashneft Oil Company. The bank’s Moscow office employs about 1,000 highly skilled staff. In 2008, Deutsche Bank Russia had a leading position on the Russian share capital market (in terms of total volume of transactions). In 2008, the bank made two deals in Russia with the amount in excess of US$ 950 million. According to Dealogic and Thomson agencies, Deutsche Bank headed the 2007 rating of the rapidly expanding Russian share capital market (in terms of total volume of transactions): it put together 10 deals with the accumulated amount of more than US$ 16 billion. The biggest of them were IPOs of VTB bank (US$ 8 billion) and PIK Group of Companies (US$ 1.9 billion), and secondary offering of Norilsk Nickel shares (US$ 2.1 billion). In 2008, Deutsche Bank Russia made 13 deals on the M&A market, with combined value of US$ 12 billion. In 2007, according to Bloomberg agency, Deutsche Bank again took a leading position in financial consulting services on the Russian M&A market, having concluded 19 deals at the accumulated sum of US$ 22 billion. Deutsche Bank is a leader in trade operations and Eurobond issues.

(g) ExxonMobil (power generation), USA; year of arrival: late 1980s. The company’s prospecting and extraction activities include participation in the Sakhalin-1 project. Exxon Oil and Gas Ltd (EOG) acts as the Sakhalin-1 operator. Since the project’s start, Russian government budget received 28 billion roubles (US$ 1.1 billion) in royalties and the state’s share in oil and gas extraction, plus 5.3 billion roubles (US$ 211 million) paid to Sakhalin Region’s local budget. On top of that, 2.5 billion roubles (US$ 100 million) was paid into Sakhalin Region’s Development Fund. Altogether in the course of the Sakhalin-1 project, the Russian budget will receive more than 1.250 trillion roubles (US$ 50 billion) as taxes, royalties and the state’s share in oil and gas extraction. By now, the total sum of orders placed with Russian companies amounts to 125 billion roubles (over US$ 5 billion) — two-thirds of all orders placed with independent suppliers. Hundreds of Russians are employed within the framework of Sakhalin-1. About 500 of them work directly for EOG, the project operator. Potential extractable resources of the fields covered by the project are estimated at 307 million tonnes (2.3 billion barrels) of oil and 485 billion cubic metres (17.1 trillion cubic feet) of natural gas. After the De-Kastri Oil Terminal went into operation in September 2006, and the Shore Production Preparation Facility was completed in October 2006, in February 2007 oil production level reached the planned volume of 250 thousand barrels (33 thousand tonnes) a day. By now, more than 20 million tonnes (157 million barrels) of oil have been extracted from the Chayvo field. At the next stages of the project, the Odoptu and Arkutun-Dagi fields will be developed, and extraction from Chayvo field increased. The plan is to sustain the extraction level from all three fields until 2050.

(h) Hewlett-Packard (electronics), USA; year of arrival: 1969. HP opened its first Moscow office in 1969. Today, HP has 10 regional offices in Russia from Moscow to Khabarovsk, employing 1,000 staff. In the near future, the company intends to open a few more offices. HP maintains a wide network of partners comprising more than 100 authorised service centres, 2,200 partners, and a Training Centre offering over 100 courses in IT and High-tech Centre representing the company’s best practices in implementing IT projects in all sectors of the economy. In 2010, in St. Petersburg, Hewlett-Packard in cooperation with Foxconn started manufacturing personal computers. It is the first foreign-owned IT factory in Russia. Investments into the project amounted to US$ 50 million; it has created several thousand new jobs. In January 2007, in St. Petersburg, HP opened the seventh HP Labs office in the world, specialising in Information Management. HP Labs provides excellent opportunities for integrating Russian scientists into international research community, and gives them a chance to absorb the company’s global expertise in research and development. The HP lab in St. Petersburg has every chance to become a world-class R&D centre in the Information Management field.

(i) Mitsubishi Corporation (manufacturing), Japan; year of arrival: 1996. The company’s biggest project in the Russian Federation is participation in Sakhalin-2 — Mitsubishi became a sponsor in 1996. Gazprom is the project’s main shareholder (50 per cent + 1 share). Royal Dutch Shell owns 27.5 per cent, Mitsui & Co. Ltd. 12.5 per cent, and Mitsubishi Corp. 10 per cent. Since July 1999, oil is successfully being extracted from the Molikpaq platform — the first stage of the project. The second stage envisages building two more platforms, a 300-kilometre sea pipeline and an over 800-kilometre trans-Sakhalin land pipeline, a shore processing complex, an oil terminal, the first facility in Russia to produce and ship liquefied natural gas (LNG). Year-round oil production started at the end of 2008. Since the early 1990s, the company represents Mitsubishi Motors Corporation’s interests in Russia. Russia became the leading foreign market for Mitsubishi Motors — in 2012, there were some 75,000 cars in Russia. With production of new models of cars, Mitsubishi’s sales are expected to increase to 85,000 cars in 2013.6 The first Mitsubishi Motors assembly plant started production in 2010 with the company’s support in the vicinity of Kaluga. Russian company MC Logistics CIS, wholly owned by Mitsubishi Group of Companies, operates in Russia since 2006. The company provides integrated logistical services — transportation of goods from the place of manufacture to the place of sale, and also offers a unique product — Integrated Logistical Solutions, a package of logistical and related services for transportation and storage of goods.

(j) PepsiCo (soft drinks), USA; year of arrival: 1972. In 1998, the group of companies acquired Tropicana, and in 2001 it acquired porridge-maker Quaker Oats Company and Gatorade. On the Russian market, PepsiCo is represented by its main products — soft drinks and snacks. In 1972, PepsiCo’s president Donald Kendall announced his company had signed a barter contract that made Pepsi Cola the first Western product available to the USSR consumers. In turn, PepsiCo got exclusive rights to import and distribute Stolichnaya vodka in the USA. In 1974, the first Pepsi Cola plant was opened in Novorossiysk. Soon, 23 more state-owned factories were licensed to make soft drinks under that brand. Currently, PepsiCo soft drinks are made by Pepsi Bottling Group, Inc. (PBG) at four production facilities: in St. Petersburg (opened in 1992), Samara (opened in 1997), Yekaterinburg, and Moscow (both opened in 1998). In October 2006, PBG began construction of another drinks factory near Moscow. It started operations in 2009. In 2002, PepsiCo invested more than US$ 100 million in construction of a snack factory in Kashira (Moscow Region). The new enterprise became the biggest and the most advanced snack factory not just in Russia but in the entire European continent. In October 2007, Frito-Lay Russia started building the second plant in Azov (Rostov Region). The total investments during the next five years amounted to US$ 170 million. The project will create 1,000 new jobs. In March 2008, PepsiCo and PBG acquired 75.53 per cent of Lebedyanski Corp. shares — the sixth biggest in the world and the largest maker of juices in Russia (30 per cent of the Russian market). The company’s profits in 2007 have reached US$ 800 million. This deal makes PepsiCo one of the three leading makers of consumer goods on the Russian market. As of today, PepsiCo and PBG have invested more than a billion dollars and founded enterprises that provide employment (directly and indirectly) for more than 30,000 people across Russia.

(k) Renault (cars), France; year of arrival: 1997. The key element of Renault’s commercial expansion on the Russian market is the Renault Logan, a car specially designed for emerging markets while matching international quality standards. In April 2005, the Avtoframos Moscow car factory was inaugurated. The total investments exceeded €400 million. Currently, Renault owns a central storage facility for car parts, a training centre for dealers, 82 official dealerships, and 115 outlets (as of July 2008). Renault operates in 76 Russian cities. Since the beginning of production (full cycle: welding, painting, assembly) in April 2005, Avtoframos factory became the second largest car manufacturer in the world (80,000 cars a year, with 2,500 employees). Since 2005, more than 182,000 Renault Logans were manufactured there. In 2007, the company sold 101,166 cars — out of them 67,844 were Logans, 40 per cent more than in 2006. Renault remains Europe’s top car manufacturer in Russia. Another important objective of Renault’s Russian operations is localisation of production. In 2007, Logan became a 40 per cent local car. In 2012, it was already 74 per cent. A joint venture between Ishikawajima-Harima Heavy Industries Co., Ltd. (IHI Corp.) and Automobile Plant ZIL (AMO ZiL) was established in Moscow for that purpose, to make pressed body parts for Renault Logan. On 29 February 2008, Renault invested US$ 1 billion to acquire 25 per cent + 1 share of AvtoVAZ Inc., and signed a contract for investment and technological cooperation, becoming its strategic partner. In 2012, Renault sold some 190,000 cars in Russia (3rd highest after Lada and Chevrolet) with a growth rate of 23 per cent compared to 2011.7

(l) British–Dutch Shell (power generation). The company participates in the Sakhalin-2 project: development of the Sakhalin shelf oilfields. This includes three sea-based oil extraction platforms, an integrated shore processing complex, 800-kilometre oil and gas land pipelines, a year-round oil terminal, and the first in Russia plant to produce liquefied natural gas, with loading terminal. In the course of the project, the island’s infrastructure has been significantly modernised, including motorways, railways, bridges, seaports, airports, and health care institutions. In April 2007, Gazprom became a shareholder of Sakhalin Energy (Gazprom: 50 per cent + 1 share; Shell: 27.5 per cent; Mitsui: 12.5 per cent; Mitsubishi: 10 per cent). By the end of 2007, the project’s total revenues to the RF budget exceeded US$ 600 million. 25,000 people are taking part in the second stage of the project. The company, jointly with Evikhon Inc., also participates in the development of the Salym oilfields (Khanty-Mansiysk Autonomous Region). The production volume at the Salym oilfields is in excess of 130,000 barrels a day, and growing. In the first quarter of 2008, tax revenues amounted to 6.2 billion roubles or about US$ 528 million. Eight hundred company employees work for the project, as well as 1,200 subcontracted professionals.

(m) Schlumberger (power generation), France; year of arrival: 1991. Schlumberger became the first service company to conduct high-tech geophysics research in West Siberian wells (at Varyegan and Tagrin oilfields). During subsequent years, the company participated in the development of Russian oil and gas industry’s infrastructure and staff training. During these years, Schlumberger’s contribution to the Russian economy (GDP) amounted to more than US$ 2 billion. Today, Schlumberger works in all Russian oil-producing regions and has 50 production facilities, R&D centres, factories, and offices throughout the country. Russians make up 98 per cent of the personnel the company employs in Russia.

(n) British–Dutch Unilever (consumer goods); year of arrival: 1991. In 1991, Unilever opened its first Russian office; now the company has more than 160 of them. The first Unilever production facility began operations in 1994. In 2008, Unilever acquired InMarko, a leading Russian ice cream maker. Currently, Unilever has seven production facilities in Russia, including a margarine factory in Moscow, tea-packing factory and perfumery in St. Petersburg, foodstuffs and ice cream factory in Tula, and ice cream plants in Novosibirsk and Omsk. The company’s accumulated investments into the Russian economy exceed 20 billion roubles (about US$ 700 million). The number of employees is about 6,500. In 2007, Unilever paid 2,182 billion roubles or about US$ 248 million in taxes (including 2,097 billion roubles or about US$ 238 million to the federal budget). Production of roll-on deodorants for European markets has been moved from the company’s Leeds factory to St. Petersburg. The oldest perfumery in Russia, previously known as Aurora Borealis, is now the biggest Unilever facility in Europe making personal hygiene and home care products.

(o) Toyota (cars), Japan; year of arrival: 2004. It should be noted that Toyota was the first international car manufacturer that decided to set up an industrial assembly facility in Russia. The negotiations started in June 2004. In April 2005, the company opted for St. Petersburg as the factory location. Investments are expected to reach US$ 160 million. Production began on 21 December 2007. The factory’s capacity allows it to make up to 50,000 cars a year. After Toyota’s arrival in Russia, many leaders of international automobile industry, such as Nissan, GM, Volkswagen, Peugeot-Citroen, Ford and others, also decided to build their own production facilities in the country.

(p) United Technologies (airspace, construction), USA; year of arrival: early 1990s. Since the early 1990s, UTC invested more than US$ 500 million in Russia. The company is involved in 25 joint projects with leading Russian industrial and airspace enterprises, and employs over 4,000 people in Russia. RD AMROSS, a joint venture of Pratt & Whitney and Energomash scientific production association, markets, sells and provides technical support for RD-180 rocket engines, which launch into space United Launch Alliance’s Atlas rockets. The Pratt & Whitney Canada design bureau in St. Petersburg designs components and modules for gas turbines, and provides technical and client support to Russian airlines. In 2008, Pratt & Whitney Canada and Russian Helicopters, Inc. signed a Memorandum of Understanding on production of PW127TS engines for Mi-38 helicopters. Pratt & Whitney participates in the development of PS-90A2 engine at the Perm Motor Complex. Pratt & Whitney Power Systems CIS supplies FT-8 gas turbine devices used for peak-hour power generation at power plants in Moscow and other Russian regions. Sikorsky Aircraft company owns 9.4 per cent of M.L. Mil Moscow Helicopter Plant’s shares. Hamilton Sundstrand Nauka, a joint venture of Hamilton Sundstrand and scientific production association, Nauka, was established in 1994 to make aircraft heat exchangers for air conditioning systems for Boeing, Bombardier and Embraer airplanes. In 2002, the company formed a design bureau to develop heat exchanger systems for Airbus A380, and then for Boeing 787 Dreamliner. In 2008, Hamilton Sundstrand Nauka launched a new production facility in Kimry. The investment project includes construction of a full-cycle research, development and production complex, which is expected to become a leading world-class producer of aircraft heat exchangers. Some 350 new jobs have been created. Otis is a world leader in the lifts and escalators market. Today Otis employs 3,500 people throughout Russia. It owns three factories in Moscow and St. Petersburg; every seventh lift in Russia is serviced by Otis. Between 1993 and 2007, the company renovated more than 10,000 lifts in Moscow apartment buildings. Carrier is a leading manufacturer of heating, ventilation, air conditioning equipment and refrigerators. The company established a wide network of dealerships covering all regions of the former USSR, and offers a full range of climate control systems (over 10,000 different products). UTC Power offers a full range of services to provide advanced environmentally safe power supply systems. The company also designs innovative integrated solutions for cooling, heating and power supply on the distributed energy market. In 2004, power stations for PureCell fuel cells started to supply power to Gazprom’s daughter company, Orgenergogas, in the Moscow Region. It was the first commercial fuel cells power plant in Russia. UTC Fire & Security offers products and services under Chubb and Kidde brands. Kidde opened an office in Moscow in 1993. Its clients include government institutions and leading Russian and international companies such as Gazprom, Lukoil, TNK, and Russian Railways. The company supplied its products to many objects in the city of Moscow, including Luzhniki stadium, Ostankino TV tower and the Moscow City business centre. Recent acquisition of the Finnish Marioff Oy strengthened UTC Fire & Security’s positions in Russia because the firm’s presence on the Russian market was significant.

(q) Volkswagen (cars), Germany; year of arrival: 2006. Volkswagen Group decided to enter the Russian market with a project to build its own production facility in 2006. On 29 May 2006, the RF Ministry for Economic Development and Volkswagen Rus signed an agreement on industrial assembly. The company has chosen Kaluga as the location for the assembly plant, and on 28 November 2007, the plant was opened. The production capacity allows it to make up to 150,000 cars a year; a number that can potentially be doubled. As of 2012, at least 10 Volkswagen and Skoda models are made in Russia. Overall investments into the project exceeded €500 million. To develop the component basis of the Russian automobile industry, in February 2008, the Ministry for Economic Development signed two agreements with Automotive Components International RUS, on production of various car parts and components. Thus the industrial assembly regime turned out to be hugely important to Volkswagen Group’s investment policy in Russia.

(r) Total (power generation), France; year of arrival: 1995. Total’s main asset in Russia is a 50 per cent stake in development of the Kharyaga oilfield in Nenets Autonomous Region. It was the first project based on the Products Division Agreement of 1995. Jointly with Rosneft, Total is prospecting deep-water resources of the Tuapse depression and plans to take part in development of the Stokman gas field in the Barents Sea. In the downstream sphere, Total shows less interest in the region’s countries than some other companies.

(s) ENI (power generation), Italy. In Russia, ENI participates in construction of oil and gas pipelines. Jointly with Gazprom, it built the Blue Stream gas pipeline from Djubga to Samsun across the Black Sea, and participated in construction of the pipeline on Sakhalin (Sakhalin-2). Also, it has an interest in development of two fields in the Rostov Region and one in the Astrakhan Region.

(t) BASF (chemicals), Germany; year of arrival: 2005. In 2005, the company signed a protocol with Gazprom, to acquire — via its daughter company Wintershall — 50 per cent-1 share in the project to develop the Southern Russian gas field, while Gazprom increased its share in another BASF daughter company Wingas — from 35 to 50 per cent-1 share. Wingas controls a 2,000-kilometre German pipeline network and gas storage facilities with a capacity of 2 billion cubic metres. However, it all belongs to the energy resources sector.

(u) BMW (cars), Germany. BMW has built an assembly plant in Kaliningrad. The company was the first West European automobile industry TNC to start assembly in Russia and throughout the CIS, though it mostly makes high-end cars.

(v) Stora Enso Oys (woodworking, pulp and paper industry), Finland. The company owns a network of production facilities in Russia.

(w) Nestle (food stuffs), Switzerland. Nestle boasts of large production capacity in Russia including Rossiya factory in Samara, Nestle Zhukovskiy Inc. (ice cream maker), confectionery factories of Altai in Barnaul and Kamskaya in Perm, another ice cream and instant coffee factory in Timashevsk (Krasnodar Region), Pure Water company (owner of the Sacred Spring brand), and others.

(x) Danone (food stuffs). The company makes dairy products, confectionary and various bakery products.

(y) British American Tobacco, year of arrival: 1994. In 1994, the company acquired controlling interest in Saratov tobacco factory and Moscow-based Yava tobacco factory. After merger with Rothmans International, BAT acquired control over the former’s joint venture in Russia as well (BAT SPb).

(z) Siemens (manufacturing), Germany. Siemens has made large investments into Russian manufacturing industry, including fluorescent lamps factory in Smolensk and a 20.62 per cent stake in Silovye Mashiny, Inc.

The Consultative Board on Foreign Investment (CBFI), between the end of March and mid-May, in 2008, conducted a survey of 51 top managers of large foreign companies — major investors into the Russian economy and other international firms, who were planning to increase their investment portfolio by investing in Russia but hadn’t yet implemented these plans for one reason or another.8 Not all of the respondents were willing to disclose their current investments in Russia, but the accumulated direct investments they did admit to amounted to US$ 78.4 billion — 40 per cent of the total inbound FDI in Russia as of the end of 2007. The following main conclusions were made by analysing the survey results:

(a) Companies’ top management gave favourable opinions about the investment climate in Russia (much more so than most of the Western media);

(b) Most of the top management believed that the overall situation in Russia would improve in the next few years, which, of course, would have a positive effect on FDI;

(c) A large amount of FDI was going to the raw material sector; however, taking into account the main macroeconomic indicators and the ongoing consumer boom, one could conclude that the amount of FDI in banking, real estate and retail would continue to grow;

(d) To a large degree, the overall positive opinions about FDI may be explained by the nature — strategic or non-strategic — of the industry the investment was made in; as was expected, strategic industries were seen as more complex compared to other industries;

(e) Serious doubts remained concerning Russia’s legal environment. Respondents were not unanimous about its future prospects. Some of them were sure corruption was becoming ever more widespread.

The following specific findings deserve a special note: The average mark the respondents gave to the overall investment climate was 4.6 out of 10; the average for industries was 4.7. However, it must be noted that these average figures do not reflect the wide spread of the respondents’ opinions. Analysis of individual answers revealed the following trend: the industries unconnected with strategic raw materials sector were seen more favourably by investors — unlike the ones connected with it in some way or other. As we will see in the following pages, this shouldn’t be regarded as unusual: foreign companies investing in the raw materials sector were facing more serious problems than those unconnected with this sector, or connected to a lesser extent.

The respondents’ expectation of investment climate in 10 years’ time was positive — on an average, 3.6 out of 10 (1: significant improvement; 10: significant degradation).9

There was no consensus among respondents about the biggest problems of doing business in Russia. Four out of the six biggest problems — namely, corruption, insufficiently transparent legislation, administrative barriers, and absence of independent justice — are interconnected and constitute a part of a wider concept of legal regulation. Obviously, it is still a major, if not the main, worry of foreign investors doing business in Russia. The borderline lies between those who believe this to be a serious obstacle hindering their business and the ones who see it as a problem that can be easily dealt with. Some of the respondents noted ‘comparatively new’ to the risk of legal prosecution initiated by Russian competition. Very noteworthy was the respondents’ opinion that infrastructure now constitutes the biggest ‘bottleneck’. The ‘Other’ group most frequently included the following problems: (i) Political interference with business (similar to ‘Administrative barriers’); (ii) Random allocation of law (similar to ‘Insufficiently transparent legislation’); (iii) Complex taxation system (four of the respondents said it was one of their biggest problems); (iv) Lack of skilled personnel (see subsequent pages for more on this important issue).

Finally, the respondents mentioned that the RF government should make several steps to encourage FDI. Not surprisingly, the respondents believed the government should concentrate on dealing with problems mentioned earlier. The priorities included fighting corruption, and steps to make the justice system independent and the legislation more transparent.

TNCs’ Effect on the Russian Economy

The effect of TNCs on the Russian economy is quite significant. Between 2005 and 2007, revenues of foreign-owned (fully or partially) organisations — and the vast majority of them are TNCs — amounted to about 40 per cent of all companies’ total revenues (Figure 3.3).

Figure 3.3: Total Revenues of Enterprises (US$ billion)

Image

Source: The Federal State Statistics Service.10, 11

Despite the large share of enterprises’ total revenues, the number of foreign-owned companies remains under 1 per cent (see Table 3.2). Obviously, the foreign-owned companies are quite large.

The same is suggested by data on the average annual number of people employed in the economy (Table 3.3). While the number of foreign-owned companies remains under 1 per cent of the total, their share of the total workforce exceeds 4 per cent.

Table 3.2: Number of Foreign-owned (Fully or Partially) and Russian-owned Companies

 

2005

2006

2007

Number of Foreign-owned (Fully or Partially) Organisations

16,196

17,748

19,502

Total Number of Organisations

4,417,100

4,506,600

4,674,900

Source: The Federal State Statistics Service.11

Table 3.3: Average Annual Number of People Employed in the Economy

 

2005

2006

2007

Average annual number of people employed in the economy (million)

66,792

67,174

68,019

Average annual number of people employed at foreign-owned enterprises (million)

2,531

2,675

2,930

Share of foreign-owned enterprises’ workforce (%)

3.8

4.0

4.3

Source: The Federal State Statistics Service.12

As Figure 3.4 shows, foreign companies are best represented in real estate, wholesale and retail trade and in manufacturing. On the other hand, TNCs are practically not represented at all in education, social and personal services, and in fisheries.

Latest Trends in TNC Investments in Russia

Trends and priorities of TNCs’ investment activities haven’t really changed in recent years (see Table 3.4).

One should note the prevailing share of wholesale and retail trade, which in 2007 had almost reached 40 per cent. Also high are shares of investments in mining and manufacturing. These three areas in 2007 accounted for 79.9 per cent of total foreign investments into the Russian economy.

The number of foreign-owned enterprises engaged in R&D activities also remained practically unchanged at about 60, though Figure 3.5 shows that in 2001–2007 the share of foreign companies engaged in R&D had been steadily growing.

Figure 3.4: Distribution of Active Foreign-owned Enterprises by Type of Economic Activity, Number of Enterprises, as Percentage of the Total Number of Foreign-owned Enterprises, 2006

Image

Source: HSE (2009).

Table 3.4: Foreign Investments by Type of Economic Activity as Percentage of Total FDI Inflow

 

2003

2004

2005

2006

2007

Agriculture, Hunting and Forestry

0.5

0.3

0.2

0.6

0.4

Fisheries and Fish Farming

0.1

0.1

0.0

0.0

0.0

Extraction of Fuel and Energy Resources

17.3

21.6

9.6

14.1

13.1

Extraction of other Raw Materials

2.0

2.9

1.6

2.5

1.3

Manufacturing

22.0

25.3

33.5

27.5

26.4

Production and Distribution of Electricity, Gas and Water

0.1

0.2

0.6

0.6

0.7

Construction

0.3

0.6

0.4

1.3

2.4

Wholesale and Retail Trade; automobile, Motorcycle, Household Appliances, and Personal Goods Repair

35.5

32.2

38.2

23.7

39.1

Hospitality and Catering

0.1

0.1

0.1

0.1

0.1

Transport And Communications

3.8

5.0

7.2

9.6

5.5

Financial Services

2.6

2.5

3.4

8.5

3.7

Real Estate Operations, Leasing and Related Servicers

15.4

6.3

4.9

10.9

7.0

Public Administration, Defence, Welfare

0.0

2.6

0.0

0.0

0.0

Health Care and Social Services

0.0

0.0

0.0

0.1

0.1

Other Communal, Social and Personal Services

0.3

0.3

0.3

0.5

0.2

Source: The Federal State Statistics Service.13

Figure 3.5: Organisations Engaged in R&D: Russian and Foreign-owned (Fully or Partially), as Percentage of the Total Number of Organisations

Image

Source: HSE (2009).

Share of foreign companies engaged in R&D between 2001 and 2007 remained at 1.5 per cent. The data in the Figure 3.6 show that foreign-owned companies are even less innovative than Russian ones.

However, a much higher level of innovation activity has been shown by companies jointly owned by Russian and foreign capital. They have been twice as innovative as other companies, in all types of innovation (see Figure 3.6).

As evidenced by the statistics, in 2006 the number of innovative foreign-owned companies was 15 times higher than of those engaged in R&D, while among jointly-owned Russian–foreign companies, that ratio in 2006 was approximately 6:1. These proportions reflect the dominant pattern of foreign-owned companies’ innovation behaviour in Russia. Namely, those companies tend to bring into Russia production facilities made abroad and then use it to satisfy internal demands. At the same time, jointly-owned companies more often contract Russian research teams to gain the competitive advantage.

Local Factors Affecting Innovation Activities

The Russian Federation is basing its hopes for long-term sustainable economic growth on switching to innovative type of development, which involves wider use of the latest scientific and technological advances in the industry and the economy in general, as well as new organisational techniques and approaches.

In recent years, the RF government has been pursuing a proactive policy aimed at encouraging and supporting basic and applied research and development and innovation activities. One of the factors determining Russia’s mid-term innovation potential is the wide network of R&D organisations inherited from the USSR. These include research institutes (mostly belonging to the Russian Academy of Sciences), state R&D centres, scientific production associations, S&T centres, etc. Another factor is the advanced higher education system that trains workforce for all industries and sectors of the economy.

There are also specialised organisations providing support to R&D activities. The Russian Foundation for Basic Research (RFBR) supports basic research in the following fields: mathematics, mechanics, informatics, physics and astronomy, chemistry and material science, biology and medicine, earth science, humanities, information technologies and computing systems, and basic engineering science. RFBR’s main objective is to select the best research projects out of those tenders submitted by scientists, and then provide necessary financial and organisational support. Major principles of RFBR’s activities include targeted funding, transparency and non-repayable funding (grants).

Figure 3.6: Companies’ Innovation Activities — By Form of Ownership, Percentage, 200614

Image

Source: HSE (2008).

The Russian Foundation for Technological Development (RFTR) since 1992 has been providing financial support to applied research and development in line with appropriate priority S&T areas and the federal list of critical technologies, and those oriented towards practical application of specific end results. RFTR’s funds are used to support research and development in various industries aimed at the following: creation of new research-intensive products, new types of raw and manufactured materials, development of new technologies, and improvement of existing ones, raising technological level of products. RFTR’s funds do not come out of government budgets but from voluntary contributions by Russian enterprises and organisations. RFTR’s financing is provided as interest-free special-purpose loans for a period required to complete R&D work and implement the results.

The Foundation for Assistance to Small Innovative Enterprises is a public non-commercial organisation established in 1994. The RF government channels to the Foundation 1.5 per cent of the federal budget allocations for research and development — in 2008, it was 1,567,500 thousand roubles or about US$ 133 million.15 By 1 January 2008, about 15,000 projects had been submitted to the Foundation, more than 50 per cent of them from provincial Russian regions. The Foundation has offices in 29 RF regions. The projects are subjected to independent evaluation (novelty, financial viability and prospects for commercialisation of products). More than 2,455 independent experts take part in the assessment of the projects. More than 5,000 projects have already received funding (mostly R&D projects). The respective industries reflect the small innovative companies’ orientation towards dealing with socially important objectives and creating highly advanced products. About 15 per cent of the funds of the Foundation are spent on: (a) development of a network of innovation and technology centres (about 30 such centres have already been created in Russia, with floor space of more than 100,000 square metres, and made available to hundreds of enterprises on preferential terms); (b) development of infrastructure for technology transfer; (c) involving students and young researchers employed at RAS and universities into innovative entrepreneurship; (d) supporting companies’ participation in exhibitions and workshops; and (e) training of managers.

The Russian Venture Company, Inc. (RVC) was established by the RF government in 2006 to promote development of the Russian national venture funding industry. At that stage, RVC’s chartered capital was about US$ 4.1 billion. RVC’s role in the innovation system is that of a public venture fund for public encouragement of venture investments and provision of financial support to high-technology sector as a whole. Priority areas for investments from RVC’s venture funds were determined on the basis of the critical technologies list approved by the RF president.

The state corporation, Russian Technologies, was founded in 2007 to promote development, production and export of high-tech industrial products by providing support to Russian organisations — developers and manufacturers of such products on domestic and foreign markets — and by attracting investments in companies operating in various industries including the defence industry complex.

The Russian Corporation of Nanotechnologies (RUSNANO) was established in 2007 by a special federal law ‘to implement Government policy in the field of nanotechnology, develop innovation infrastructure in the field of nanotechnology, and implement projects to develop promising nanotechnologies and nanoindustry’.16 The corporation deals with this task by acting as a co-investor in nanotechnology-related projects that have significant economic or social potential. The corporation’s financial participation during the early stages of projects decreases the risks for its partners — private investors. The corporation participates in development of nanotechnology infrastructure such as nanotechnology centres of excellence, business incubators and early-stage investment funds. RUSNANO selects promising spheres for investments based on longer-term foresight created by the leading Russian and world experts. The government allocated 130 billion roubles to the corporation that had invested into RUSNANO’s chartered capital in November 2007. In June 2008, the temporarily free funds were placed in eight commercial banks according to guidance by the RF Ministry of Finance.

The most recent and probably most influential policy developments, which could affect innovation activities by TNCs and Russian companies, are the PIDs and TPs.

The PIDs, approved by the Russian Governmental Commission on High Technology and Innovation of July 2011, provide a great impact taking account of the size of financial obligations taken by the 47 largest Russian state-owned companies. Altogether all companies plan to stream unprecedented amount of funds to innovation. The total planned investment in S&T and innovation is about 3,000 billion roubles (see Table 3.5).

Table 3.5: The Planned Budget of PIDs of 47 Largest Russian State-owned Companies17

 

PID Budget (thousand roubles)

 

2011

2012

2013

2011–2013 (%)

The Largest Russian State-owned Companies, TOTAL

732,257

949,850

1,441,220

197

The increase of R&D expenditures of these companies leveraged by PIDs is also quite impressive. It goes higher than twice in comparison with the figure of 2010 (see Table 3.6).

Table 3.6: R&D Expenditures Leveraged by Innovation Strategies of the Biggest Russian State-owned Enterprises

 

R&D Expenditures (thousand roubles)

 

2010

2011

2012

2013

2010–2013 (%)

The Largest Russian State-owned Companies, TOTAL

216,854

296,643

341,674

446,279

206

Given such a large scale of PIDs initiative, it could have a great impact on the whole Russian innovation system as well as on TNC and Russian companies’ innovation activity in particular by increasing demand on innovation.

Technology Platforms could also affect innovation activities of TNCs and Russian companies to a large extent. Some idea of the scale of this initiative could be given by figures related to TPs’ creation campaign. It has been taken in several steps. By December 2010, over 180 proposals to establish TPs in a wide range of technology areas were submitted to the Ministry of Economic Development. There were altogether more than 1,000 organisations behind those proposals. By April 2011, all the proposals were evaluated, and the Government Commission on High Technologies and Innovation approved the list, which currently includes 28 TPs. Given similar European and other worldwide practices, it is clear now that not all TPs will be successful to the same extent, but even those that survive will affect many innovative players in Russia — both domestic and foreign. In fact, some of the TPs have already incorporated foreign organisations as their members.

International TNCs actively use Russian R&D potential. Among the many evidences, there are several examples worthy of notice (see Box 3.1):

Box 3.1: International TNCs Engaged in R&D and Innovation Activities in Russia18

(a) Boeing (American; aircraft construction) in September 1993 established its own R&D centre in Moscow. The R&D centre cooperates with leading Russian R&D institutions, including Central Aerohydrodynamic Institute (TsAGI), Russian Academy of Sciences and its Siberian division, and Moscow and St. Petersburg research institutes. In June 1998, Boeing established its own design centre attached to the R&D centre. The design centre employs about 200 Russian engineers from such airspace companies as Ilyushin Joint Design Bureau, Tupolev Joint Design Bureau, Khrunichev State Design Centre, Miasischev Design Bureau, and Sukhoi Civil Aircrafts. The design centre designs interiors for practically all Boeing aircrafts, and some components for the Boeing 777–737 glider. Since 1993, Boeing has invested more than US$ 1 billion into joint projects with various Russian airspace enterprises.

(b) Nortel Networks (Canadian; computer and telephone networks equipment) established its own R&D centre in 1993. Russian scientists develop various data transmission technologies from wireless to fibre optics.

(c) Motorola (American) established its own laboratory in Moscow in 1995. It employs full-time personnel (in four divisions) and contracts 200 external professionals from various Russian companies (development of integrated circuits, modelling of semiconductor devices and design of computer software). In June 1997, it established the Software Development Center in St. Petersburg. It employs more than 230 Russian professionals who design software for the company. In cooperation with Information industry companies, Motorola also developed a speech encoder for walkie-talkies.

(d) Intel (American) has contracted Russian software designers since 1993. In the spring of 2000, it established its own centre in Nizhniy Novgorod, which employs about 170 software designers. It has also established a centre in Novosibirsk.

(e) Hewlett-Packard (American; electronics) in January 2007 established a HP Labs in St. Petersburg, which concentrates on information management. It provides good opportunities for Russian scientists to integrate into the international research community, and promotes transfer of the company’s extensive R&D experience to Russian researchers. The HP Labs in St. Petersburg has every chance to become a world-class facility specialising in information management.

(f ) Schlumberger (French; power generation) in 2002 established training courses for oil and gas industry personnel, with training capacity of 2,500 people a year. In 2002, it also established the Schlumberger R&D Center in Moscow, which employs more than 250 Russian scientists, and implements 40 projects. In 2004, Schlumberger signed an agreement with the Tyumen State University to establish the Schlumberger Petrochemical Laboratory, personal scholarships and to develop a program to support research. Total investments amount to US$ 2 million. Also that year, the company established a Schlumberger Technology Center in Novosibirsk in the Academic Town of the RAS’s Siberian Division (total investments amount to US$ 20 million) and a Technological Expertise Centre on the premises of Gubkin Russian State University of Oil and Gas. In 2008, it officially opened the Siberian Training Center, with total investments in excess of US$ 100 million.

(g) United Technologies (American; airspace, construction) established the Pratt & Whitney Canada design bureau in St. Petersburg. The bureau designs components and modules for gas turbines, and provides complex technical and client support to Russian airlines. In 2002, it established the Hamilton Sundstrand Design Bureau to develop heat exchange systems for Airbus A380 and then for the Boeing 787 Dreamliner. The design bureau develops heat exchange systems for Airbus A380 and Boeing 787 Dreamliner. In 2008, Hamilton Sundstrand Nauka launched a new production facility in Kimry, Tver Region. The investment project includes construction of a full-cycle research, development and production complex, which is expected to become a leading world-class producer of aircraft heat exchangers. Some 350 new jobs have been created, while the regional and local budgets got a new revenue source.

(h) Siemens (German; manufacturing) launched R&D centres in Moscow and St. Petersburg in 2005 to develop computer software for mobile communications.

The RF Government Policy towards TNCs

The RF government supports TNCs doing business in Russia. In order to attract FDI in Russia, the government implements a set of specific measures. In particular, the Russian government hosts the annual Sochi International Investment Forum.

In 1994, in order to improve the investment climate in Russia, the RF government in cooperation with foreign companies established the Foreign Investment Advisory Council (FIAC). Its main objective is to create an attractive investment climate in Russia on the basis of international experience and practical experience of international companies doing business in Russia. The council is chaired by the Russian prime minister and includes CEOs of major international companies. FIAC focuses its efforts on major Russian economic and industry sectors through several working groups covering issues of highest relevance to foreign investors. The working groups hold regular meetings to develop specific actions and recommendations on key issues in the Russian economy. They are coordinated by government agencies, most notably by the Ministry of Economic Development. FIAC holds annual sessions with the Russian government to discuss investment policy priorities, analyse possible amendments in order to resolve current issues, and identify measures for coordinated improvement of the investment climate by balancing the interests of all parties involved. Over 20 sessions have been held since its establishment.

In 1999, the federal Law ‘On Investment Activities in the Form of Capital Investments in the RF’ was passed. It established a legal and economic framework for investment activities in Russia, and provides guarantees of equal rights and protection of interests and property to all investors regardless of ownership.

Also in 1999, the federal law ‘On Foreign Investments in the Russian Federation’ was adopted. This law established basic guarantees to ensure foreign investors’ rights to investments and profits, and described conditions for foreign investors’ entrepreneurial activities in the RF. The law is aimed at attracting foreign material and financial resources, advanced equipment and technologies, management techniques to the Russian economy and efficient use thereof; as well as creating stability for foreign investors and ensuring that the legal framework for foreign investment matches appropriate international legislation and practices.

In 2008, the federal law ‘On Procedures for Foreign Investment in Commercial Organizations of Strategic Importance to the RF National Security’ was adopted (it took three years to pass it). The law defines 42 industries as strategic (compared with 16 industries in 2005). To invest in these industries, foreigners now have to apply for an appropriate authorisation. Private foreign investors willing to acquire more than 50 per cent of assets in most of the 42 strategic industries will need an authorisation by a commission headed by the RF prime minister. The threshold value for foreign investors controlled by their governments is 25 per cent. There were established smaller barriers for the mining industry — 10 per cent of assets acquisition and 5 per cent of shares controlled mentioned earlier. This law was considered by many TNCs as a step in the right direction whose effects would be dependent on the practices of its application. The law on foreign investments in strategic industries was generally seen as a positive decision since it clearly defines what foreign investors can and cannot do.

In 2005, the federal law ‘On Special Economic Zones in the Russian Federation’ was passed. A SEZ is a Russian territory whose borders are defined by the government, within which a special regime for entrepreneurial activities applies. SEZs are established to develop manufacturing industries and high-technology industries, promote manufacturing of new products and develop transport infrastructure. There are two kinds of SEZs: (i) industrial special economic zones, and (ii) technological and innovative special economic zones. Residents of SEZs enjoy special tax breaks; the zones also have duty-free status. Residents have guarantees against unfavourable changes in taxes-and-duties laws. Currently there are 17 special economic zones in Russia.19

The Tax Code of the Russian Federation provides breaks on profit tax for TNCs (Article 251): when tax base is calculated, profits in the form of property received by taxpayer as target funding — investments made by foreign investors to finance capital expenditures for production purposes, provided they are used within one calendar year after receipt.20

The role of local universities and research institutes

According to the Science and Innovation Development Strategy in the Russian Federation,21 during the second stage of its implementation (2008–2010), one of the key objectives was creation of centres of excellence for the R&D sphere through establishment of national research centres specialising in breakthrough technological areas. These act as coordinators of R&D funded from the federal budget, and promote development of industrial S&T centres of excellence (including those created on the basis of State research centres and research universities), to design advanced commercially viable technologies and help implement them in various industries.

On 7 October 2008, the executive order ‘On Implementation of the Pilot Project to Establish National Research Universities’ was signed. The first institutions to receive the status of ‘national research universities’ were the Moscow Engineering and Physics Institute and the Moscow Institute of Steel and Alloys: they serve as bases for National Nuclear Research University and the National Technological Research University, respectively. Fourteen other higher education institutions in Russia obtained that status in 2009 on the basis of a national tender with participation of more than 140 leading universities.

The largest higher education institution that cooperates with foreign TNCs is the Lomonosov Moscow State University (MSU) — 32 faculties, 11 research institutes and numerous specialised training and research centres, 354 departments, more than 9,000 teachers and researchers, 170 full academicians and correspondent members of the Russian Academy of Science, and 7,000 full doctors and candidates of science.22 MSU’s research divisions conduct a wide range of applied research and development, contracted by more than 100 foreign companies and advanced high-technology R&D centres, in such areas as microelectronics, nanotechnology, biotechnology, new materials, airspace, robotechnics, etc. Foreign companies and research centres engaged in fruitful joint work with MSU include National Institute for Research in Computer Science and Control (INRIA), Schlumberger, Bayer AG, Daewoo Systems, Sun Microsystems, Shell, Volkswagen, QinetiQ, Universal Oil Products (USA), General Electric (USA), Petroleum Energy Centre, Duck Study Group, France Telecom, Akzo Nobel Research, ChemCollect GmbH, Elbe-Stahlwerke Feralpi GmbH (ESF), Eaton Corp PLC (ETN), Netzsch (Germany), the French Aerospace Lab ONERA (France), Electron-Beam Technology Institute (Germany), and Shimadzu (Japan).

Another large higher education institute that has close working contact with foreign TNCs is the Moscow Institute of Physics and Technology (MIPT). In 2005, MIPT under its own steam implemented the following projects under orders of TNCs: Research Programme to Study Oxidation of Alkylaromatic Carbohydrates, commissioned by BP Amoco Corporation (USA); and Theoretical Research and Computing of Multiphase Flows in Inclined Tubes, commissioned by Schlumberger (France). In 2006–2007, the projects undertaken included: Transfer of Solid Phase by Flow of Liquid through Long Tube, commissioned by Schlumberger (Switzerland); Agreement to Design Software for PRODERA (France); and Modelling of Interaction between Electric Field and Combustion, commissioned by Siemens (Germany). MIPT’s Centre of Open Systems and High Technology conducts research commissioned by Sun Microsystems, IBM, HPS (Austria), and FatWire Software Company. In 2003, work started on mastering Sun Java Enterprise System’s portal architecture, to apply it in portal solutions for government, municipal administration agencies and local self-government organisations, and commercial and non-commercial structures. A portal for Java developers was developed and maintained with support from Sun Microsystems’ Russian office (www.javagu.ru).

Foreign TNCs’ R&D expenditures allocated to higher education institutions amount to just a very small share of their total internal R&D expenditures (Table 3.7).

Table 3.7: Foreign TNCs’ Intramural R&D Expenditures, by R&D Sectors (percentage)

R&D Sector

2005

2006

2007

Government Sector

15.1

11.8

28.5

Higher Education Sector

3.1

2.2

2.4

Business Enterprise Sector

81.7

86.0

69.0

Private Non-profit Sector

0.08

0.06

0.01

Source: HSE (2009).

Despite the successful cooperation between TNCs and leading Russian higher education institutions to implement innovation projects, it mainly amounts to training professionals for future employment by TNCs.

Effect of local expenditures on TNCs’ innovation activities

The main aspect of local expenditures that greatly affects TNCs’ innovation activities in Russia is the low salaries of highly skilled professionals, compared with international levels (see Table 3.8).

Despite the fact that in 2001–2007 salaries of R&D personnel across all R&D sectors have increased, they still remain extremely low, which makes conducting R&D in Russia — in the areas where Russia is at the forefront — extremely attractive.

Table 3.8: Average Monthly Salaries of R&D Personnel, by R&D Sectors (US$)

 

Total

Government Sector

Business Enterprise Sector

Higher Education Sector

Non-profit Sector

2001

1,189

1,019

1,289

846

930

2002

1,396

1,217

1,500

1,066

1,462

2003

1,501

1,306

1,609

1,248

1,486

2004

1,499

1,291

1,630

1,102

1,424

2005

1,605

1,337

1,777

1,304

1,068

2006

1,586

1,416

1,719

1,222

1,377

2007

1,668

1,614

1,727

1,390

1,504

Source: HSE (2009).

Effect of legislation and education system

As mentioned before, the Russian government gives significant attention to the goal of modernisation of the national economy and switching to innovative type of development. The objective of the State policy aimed at development of innovation system is to create economic conditions for marketing competitive innovative products in the interests of Russia’s strategic national priorities, by joining forces of the State and the economy’s entrepreneurial sector on the basis of mutually beneficial partnership.

The most important mechanisms and tools for implementing national innovation policy include:

(a) Development of an integrated system of legal, economic and other motivational, supporting and regulation measures for innovation activities, including:

(i) clear procedures for securing and transferring rights to intellectual activity results (civil and twofold purpose) created with federal budget funding, in order to implement them in the economy;

(ii) development of legal framework to promote venture entrepreneurship;

(b) Switching to programme approach and targeted principle of providing public support to innovation activities by coordination of federal, regional, interdepartmental and departmental target programmes, including support for innovation activities at state academies of science, state research centres and higher education institutions of the Russian Federation;

(c) Increasing the share of non-public funds at later stages of innovation projects, including:

(i) creation of funding mechanisms to support small high-tech enterprises at the early stages of innovative products development;

(ii) providing support to development of regional and industrial venture funds.

Respectively, Russian legislation encourages innovation activities. The following laws constitute the basic legal framework for S&T and innovation activities:23

(1) Russian Science Development Doctrine (1996)24

(2) Federal law ‘On Science and State S&T Policy’ (1996)25

(3) Information Security Doctrine of the Russian Federation (2000)26

(4) Basic Policy of the Russian Federation to Develop Science and Technology for the Period until 2010 and Subsequently (2002)27

(5) Basic State Investment Policy in the Science and Technology Sphere in the Russian Federation (2002)28

(6) Basic Policy of the Russian Federation to Develop Innovation System for the Period until 2010 (2005)29

(7) Science and Innovation Development Strategy in the Russian Federation for the Period until 2015 (2006)30

(8) Priority Development Areas of Science, Technology and Innovation in the Russian Federation (2006)31

(9) Russian Federation’s List of Critical Technologies (2006)32

(10) On Exercising Control in the Sphere of Legal Protection and Use of Civil R&D Results Obtained with the Help of Federal Funding (2006)33

(11) Federal Law ‘On Transfer of Rights to Integrated Technologies’ (2008)34

The main provisions of public policy to develop science and technology — the goals, objectives and the ways to achieve them, as well as a system of economic and other tools to encourage and promote S&T activities — are described in the ‘Basic Policy of the Russian Federation to Develop Science and Technology for the Period until 2010 and Subsequently’ (2002).35 This document aims to implement Russian strategic national priorities, including higher living standards, economic growth, development of basic research, education, culture, supporting the country’s defence, and ensuring its security. The NIS is given the key role in accomplishing the objective of switching to the innovative development model. One of the most important tasks of the Basic Policy is development of NIS.36 Due to reduced public funding of the S&T sphere, identification of priority S&T development areas becomes particularly relevant. Recently, this issue was given special attention at various levels of the government.

Following the Basic Policy, the RF president approved in 2011 the list of priority development areas in science and technology:37

(1) Security and counter-terrorism

(2) Industry of nanosystems

(3) Information and telecommunications systems

(4) Life sciences

(5) Perspective weapons, military and special equipment

(6) Rational use of natural resources

(7) Transportation and airspace systems

(8) Power generation, energy-saving nuclear energy

A more detailed list of critical technologies allows for mapping of specific areas of critical technologies.38 It should be noted that the list of critical technologies was significantly reduced in 2006 (from 53 to 34 items).39 In 2009–2010, the list of critical technologies was revised and further reduced to 26 items.40

The RF government policy on development of innovation systems is based on public–private partnership, and aimed at joining efforts and resources of the State and the entrepreneurial sector to promote innovation activities.41 The implementation of this principle is well illustrated by Technology Platforms, which are one of the most promising tools of the Russian STI policy. Currently, the 28 TPs approved by the governmental commission are as follows:

(1) Closed Nuclear Fuel Cycle with Reactors Based on Fast Neutrons

(2) Controlled Fusion Synthesis

(3) Radioactive Technologies

(4) High-speed Intellectual Railway Transport

(5) National Space Technology Platform

(6) National Information Satellite System

(7) Aeronautic Mobility and Aircraft Technologies

(8) Intellectual Energy System of Russia

(9) Environmentally Friendly Thermal Power of Enhanced Efficiency

(10) Advanced Technologies of Renewal Energy

(11) Small-scale Energy Distribution

(12) Innovative Technologies to Increase the Efficiency of Construction, Security and Maintenance of Automobile and Rail Roads

(13) Solid Minerals

(14) Hydrocarbon Mining and Usage Technologies

(15) Deeper Oil and Gas Processing

(16) Exploration of the Ocean

(17) Medicine of the Future

(18) Bioindustry and Bioresources — BioTech2030

(19) Bioenergy

(20) National Software Platform

(21) National Supercomputer Technology Platform

(22) Innovative Laser, Optical and Optoelectronic Technologies — Photonics

(23) Development of Russian Light Emitting Diodes Technologies

(24) New Polymer Composite Materials and Technologies

(25) Materials and Technologies of Metallurgical Engineering

(26) Technologies of Mechatronics, Embedded Systems of Control, Radio Frequency Identification and Robotics Industry

(27) Ultra-high Frequencies Technologies

(28) Technologies for Environmental Development

The Russian STI expert community considers this list of TPs as a kind of new priority area together with the list of priority development areas in science and technology and critical technologies mentioned earlier.

Another source of priorities arise from the PIDs submitted by the 47 largest State-owned companies, which define their priorities in STI and develop relevant strategic research programmes.

TNCs and Local Enterprises: Transfer of Knowledge, Horizontal and Vertical Links

Transfer of knowledge from TNCs to Russian enterprises

Foreign TNCs share their experience and knowledge, and establish training centres specifically for these purposes. Such centres train staff to ensure Russian personnel’s skills match the required level, and transfer knowledge necessary to use or implement specific technological solutions. A good example is the American company Hewlett-Packard, which has opened a high-technology centre to present best corporate practices for implementing IT projects in all sectors of economy. Also, HP Labs, which opened in January 2007 in St. Petersburg, provides good opportunities for Russian scientists to integrate into the international research community, and promotes transfer of the company’s extensive R&D experience to Russian researchers.

Another example is French company Schlumberger. In 2002, the company offered training courses for oil and gas industry personnel; in 2004, it signed an agreement with Tyumen State University to establish the Schlumberger Petrochemical Laboratory, offer personal scholarships and to develop a programme to support research. In 2008, Schlumberger opened its Siberian Training Centre.

Practically all IT companies support training programmes to promote corporate standards for business solutions. A good example is cooperation between the National State University — Higher School of Economics and TNCs dealing with information technology like Microsoft, INTEL and SAP. Some TNCs (like, for example, CISCO) in the framework of cooperation with Russian universities develop corporate educational standards to be included in the university curricula. This has a significant impact on Russian IT companies in terms of bringing in the best practices of conducting R&D and implementing their results in the production process. Another important point is related to the creation of small IT businesses that know the rules of the game and, therefore, can be competitive both in Russia and globally.

A significant role in knowledge transfer from TNCs to Russian enterprises should be played by Technology Platforms. TP is a mechanism of public–private partnership in innovation. It is aimed at overcoming the lack of business innovation by bridging the gap between science and industry. It assumes different stakeholders (companies, universities, research organisations, etc.) and, in particular, technological areas to consolidate their efforts in order to (a) build shared mid- and long-term visions on important issues to be articulated and the problems to be resolved via joint efforts, and (b) develop Strategic Research Agenda (SRA) to be implemented by joint efforts of TP members.

Therefore, knowledge transfer between universities, research organisations and companies within particular TP is implied by its nature. There is already some evidence for TPs as knowledge transfer facilities. First, universities and research organisations have already demonstrated their interest to apply their research capacities in the frame of SRAs. Their proposals on the SRA research topics given to the Ministry of Education and Science so far mostly consist of results of research done in the past. Second, action plans of some TPs envisage creation of databases containing descriptions of subjects and results of R&D previously done in the technology areas attributed to those TPs. This creates a background for using these capacities in implementation of SRA at the full scale.

As mentioned previously, foreign companies are invited to join Russian TPs — some of them already include foreign members. Yet at the initial stage of creation of TPs, there were several proposals that implied knowledge transfer from abroad as a cornerstone of their R&D strategies. PIDs should also facilitate knowledge transfer to a great extent. Due to government recommendations, PIDs should include measures to intensify international collaboration in STI and to develop linkages with their innovative environment. It includes universities, research organisations, small and medium innovative enterprises, and TPs. This measure should foster knowledge transfer.

Outward FDI and Russian TNCs

Russian outward FDI increased dramatically between 2001 and 2008 (Figure 3.7). To some extent it can be attributed to the emergence of Russian TNCs, mostly in the fuel and energy sector, over recent years. In the first decade of the 20th century, Russian TNCs significantly increased their foreign direct investments abroad.

Russian TNCs

During recent years, Russia has confidently remained among countries whose companies legally exported the largest amounts of capital. According to UNCTAD, in 2005 Russia was the 15th largest foreign direct investor, and by the beginning of 2006, had reached 17th place in terms of FDI accumulated abroad. In 2004, the leading Russian TNC, the privately owned LUKOIL, was 160th in terms of foreign assets. Indirect assessments of investments by State-owned concern Gazprom (it doesn’t publish data) suggest that it is also one of the 200–300th largest corporations in the world (see Table 3.9).

The number of publications about Russian TNCs has recently grown quite significantly. Currently, one can name 40–50 Russian companies that own foreign production facilities (or appropriate service facilities in the service sector), with accumulated FDI over US$ 5 million. Total accumulated foreign assets of Russian TNCs (not counting financial institutions) can be estimated at approximately US$ 35–37 billion. In addition, Vneshtorgbank, Alpha Bank and some other banks, as well as Ingosstrakh (insurance), have also made significant investments into their foreign daughter companies.

About 30 per cent of Russian TNCs’ accumulated foreign assets are owned by the State, mostly via the shares controlled by the State-owned companies mentioned in Table 3.9: Gazprom, Sovkomflot, Zarubezhneft, and Russian Unified Energy Systems. Also, in 2005, Gazprombank bought a controlling interest in United Heavy Machinery (OMZ), while Sovkomflot acquired 50.3 per cent of Novoship. Other State-owned companies that make serious FDI include Rosneft, TVEL and Atomredmetzoloto — investments in CIS countries — as well as joint Russian–Mongol ventures, Ulan-Bator Railways, Mongolsovtsvetmet and Erdenet. Also, in 2006 Rosoboronexport acquired 68 per cent of VSMPO-AVISMA, which had small foreign assets in non-ferrous metallurgy. At the same time, litigation involving Yukos caused the company to lose its foreign assets, most notably 53.7 per cent of the Lithuanian Mazeikiu Nafta refinery (at about US$ 1.4–1.7 billion), though none of Yukos’s large foreign daughter companies went under control of the Russian State.

Figure 3.7: OFDI between 2001 and 2009 (US$ million)

Image

Source: The Central Bank of the Russian Federation.42

Table 3.9: Russian TNCs (Except Financial Institutions) with Largest Foreign Assets, August 2006

Name

Estimated Foreign Assets US$ million

Major Recipient Countries

LUKOIL (Oil)

10,000

Kazakhstan, USA, Serbia, Ukraine, Romania, Bulgaria, and EU countries

Gasprom (Gas)

4,000

Germany, Poland, Latvia, Lithuania, Austria, and other EU countries

RUSAL (Non-ferrous Metals Industry)

2,600

Italy, Australia, Nigeria, Guinea, Guyana, Ukraine, Armenia, and other CIS countries

Sovkomflot (Transportation)

2,500

Liberia, Cyprus and other ‘cheap flag’ countries, Spain

Novoship (Transportation)

2,400

Liberia, Malta and other ‘cheap flag’ countries, Spain

ALTIMO (ICT)

2,300

Turkey, Ukraine

Mobile TeleSystems (ICT)

2,100

Ukraine, Uzbekistan, Belorussia, and Turkmenistan

Nornickel (Non-ferrous Metals Industry)

1,800

USA

Zarubezhneft (Oil)

1,100

Vietnam

Severstal (Metallurgy)

900

USA, Italy, UK, and other EU countries

Vympelcom (ICT)

800

Kazakhstan, Ukraine, Uzbekistan, and Tajikistan

Russian Unified Energy Systems (Energy)

600

Tajikistan, Armenia, Georgia, Moldavia, and Kazakhstan

Evrazholding (Metallurgy)

500

Czech Republic, Italy, USA, and SAR

Ampel

300

Netherlands

Primorye Sealines Company (Transportation)

300

‘Cheap flag’ countries, Hong Kong

OMZ (Machinery)

200

Czech Republic

Sitronics (Electronics)

200

Greece, Czech Republic and Ukraine

TNK-BP (Oil)

100

Ukraine

Source: Kuznetsov (2007).

In recent years, most of the OFDI was made by private companies. The key deals of the last two years include:

(a) 2005: LUKOIL acquires Nelson Resources, a British-registered mining company doing business in Kazakhstan, for US$ 2 billion or about 4.7 billion in USD;

(b) 2006: RUSAL acquires 56.2 per cent of Italian alumina company Eurallumina for more than US$ 1 billion (or about 2.1 billion in USD), and 77.5 per cent of Aluminium Smelter Company of Nigeria for US$ 250 million (or about 522 million in USD);

(c) 2005: Severstal concern acquires 60 per cent of Italian metal-lurgical company Lucchini, which has factories in several EU member states, for US$ 0.5 billion (or about 1.18 billion in USD);

(d) 2005: Evrazholding wins privatisation tender and buys controlling interest in Czech metallurgical company Vitkovice Steel for US$ 289 million (or about 681 million in USD);

(e) 2006: Nornickel acquires 35 per cent of US hydrogen power plant Plug Power for US$ 241 million (or about 503 million in USD).

Significant FDI was made by Russian telecommunications companies. In 2005, Altimo, formerly called Alpha Telecom, and one of Vympelcom’s shareholders, bought 13.2 per cent of Turkish Turkcell for US$ 1.6 billion (or about 3.8 billion in USD); in 2006, Vympelcom paid US$ 270 million (or about 565 million in USD) to buy two mobile operators in Uzbekistan. MTS didn’t make any big deals but invested a lot of money to further develop the mobile telephony infrastructure in Ukraine.

Thus, we can note a further reduction of State-owned TNCs’ share of Russian OFDI. Furthermore, it is the State-controlled companies that often face the more serious problems abroad, especially in former socialist countries, because local authorities fear such expanding companies would act as carriers of Russian foreign policy.

The EU remains the leading recipient of FDI from Russian TNCs (35–40 per cent). Countries with largest accumulated investments include the UK, Italy and Germany, followed by Austria, France, the Netherlands, Finland, Czech Republic, and the Baltic countries. Cyprus and Malta are among the leaders exclusively due to investments made by their sea lines. Serious Russian FDI also received other European countries: Switzerland, Romania, Bulgaria, and Serbia. The second most important vector of Russian TNCs’ investment expansion is the CIS countries, primarily Kazakhstan and Ukraine. Among other countries, one should mention the USA, South Africa, Turkey, and Vietnam (at 2.4 per cent each), Mongolia, Guinea, Nigeria, and Australia. Russian investors’ presence in Latin America and China is also growing.

Russia and the BRICS countries

The shares of foreign direct investment from Brazil, India, China, and South Africa into the Russian economy are very small (in particular, see Table 3.10).

Table 3.10: FDI into Russian Non-Banking Sector Companies in 2007 and I–III Quarters of 2008 (US$ million)

 

2007

2008

Country

Total

I Qtr

II Qtr

III Qtr

IV Qtr

Total

I Qtr

II Qtr

III Qtr

Total or All Countries

47,853

16,757

9,237

6,729

15,129

52,173

18,564

20,305

13,304

India

3

1

0

1

1

17

0

17

–1

China

112

8

13

9

81

46

20

17

9

Hong Kong

8

6

1

0

0

50

16

17

18

Source: The Central Bank of the Russian Federation.43

In the last two years, most of the FDI came from China — more than US$ 220 million, and more than 10 times higher than Indian investments.

FDI by Russian TNCs in the Chinese economy in 2007 was less than the inbound FDI from this country (see Table 3.11). The situation with India was the opposite: outward FDI was US$ 10 million higher than inbound investments. However, the overall figures are so small that the difference doesn’t really matter.

On the whole, FDI in Russia from Brazil, India, China, and South Africa and Russian outward investments into these countries remain at very a low level compared with other countries.

Table 3.11: OFDI by Russian Non-Banking Sector Companies (US$ million)

 

2007

Country

Total

I Qtr

II Qtr

III Qtr

IV Qtr

Total for All Countries

46,259

6,064

21,300

9,055

9,840

India

13

0

0

12

1

China

48

6

10

9

23

Source: The Central Bank of the Russian Federation.44

Conclusion

As argued in preceding pages, almost all of the biggest TNCs are, to varying extents, present in the Russian economy. Many of them consider Russia a big and attractive market to be developed; many have invested in Russian production facilities to make their penetration to the local market more cost-effective and to overcome legal restrictions on imports. At the same time, some TNCs, especially those whose business is related to high-tech industries, tend to utilise scientific potential of Russian research institutions by establishing R&D centres and contracting them on the long-term basis.

The role of TNCs in the Russian NIS could be estimated as high given the volume of foreign direct investment into the Russian economy during the last 10 years. There is a hope that the crisis will not have a strong negative impact on the FDI growth. A rather limited number of foreign-owned — fully or partially — companies have been making up to 30 per cent of the total revenue during the last few years. They are also the most active in terms of innovation. All this demonstrates a significant positive role foreign TNCs play in the Russian economy and their contribution to the economic growth of Russia.

Image

Notes

1. Hereafter, the US$ figure of the respective period is adjusted to the US$ of 2010 using GDP deflator (taken in accordance with OECD data).

2. See http://www.cbr.ru/statistics/ (accessed 1 June 2013).

3. See http://www.cbr.ru/statistics/credit_statistics/print.asp?file=iip_rf.htm (accessed 1 June 2013).

4. See http://www.gks.ru/bgd/regl/b09_56/IssWWW.exe/Stg/04-02.htm (accessed 1 June 2013).

5. Information about these TNCs is taken from http://www.investinrussia.info/ru/success/ (accessed 10 November 2011). See Gigin (2006).

6. See http://www.rbc.ru/rbcfreenews/20130523154226.shtml (accessed 1 June 2013).

7. See http://serega.icnet.ru/CarSale_2012_1.html (accessed 1 June 2013).

8. See http://www.fiac.ru/files/fiac_survey_2008_rus.pdf (accessed 1 June 2013).

9. See http://www.fiac.ru/files/fiac_survey_2008_eng.pdf (accessed 1 June 2013). Most of the respondents were polled at the beginning of May 2008, immediately before the then president had signed the law on foreign investments in strategic industries — a regulating measure in the foreign investments field. The new law, which took three years to be adopted, defines 42 industries as strategic (compared with 16 in 2005). To invest in these industries, foreigners now have to apply for appropriate authorisation. Private foreign investors willing to acquire more than 50 per cent of assets in most of the 42 strategic industries (10 per cent for the mining industry) will need authorisation by a commission headed by the prime minister of Russia. Many respondents considered adoption of this law as a step in the right direction, while noting that the effects would depend on how the law was applied.

10. See http://www.gks.ru/bgd/regl/b08_13/IssWWW.exe/Stg/d3/12-05.htm (accessed 1 June 2013). See also http://www.gks.ru/bgd/regl/b08_13/IssWWW.exe/Stg/d3/12-10.htm (accessed 1 June 2013).

11. See http://www.gks.ru/bgd/regl/b08_13/IssWWW.exe/Stg/d3/12-10.htm (accessed 1 June 2013).

12. See http://www.gks.ru/bgd/regl/b08_13/IssWWW.exe/Stg/d1/05-04.htm (accessed 1 June 2013).

13. See http://www.gks.ru/bgd/regl/b08_13/IssWWW.exe/Stg/d6/23-17.htm (accessed 1 June 2013).

14. The data covers the following industries: mining, manufacturing, production and distribution of electricity, gas and water, communications, use of computers and IT, and wholesale trade.

15. Hereafter, all the calculations in US$ are made as follows: first, the figure is converted from Russian roubles to US$ at the exchange rate as of the calculation date measured in purchasing-power parity (see http://www.multitran.ru/c/m.exe?t=98801_1_2, accessed 1 June 2013), and taken in accordance with Rosstat data and the estimations of the Institute for Statistical Studies and Economics of Knowledge [ISSEK], Higher School of Economics (HSE), Moscow; at the second step, the figure in US$ as of the calculation date was adjusted to US$ of 2010 according to the GDP deflator coefficient (taken in accordance with OECD data).

16. See http://www.rg.ru/2007/07/25/nano-korporacia-dok.html (accessed 1 June 2013).

17. Final Report ‘Impact of the Biggest Russian State-owned Enterprises Innovation Development Programs Implementation on Socio-economic Development of Russia’, prepared by the Ministry of Economic Development on September 2011.

18. All figures in Box 3.1 are equivalent to US$ or € of the respective period. This part was prepared on the basis of Borushevskiy (2003) and Gigin (2006).

19. See http://www.rosez.ru/ (accessed 1 June 2013).

20. See http://www.info-law.ru/kodeks/12/4796/ (accessed 1 June 2013).

21. ‘Science and Innovation Development Strategy in the Russian Federation for the Period until 2015’, Approved by the Interdepartmental Commission on Science and Innovation Policy on 15 February 2006.

22. An analogue of PhD.

23. Russian Science Development Doctrine. Approved by the RF President on 13 June 1996, executive order of 13.06.1996 N 884.

24. Ibid.

25. Federal law of 23 August 1996, N 127-FZ ‘On Science and State S&T Policy’. Adopted by the State Duma on 12 July 1996, approved by the Council of the Federation on 7 August 1996.

26. Information Security Doctrine of the Russian Federation. Approved by the RF President on 9 September 2000, N Pr-1895.

27. Basic Policy of the Russian Federation to Develop Science and Technology for the Period until 2010 and Subsequently. Approved by the RF President on 30 March 2002, N Pr-576.

28. Basic State Investment Policy in the Science and Technology Sphere in the Russian Federation. Approved by the RF Government, regulation of 11.12.2002, N 1764-r.

29. Basic Policy of the Russian Federation to Develop Innovation System for the Period until 2010. Approved by the RF Government, regulation of 5 August 2005, N 2473p-P7.

30. Science and Innovation Development Strategy in the Russian Federation for the Period until 2015. Approved by Interdepartmental Commission on Science and Innovation Policy on 15 February 2006.

31. Priority Development Areas of Science, Technology and Innovation in the Russian Federation. Approved by the RF President on 21 May 2006.

32. Russian Federation’s List of Critical Technologies. Approved by the RF President on 21 May 2006.

33. On Exercising Control in the Sphere of Legal Protection and Use of Civil R&D Results Obtained with the Help of Federal Funding. Approved by the RF Government, regulation of 18 November 2006, N 696.

34. Federal Law ‘On Transfer of Rights to Integrated Technologies’. Adopted by the State Duma on 17 December 2008, and approved by the Council of the Federation on 22 December 2008.

35. Basic Policy of the Russian Federation to Develop Science and Technology for the Period until 2010 and Subsequently. Approved by the RF President on 30 March 2002, N Pr-576.

36. Ibid.

37. See http://text.document.kremlin.ru/SESSION/PILOT/main.htm (accessed 1 June 2013).

38. Russian Federation’s List of Critical Technologies. Approved by the RF President on 21 May 2006.

39. For more detail, see Sokolov (2008).

40. See http://kremlin.ru/ref_notes/988 (accessed 1 June 2013).

41. Basic Policy of the Russian Federation to Develop Innovation System for the Period until 2010. Approved by the RF Government, regulation of 5 August 2005, N 2473, P7.

42. See http://www.cbr.ru/statistics/credit_statistics/print.asp?file=iip_rf.htm (accessed 1 June 2013).

43. See http://www.cbr.ru/statistics/credit_statistics/print.asp?file=inv_incountry.htm (accessed 1 June 2013).

44. See http://www.cbr.ru/statistics/credit_statistics/print.asp?file=inv_outcountry_07.htm (accessed 10 November 2011).

References

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4

Foreign Direct Investment and National Innovation System

Evidence from India

Dinesh Abrol


The rationale behind the liberalisation of foreign direct investment (FDI) and its promotion efforts in many developing countries is the idea that FDI fosters economic growth and can contribute to increase in the level of technology in the entire economy. In fact, the view went even further in the case of Indian policy makers; they held that FDI would contribute directly — and more strongly than domestic investment — to accelerated levels of growth in an economy because of the more advanced levels of technology, managerial capacity and know-how, resulting in higher levels of efficiency and productivity (Desai 1988; M. Singh 1995). However, the assumption of foreign firms being more efficient than domestic firms is not necessarily true (Hausmann and Fernández-Arias 2000; Krugman 2000). The assumption of how the National System of Innovation (NSI) can also be upgraded faster under the conditions of FDI liberalisation is even stronger. It involves the contribution of FDI in the challenge of systemic transformation of innovation activity. It envisages by implication the successful realisation of direct and indirect effects of FDI on the processes of competence-building and innovation-making under the conditions of liberalisation.

The effects of the presence of transnational corporations (TNCs) on domestic firms’ productivity are known to occur via two channels: the increase of competitive pressure and technology, and knowledge transfer. Productivity spillovers stemming from competitive pressures are, however, quite different from technology spillovers (Marin and Bell 2004). Technology and knowledge spillovers are known to take place when there is a non-market mediated technology and knowledge transfer — intentional or unintentional — between foreign subsidiaries and domestic players. Technology spillovers can occur through talent mobility, and backward and forward linkages. Though both talent mobility and social dimension of collaborative efforts are known to facilitate knowledge diffusion and R&D spillovers beyond geographical boundaries, but when the demonstration, competition and linkage effects of FDI under the conditions of liberalisation are realised for domestic firms as well as non-market actors through the pathways of global integration, the systemic impacts of technology and knowledge transfer on competence-building and innovation-making processes can also be considered as the liability effects for an immature and underdeveloped NSI.

Conditions favouring the realisation of spillover potential have so far been predominantly related to the host country firms’ technology gap vis-à-vis foreign subsidiaries, domestic firms’ absorptive capacity, foreign subsidiaries’ productive and technological activities, foreign subsidiaries, host country embeddedness, learning environment investment, and the intellectual property rights (IPR) regime. Empirical evidence of spillovers consists of confirmation of mainly vertical spillovers to suppliers and buyers of multinational corporations (MNCs) occurring more commonly. However, studies also confirm that the activity of foreign affiliates in developing countries may take place without appropriate linkages with host country firms creating ‘enclave economies’ within developing countries. Horizontal spillovers have not been confirmed and seem to be dominated by negative competition effects in many developing countries. Today, a very important factor affecting the scope for technological spillovers from FDI is the host country’s IPR regime. Although the tax and investment regulations, trade policies and competition rules also affect FDI decisions, the post-TRIPS IPR regime is considered to be having maximum impact of the FDI on the outcomes of technological interactions of foreign and domestic firms.

The systemic nature of the impacts of policies of FDI liberalisation and promotion on the realisation of prospects of upgrading of NSI needs careful attention with regard to the aspects of direction, distribution and diversity of competence-building and innovation-making activity. The systemic effects of FDI on NSI can be different because the different types of institutions, in which non-market mediated knowledge distribution and diffusion actions are ‘embedded’, have not been restructured everywhere in the same way (Abrol 2010; Taube 2012). Recently, Baskaran and Muchie (2008a, 2008b) connected the outcomes of FDI to the status of development of the NSI. The outcomes varied significantly across countries, sectors and firms. The FDI outcomes have been heterogeneous and connected to the factors such as the type of FDI, the economic sector, and the absorptive capacity. The achievements and limitations of upgrading of NSI of developing countries also require investigation with a view to understand the ‘who-whom’ of competence-building and linkage-making and the relationship of outcomes with the coordination of policies being undertaken for FDI promotion and innovation-making (Ljungwall and Tingvall 2008; Huang and Tang 2011; Crescenzi and Rodríguez-Pose 2012).

This chapter examines the impact of foreign direct investment on the processes of upgrading of systems of innovation in the conditions of laissez-faire governance of FDI promotion and innovation-making activities in India. Outcomes arising out of the changes made in respect of the policy regime during the period of liberalisation are evaluated to be a failure in respect of directing and harnessing the FDI inflows for the benefit of development of capabilities of domestic firms for indigenous innovation. Assessment is made of the resources that domestic firms and foreign subsidiaries could seek through the alliances and acquisitions in the course of paving the selected pathways of growth for the benefit of upgrading the national and sectoral systems of innovation during the period of liberalisation. The direct contribution of foreign firms to the activities connected with the processes of making of major innovations and upgrading of NSI is found to be insignificant compared to the challenge that India faces. Indirect contribution to the upgrading of NSI through the demonstration, spillover and competition effects has also been less than potentially possible due to the conditions prevailing locally in respect of institutions and incentives necessary for indigenous innovation. A policy regime favouring total freedom for private sector corporations in which FDI inflows have been assumed to induce technological dynamism in the system during the period of economic reforms is shown to bear the responsibility for failures experienced recently in respect of policy coordination required for ensuring foreign firms to contribute far more directly and domestic firms to organise spillovers harnessing for the development of NSI in India. Assessment of the outcomes realised through the promotion of inward and outward FDI for the new and emerging relationships of foreign firms with the domestic firms and non-market actors in respect of pharmaceutical and automobile sectors clearly indicates that FDI-induced possible spillovers would have to be proactively captured by domestic firms and publicly-funded technology development programmes and platforms through the coordination of FDI promotion and innovation policy supporting the activities of domestic firms for the benefit of introduction of major innovations.

The Position and Evolution of Inward FDI in India

During the period of the last six decades, in India, major FDI-related policy reforms have been associated with crises. As a result, changes that have occurred in the approach and policies relating to FDI in India have been only once restrictive in attitude to FDI. Still, until the early 1990s Indian government policy towards FDI was influenced by the need to gain a bargaining position for domestic firms, which required the nation to obtain a degree of technological autonomy. Four different major episodes of changes in the policy framework are identified. Initially, the government was liberal not only in allowing the existing British firms to retain their control and position in the domestic market, but also in permitting the new foreign capital to come in without any restrictions. The rationale offered was that as the domestic base of technology, skills and entrepreneurship was limited and the country needed technological autonomy, the government should try to seek FDI on mutually advantageous position. However, when the liberal attitude failed in obtaining the benefits of technology as well as export competitiveness, the government shifted to a more restrictive attitude towards FDI in the late 1960s. During this period, the government became selective in allowing majority ownerships and preferred technology collaborations to foreign financial participation. In the 1980s, the attitude towards FDI changed as the government wanted to assign a greater role to MNCs in the promotion of manufactured exports. The FDI-related policy changes covered liberalisation of industrial licensing rules, a wide range of incentives, and exemptions from foreign equity restrictions under the Foreign Exchange Regulation Act (FERA) to 100 per cent export-oriented units and a degree of flexibility concerning foreign ownership. But even as these policies failed to yield the desired results, the government chose to make a break with the policy of exercise of caution with regard to FDI.

Based on an analysis of the thrust and direction of the policies, we indicate in Table 4.1 four distinct phases in the evolution of the policies: (i) first phase, from 1950–1967 — characterised by cautious welcome, liberal attitude and building of technological capabilities (TC) in the public sector; (ii) second phase, from 1970–1980 — marked by restrictive and selective policies; (iii) third phase, from 1980–1990 — gradual liberalisation; and (iv) fourth phase, from 1991 till date — a shift to the open-door policy.

In the latest phase, major changes have occurred in the policy of FDI promotion. Policy makers have started viewing the FDI inflows to be a major source of scare capital, which is capable of contributing to capital formation, output and employment and providing access to technology, managerial skills and markets. The latest emerging FDI policy regime is a complete break from all the previous policy mixes selected by the policy makers in the past in India. Defence and Retail sectors are also going to be opened up soon. Media and Banks are, however, still maintaining restrictions. From the 1990s onward, the economic reforms in general and liberalisation of FDI in particular are understood to be a key factor affecting the magnitude and pattern of FDI inflows received by India. Policy makers in India have been shaping the policy mix for FDI promotion to make a shift away from the focus on merely attracting a higher quantity of FDI to targeting a higher quality of FDI and widening the scope of FDI by opening up many more sectors (UNCTAD 2005). From the mid-1990s onwards, policy makers in India even targeted to attract FDI for activities such as research and development (R&D), design, development and testing, technical support centre, education and training, etc. FDI in sectors designated as high technology is receiving preferential treatment in terms of access to infrastructure, tax incentives and subsidies.

Openness has been the most significant feature of FDI promotion policies in the fourth phase. The degree of openness is reflected in: (a) sectors completely open to FDI, (b) higher level of foreign equity participation, and (c) transparency in approval procedures. Over the period of the last two decades, FDI promotion has been gradually freed completely from the controls used earlier by the government to reserve and regulate the access of foreign firms to the Indian markets. The policy of greater freedom to the domestic firms to enter into collaborations of their own choice with the foreign firms became the policy of automatic approval of technology import agreements. Subsequently, the policy has graduated to the level of the policy of total freedom for foreign firms to operate in the domestic economy. The policy of higher fiscal incentives and non-fiscal concessions to the corporate sector for undertaking in-house R&D has been strengthened. The government is trying to attract the foreign affiliates to invest in knowledge-intensive activities by giving tax incentives and freedom to own intellectual property in the name of parent firms.

Table 4.1: Evolution of Policies of FDI Promotion and Innovation-making in India

Phase I 1950–1967

Phase II 1967–1980

Phase III 1980–1990

Phase IV 1991 Onwards

Non-discriminatory treatment to FDI

Restriction on FDI without technology

Higher foreign equity in export-oriented units permitted

Liberal policies relating to foreign and technological collaboration, foreign trade and foreign exchange

No restrictions on remittance of profits and dividends

Above 40% stake not allowed;

Allowed only in priority areas

Procedure for remittance of royalty and technical fees liberalised

Encouraging FDI in core and infrastructure industries;

FERA replaced with Foreign Exchange Management Act (FEMA)

Majority ownership and control sought for Indians

FDI controlled by FERA;

Discretionary power used in the sanctioning of projects

Fast channel for FDI clearance

Liberal approach for NRI investments;

FDI through mergers and acquisitions (M&A);

Services, FDI in banks, insurance and non-banking financial companies (NBFCs)

Building of science and technology (S&T) capabilities through the development of public sector in parallel

State intervention for the promotion of utilisation of publicly funded R&D capabilities by domestic private sector firms;

Strengthening of engineering design competence through domestic firms by insisting that foreign firms engage the public and private sector firms as primary consultants

A fresh round of public investment in building of R&D in newer technologies, e. g., molecular biology, biotech, IT, telecom, new and renewable energy, superconductivity, and industrial electronics;

Technology missions launched using public investment for the diffusion of new innovations in health, telecom, low cost housing, and fly ash utilisation;

Public procurement under utilisation weakened;

Capital goods import liberalised

Opening up of publicly funded R&D to foreign firms;

Privatisation and disinvestment of public sector;

Societal technology missions gradually abandoned;

Strategic role of public sector in technology development converted into public–private partnerships;

Deregulation of development finance

Import protection/promotion of domestic private sector in parallel

Import restrictions, local content and export obligations;

Sector reservations for domestic private sector strengthened in sectors like pharmaceuticals

In-house R&D of private sector through registration, relaxation in custom and excise duties, tax incentives, and so on;

Liberalisation of areas reserved for public sector;

Easing of restrictions imposed on foreign technical collaboration

Accepted stronger IPR regime;

Local content and export obligations withdrawn from most sectors;

Foreign firms provided freedom of expansion into associated markets;

Deregulation of monopolies and restrictive business practices

Source: Compilation based on the author’s assessment of the policy changes w.r.t. FDI and NSI.

Policy makers have become highly liberal in their approach with regard to encouraging FDI in the sectors connected with information technology, software development, biotechnology, pharmaceuticals, and so on. Consequently, the thrust of new policy mixes includes the introduction of measures providing for (a) stronger protection of intellectual property, and preferential access to infrastructure, both technological and physical, through the formation of special economic zones (SEZs); (b) supply of cheaper R&D services from publicly funded S&T institutions; (c) availability of cheaper talent for scientific and engineering work; (d) development of educational institutions that are capable of offering well-trained professionals who are fully familiar with international management and accounting practices; (e) easy access to the domestic market; (f ) elimination of export and technology transfer obligations; (g) removal of controls over monopolies and restrictive business practices; (h) dilution of environmental controls; and so on.

The latest policy of FDI promotion practices the principle of no discrimination against foreign firms. The policy for protection of IPRs has been changed to bestow an absolute monopoly to the generators of intellectual property again with the aim to encourage the foreign firms to invest in the development of technology and innovation-making. The government has been accelerating the pace of deregulation of the development finance, private equity and foreign venture capital (VC) firms to attract foreign finance. The new policy regime has moved in the direction of elimination of priority lending earlier undertaken actively by the development finance institutions for the benefit of domestic firms. The new policy regime encourages the foreign VC entities to freely establish their operations in the sectors of their own choice. Foreign consultancy firms haves been offered a strategic role by the government in the processes of policy-making.

Inward FDI in India: An analysis of emerging trends

First of all, we describe in this section the position and historical evolution of inward FDI received until the mid-1990s in India. In brief, the total stock of private foreign capital in India was valued at Image5.8 billion (US$ 1.2 billion at 1948 exchange rates). By 1995, the most recent year for which comparable data is available, the stock had grown to Image989 billion (US$ 31 billion). Table 4.2 profiles the long-term liabilities of Indian firms over this period of 1948–1995.

Table 4.2: Stock of Private Foreign Capital in the Indian Corporate Sector (Image billion)

 

1948

1960

1970

1980

1987

1992

1995

Long-term

5.8

5.7

16.4

22.19

133.6

536.5

988.9

Investment (Image billion), of which:

 

 

 

 

 

 

($31 billion)

(a) Direct investment (% share in total)

2.6

5.0

7.4

9.3

17.4

38.4

94.2

 

(89)

(44.8)

(42.1)

(13.0)

(7.2)

(9.5)

(b) Portfolio investment (% share in total)

NA

0.5

0.9

1.2

4.6

14.8

226.2

 

(9.0)

(5.7)

(5.5)

(3.4)

(2.8)

(22.9)

(c) Foreign debt

NA

0.1

8.1

111.0

483.3

(67.6)

 

 

(49.5)

(52.4)

 

(90)

 

Source: Athreye and Kapur (2001).

Note: This is private long-term capital in firms, excluding banks. The procedure for classifying equity capital as direct investment and portfolio investment changed in 1992; hence, relative shares are not comparable after that year.

In 1948, a third of all foreign direct capital was in the primary sector (plantations, mining and oil), and the rest in services (mostly trading, construction, transportation, and utilities). By the mid-1990s, manufacturing accounted for about 85 per cent of all foreign direct investment. In absolute terms, the stock of foreign direct capital in manufacturing rose from Image0.7 billion in 1948 to over Image79 billion by 1995. Within manufacturing, the capital goods sector was the predominant recipient of FDI — engineering and heavy chemicals account for two-thirds of all foreign capital. Table 4.3 summarises the changing industrial distribution of foreign direct investment.

After the introduction of a regime of external liberalisation, private foreign capital, whose presence until the beginning of the 1990s in Indian economy was regarded with some concern, is now being touted as a panacea for India’s economic and technological problems. Although Indian policy makers are expecting major contribution from FDI, but when we examine the historical evolution of trends and patterns of response of foreign capital to the policy regime of external liberalisation, we again find a considerable gap between political rhetoric and economic reality. A phase-wise analysis of the trend of FDI inflows undertaken after the implementation of policy regime of external liberalisation suggests that inward FDI inflows were fluctuating in accordance with the changes in supply conditions. It showed a marked increase from 1992 onwards until 1997, when it peaked at US$ 3.6 billion. A proportion of the inflow to acquire shares in the domestic firms, and flotation of American Depositary Receipts/Global Depositary Receipts (ADRs/GDRs) gained in prominence in the latter half of the 1990s, while India’s share in world foreign investment increased from 0.5 per cent in 1992 to 2.2 per cent in 1997.

The Foreign Investment Promotion Board (FIPB) route — representing larger projects requiring the government’s discretionary approval — accounts for the bulk of the inflow, though its share was somewhat declining. The automatic approval route via the Reserve Bank of India (RBI) meant for smaller sized investments received modest inflow; and the non-resident Indian (NRI) route’s share declined sharply. Then, there was a decline experienced in the FDI inflows due to the East Asian Crisis until 2000. After stagnating for a few years at around US$ 2.5 billion, FDI inflows rose again to a level of about US$ 4.3 billion in 2003. The period from 2005–06 to 2008–09 saw again a spurt in FDI inflows until the event of global meltdown. FDI inflows grew from US$ 4.3 billion in 2003–04 to US$ 5.7 billion in 2004–05 to US$ 6.6 billion in 2005–06 to nearly US$ 17 billion in 2006–07 to US$ 22.8 billion, and then registered a sharp spike to touch US$ 34.8 billion in 2007–08, and US$ 35.3 billion in 2008–09. Since the meltdown, the country has again seen a dip in the FDI inflows, but these figures are yet to be computed officially.

Table 4.3: Changing Distribution of Foreign Direct Capital Stock in India (percentage)

Industry/Sector

1948

1960

1970

1980

1987

1992

1995

Plantations

20.4

19.0

16.5

4.1

8.8

8.5

4.8

Mining

4.5

2.4

0.8

0.9

0.3

0.6

0.3

Petroleum

8.7

29.7

16.7

4.0

0.1

2.0

2.9

Total Primary Sector

33.6

51.0

34.0

9.0

9.2

11.1

8.0

Food and Beverages, Tobacco

14.2

6.4

5.6

4.2

6.5

4.9

7.3

Textiles

39.4

2.7

3.0

3.4

4.6

2.9

3.9

Transport Equipment

1.4

1.2

3.7

5.6

9.9

12.4

10.5

Machinery and Machine Tools

1.7

0.8

3.8

7.6

12.1

12.6

11.3

Metals and Metal Products

11.3

2.8

8.8

12.7

4.9

5.1

4.6

Electrical Goods

6.8

2.3

6.5

10.5

11.9

11.0

10.8

Chemicals and Pharmaceuticals

3.1

6.4

18.8

32.4

29.6

28.0

22.2

Miscellaneous

9.9

6.2

12.0

10.7

6.1

6.4

12.8

Total Manufacturing

27.8

30.0

60.0

87.0

85.6

83.2

83.4

Trading

16.3

5.4

2.6

2.3

0.4

1.1

1.3

Construction, Utilities, Transport

11.9

7.6

1.6

0.6

2.2

1.1

0.7

Total Services

38.7

19.5

16.0

4.0

5.1

5.7

8.9

Total FDI (current, Image million)

2,558

5,017

7,354

9,330

17,420

38,400

94,160

Source: Athreye and Kapur (2001).

Note: The 1992 and 1995 figures use the modified definition of FDI.

The range of instruments through which FDI is allowed in India also shows that ‘new types of investors’ already account for a significant proportion of total inflows coming in as FDI, especially through tax havens (Rao and Dhar 2010). National statistics include even those inflows that are simply portfolio investments seeking capital gains, neither meant to be equity that reflects lasting interest nor relating to ownership of proprietary assets in the area of operation of the investee company, and have been invested by international banks, other financial intermediaries and private equity (PE) funds. Investment by Foreign Institutional Investors (FIIs) in a company up to 10 per cent of a company’s total issued capital, depository receipts, foreign currency convertible bonds, and convertible preference shares/ debentures, all of these are also being treated as FDI. In their latest investigation on national FDI statistics, Rao and Dhar found that just less than three-fourths of the inflows during 2004–2008, under the round-tripping and PE/VC categories of investors, entered through the automatic route that does not require any prior approval from the government.

Analysts have been pointing out the need to separate PE investors and portfolio investors as well as those controlled by those Indians from the FDI category and considering only ‘Typical FDI’ that would add to the existing facilities. In their latest investigation of FDI cases, Rao and Dhar (ibid.) found that if all these points are taken into account, only a little less than half of the inflows could be categorised under the FDI category. National statistics of FDI in India do not reflect now the important differentiating aspect of FDI which is that the foreign direct investor has a lasting interest and necessity to maintain control of the enterprise being established in another economy.1 It is, therefore, important that we do not rely completely on the FDI statistics for the assessment of the contribution and impact of FDI to the economy of India.

In the previously provided figures, also included are the cases of all those companies that had raised the foreign stake in their paid-up capital (PUC) through issue of new shares to the foreign investor. Further, these figures include a large number of cases of foreign firms acquiring wholly Indian ones. The latter trend is shown to account for a share of 23 per cent of the total in 2006–2007. C. P. Chandrasekhar and Jayati Ghosh (2010) point out that the figure has generally been around 15 per cent of the total. K. V. K. Ranganathan and M. R. Murthy (2009) also provide evidence on the cases of disinvestment by foreign companies, re-entry by the foreign investors, takeover of companies, and takeover of units/divisions. Withdrawal from manufacturing of certain types, retention of control by foreigners even while disinvesting, turning partially controlled ventures into foreign subsidiaries, etc., are the prominent tendencies of FDI inflows in India.

Emerging trends in sectoral composition, mode of entry and place of FDI

Available evidence also suggests that the policy of openness is not by itself a key determinant of FDI inflows. It is also dependent in a strategic way on the dynamics of events of countries of the advanced capitalist world.2 According to the preliminary FDI data for 2009, the downward FDI trend accelerated in the first quarter of 2009, with FDI inflows declining by 50 per cent and outflows by 40 per cent from the fourth quarter of 2008 for the 17 OECD countries that have reported. If this rate of decline continues through 2009, inflows would fall to around US$ 500 billion and outflows could dip below US$ 1 trillion for the first time since 2005.

Recent data on international mergers and acquisitions (which account for 80 per cent of FDI flows) provide further support for the idea that the FDI situation is rapidly deteriorating. Data on international M&A through May 2009, as reported to the OECD by Dealogic, suggest that international M&A activity both to and from OECD countries is on course to decline by almost 60 per cent from the record US$ 1.4 trillion (both inward and outward M&A) reached in 2007 (OECD 2009: 3).

Pattern of distribution of FDI by transnational companies

As far as the composition of FDI source countries is concerned, the historical dominance of British firms has shown remarkable persistence in post-British India. Three-quarters of all foreign capital was British in 1948. This share declined to 40 per cent by 1992, but since then has been eroded to 255 by disproportionately large inflows from other countries. The share of US firms has risen; Germany, Japan and Switzerland have a significant presence, too. The industrial distribution of foreign capital differs according to the nationality of technology-intensive manufacturing. Multinationals from US, Germany and Japan have gravitated to technology-intensive manufacturing. Traditional investments, such as plantations, are predominantly monopolised by British firms. Among countries, Mauritius has been the largest direct investor in India. However, this data is rather misleading. Mauritius has low rates of taxation and an agreement with India on double taxation avoidance regime. In the post-reform period, the composition and type of FDI has changed considerably. Many companies have set up dummy companies in Mauritius before investing in India. In reality, the United States is now the largest investor in India. The total capital flows from the US was around US$ 6 billion between August 1991 and July 2007, which accounted for 12 per cent of the FDI inflows.

Here we provide latest information on the distribution of FDI projects in terms of source countries. Between January 2003 and May 2009, fDi Markets, of fDi Intelligence, Financial Times, recorded a total of 4,708 investment projects from 2,380 companies. A total of 944 companies from USA invested overseas during this period, representing 40 per cent of all companies. The top three source markets for outward investment were USA, UK and Germany, providing 39 per cent, 10 per cent and 8 per cent of investment projects, respectively. The top 10 source countries accounted for 80 per cent of outward investment projects and 76 per cent of companies investing overseas. International Business Machines Corporation (IBM) from USA is the top company with a total of 35 investment projects announced during January 2003 and May 2009. The top 10 companies accounted for 5 per cent of the investment projects. The top 10 companies accounted for 5 per cent of all investment projects with IBM (USA), General Electric (GE) (USA) and LG (South Korea) among the top 10 companies. See Table 4.4 for the details in respect of pattern of distribution of source countries of FDI and changing average annual rates of growth of FDI projects outsourced to India by the transnational corporations originating from different regions and countries during the period between January 2003 and May 2009.

US Companies Drive Internationalisation of R&D Intensive FDI

Analysis based on the data obtained on FDI projects in India from fDi Markets indicates that an important new FDI trend is also now in the making on the part of US companies with regard to India and China. During the period of the last five years, there has been a significant increase in the number of FDI projects through US companies for design, R&D and technical support activities in India. In order to bring this out, we compare the data on FDI sourced by India from US and all the different regions. Between January 2003 and May 2009, fDi Markets recorded a total of 1,748 investment projects from 911 companies in respect of FDI sourced from the US for the majority of sectors. The leading sector was again software and IT services. Software and IT services accounted for the highest number of projects, a total of 713, representing 41 per cent of the investment projects. Among the top sectors, the industrial machinery, equipment and tools sector recorded the highest growth at 87 per cent per annum on average.

Table 4.4: Pattern of Distribution of FDI in Terms of Projects and Companies, 2003–2009

Source Country

Projects

Projects (%)

Companies

Companies (%)

USA

1,852

39.34

944

39.66

UK

481

10.22

246

10.34

Germany

381

8.09

154

6.47

Japan

318

6.75

129

5.42

France

219

4.65

95

3.99

UAE

108

2.29

60

2.52

Italy

107

2.27

67

2.82

South Korea

107

2.27

26

1.09

Switzerland

99

2.10

58

2.44

Netherlands

95

2.02

35

1.47

Other Countries

941

19.99

568

23.87

TOTAL

4,708

100.00

2,382

100.08

Source: fDi Intelligence (2009).

The leading business activity was design, development and testing, which accounted for 27 per cent of projects. A total of 911 companies were recorded as investing overseas. IBM from USA was the top company with a total of 34 investment projects announced during January 2003 and May 2009. The top 10 companies accounted for 11 per cent of all investment projects with IBM (USA), GE (USA) and General Motors (GM) (USA) among the top 10 companies. The top three source cities for outward investment were New York, San Jose and Santa Clara, providing 9 per cent, 5 per cent and 4 per cent of investment projects respectively. The top three destination cities for inward investment were Bangalore, Hyderabad and Chennai, providing 23 per cent, 12 per cent and 9 per cent of investment projects respectively.

The contrast becomes clear when we analyse the picture emerging in respect of FDI sourced from all the regions, including US. The story that emerges in respect of the business activity orientation of FDI is still conventional (Table 4.5). Data analysed showed that between January 2003 and May 2009, fDi Markets recorded a total of 4,708 investment projects from 2,380 companies. Even here, the sector of software and IT services accounted for the highest number of projects, with a total of 981, representing 21 per cent of the investment projects. Among the top sectors, the automotive components sector recorded the highest growth at 148 per cent per annum on average. The leading business activity was manufacturing, which accounted for 24 per cent of projects. Manufacturing accounted for the highest number of projects, with a total of 1,140, representing 24 per cent of the investment projects. Among the top business activities, logistics, distribution and transportation recorded the highest growth at 69 per cent per annum on average.

FDI projects from western Europe

In case of FDI sourced into India from Western Europe, manufacturing still accounts for the highest number of projects, with a total of 9,144, representing 56 per cent of the investment projects (Table 4.6). Among the top business activities, the share of R&D activity is too small to get even a mention. Education and training recorded the highest growth at 47 per cent per annum on average.

Sectoral composition

Sectoral composition of FDI inflows is an important partial indicator for assessing the contribution of FDI to the building of productive capabilities. It can tell us whether or not FDI is going to the relevant sectors to build the productive capabilities of an economy. In terms of the sectoral composition of FDI inflows, in India there is a major shift since 1991. After the onset of liberalisation, a substantial proportion of FDI inflows began to be directed to services. Manufacturing has accounted for only about 40 per cent of inflows in the post-1991 period with services accounting for about 35 per cent share. Retail estate is now a burgeoning sector and is attracting FDI inflows in a big way. Furthermore, among the manufacturing sub-sectors, FDI stock is more evenly distributed between food and beverages, transport equipment, metal and metal products, and miscellaneous manufacturing unlike a very heavy concentration in relatively technology-intensive sectors — namely, machinery, chemicals, electrical, and transport equipment — up to 1990. (See also Kumar 2005, cited in Kumar 2009b). Table 4.7 provides a synoptic view of the amount of FDI inflows received by important sectors in India during April 2000–2009.

Table 4.5: Industry Analysis: Number of FDI Projects from all the Regions, by Activity

Business Activities

2003

2004

2005

2006

2007

2008

2009

Total

Average Annual Growth (%)

Manufacturing

93

132

128

232

188

287

80

1,140

30.8

Sales, Marketing and Support

59

95

103

146

143

181

67

794

27.1

Design, Development and Testing

80

145

92

149

101

93

32

692

13.3

Business Services

37

61

35

73

69

110

48

433

37.0

Retail

22

59

58

111

46

59

29

384

45.5

Research and Development

35

54

57

58

24

20

13

261

–2.7

Logistics, Distribution and Transportation

10

19

14

59

36

36

6

180

69.2

Construction

17

8

13

43

25

48

23

177

58.1

Shared Services Centre

24

38

34

41

6

11

4

158

13.3

Technical Support Centre

9

20

22

14

15

12

3

95

16.6

Other Business Activities

66

62

35

58

39

100

34

394

28.0

OVERALL TOTAL

452

693

591

984

692

957

339

4,708

22.7

Source: fDi Intelligence (2009).

Table 4.6: Activity-wise FDI Projects from Western Europe

Business Activities

2003

2004

2005

2006

2007

2008

2009

Total

Average Annual Growth (%)

Manufacturing

1,329

1,393

1,396

1,476

1,520

1,638

392

9,144

4.3

Sales, Marketing and Support

408

567

795

941

1,162

1,413

446

5,732

28.5

Design, Development and Testing

80

93

78

134

182

210

55

832

24.6

ICT and Internet Infrastructure

61

69

54

34

37

55

32

342

2.4

Education and Training

17

19

20

25

29

80

26

216

46.8

Technical Support Centre

7

24

31

18

22

13

3

118

42.3

OVERALL TOTAL

1,902

2,165

2,374

2,628

2,952

3,409

954

16,384

12.4

Source: fDi Intelligence (2009).

Table 4.7: Statement on Sector-wise FDI Inflows, April 2000–April 2009

Sector

Amount of FDI Inflows (million)

Total FDI Inflows (%)

Services

19,828.95

22.96

Computer Software and Hardware

9,019.59

10.46

Telecommunications

6,956.34

8.21

Housing and Real Estate (including Cineplex, Multiplex, Integrated Townships, Commercial Complexes, etc.)

5,872.98

6.72

Construction Activities

5,327.13

6.00

Automobile Industry

3,434.86

4.02

Power

3,227.28

3.73

Metallurgical Industries

2,732.49

3.03

Petroleum and Natural Gas

2,565.29

2.90

Chemicals (other than Fertilisers)

2,153.76

2.54

Cement and Gypsum Products

1,674.89

1.93

Electrical Equipments

1,519.45

1.76

Trading

1,561.45

1.75

Drugs and Pharmaceuticals

1,458.78

1.69

Ports

1,558.75

1.67

TOTAL

92,157.54

100.00

Source: Fact Sheet on FDI, August 1991 to April 2009, Annex – B, Page 8–10, Department of Industrial Promotion and Policy (DIPP), Government of India.

The data provided in Figures 4.1 and 4.2 on inward FDI stocks for specific sectors and industries also makes one more aspect quite clear. While manufacturing industries, too, have attracted rising FDI, the services sector accounted for a steeply rising share of FDI stocks in India since the mid-1990s. In fact, it reveals a tremendous shift from FDI in the primary and the manufacturing sectors to FDI in services since the mid-1990s.3 In the manufacturing sector, all previous priority areas, notably the chemical industry and (electrical and non-electrical) machinery, accounted for steeply decreasing shares in overall FDI stocks. The changing composition of FDI in India has implications for both productivity spillovers and linkage effects.4 See also Table 4.8 for the details of the emerging industry sector-wise pattern of distribution of FDI projects. Based on the information provided in the fDi Markets database, we have an analysis of the industry-wise FDI projects attracted to India over the period of last five years. It shows that software and IT services accounted for the highest number of projects, with a total of 981, representing 21 per cent of the investment projects. And the business services and financial services accounted for the second and third highest number of projects, respectively, with total of 400 and 291 projects, representing 8.496 per cent and 6.18 per cent of the investment projects. Among the top sectors, the automotive components sector recorded the highest growth at 148 per cent per annum on average.

Figure 4.1: Sector-wise Composition of FDI Stocks, 1987–2000 (percentage)

Image

Source: UNCTAD (2000); cited in Chakraborty and Nunnenkamp (2006).

Figure 4.2: Sectors Attracting Highest FDI Inflows, August 1991–September 2005 (US$ million)

Image

Source: Department of Industrial Policy & Promotion, Ministry of Commerce and Industry: http://dipp.nic.in/English/Publications/FDI_Statistics/FDI_Statistics.aspx (accessed 9 June 2013).

Table 4.8: fDi Markets: Industry Sector Report — Number of Projects, January 2003–May 2009

Sector

2003

2004

2005

2006

2007

2008

2009

Total

Software and IT services

126

215

162

190

130

122

36

981

Business Services

35

64

40

70

52

96

43

400

Financial Services

23

30

32

57

40

79

30

291

Industrial Machinery, Equipment and Tools

15

21

23

30

62

82

29

262

Communications

23

35

38

67

29

39

18

249

Transportation

9

24

23

39

45

33

10

183

Automotive Components

2

11

12

38

30

56

10

159

Textiles

11

16

17

49

19

36

8

156

Automotive OEM

19

20

15

35

20

28

7

144

Electronic Components

15

15

14

23

19

42

6

134

Metals

9

7

14

30

26

38

9

133

Consumer Products

11

26

14

33

14

22

10

130

Semiconductors

16

27

21

34

16

13

2

129

Chemicals

14

19

12

20

21

25

15

126

Consumer Electronics

19

33

32

14

5

7

2

112

Real Estate

8

16

11

15

19

32

7

108

Hotels and Tourism

9

6

11

31

15

21

8

101

Food and Tobacco

11

10

9

13

11

24

11

89

Pharmaceuticals

5

16

20

12

15

13

3

84

Business Machines and Equipment

4

18

18

19

9

5

3

76

Coal, Oil and Natural Gas

11

4

3

19

9

14

7

67

Leisure and Entertainment

6

9

6

22

4

7

1

55

Aerospace

6

3

7

11

8

11

7

53

Building and Construction Materials

3

6

3

16

5

9

2

44

Health care

3

2

3

9

2

5

19

43

Warehousing and Storage

5

2

3

16

3

13

1

43

Engines and Turbines

2

4

3

10

7

12

2

40

Plastics

1

4

6

11

8

7

3

40

Biotechnology

5

3

4

11

4

5

6

38

Beverages

3

6

2

7

6

7

1

32

Non-Automotive Transport OEM

5

2

3

4

3

10

4

31

Alternative/Renewable energy

1

2

6

5

11

5

30

Ceramics and Glass

3

2

5

11

8

29

Medical Devices

3

3

1

5

4

5

4

25

Rubber

2

3

8

6

4

23

Paper, Printing and Packaging

1

1

4

3

4

7

20

Minerals

6

4

1

1

2

4

1

19

Wood Products

2

7

1

5

1

16

Space and Defence

2

1

1

1

3

5

13

OVERALL TOTAL

452

693

591

984

692

957

339

4,708

Source: fDi Intelligence (2009).

India’s sectoral composition seems to have been determined by the unregulated opening up of many sectors for FDI. Table 4.9 shows this when we estimate the entry in terms of magnitude of inflows.

Mode of entry

The mode of entry of FDI is also used as a partial indicator of the country bearing the consequences for its developmental impact in relation to competence-building. As the essential objective of FDI is to augment stock of productive capital in the host country, entry through acquisitions can be characterised as carrying the impact of limited addition to capital stock and knowledge inflow. In terms of entry mode, a very substantial proportion of FDI inflows into India in the reform period have taken place through acquisitions. During this period, the bulk of the approvals were supposed to be for investment in infrastructure due to the government policy of promotion of FDI. But the actual inflow was seen largely in registered manufacturing — more precisely, in consumer durable goods and automotive industries; very little of it had gone into capital goods industries. The inflow in the telecommunication industry was probably to get licences for mobile phone operations, and not for manufacturing equipment. Investments in the electrical machinery industry are apparently to set up local offices to produce computer software. Much of the realised FDI has also come in as fully-owned subsidiaries (or branch plants) of their parent companies abroad.

Further, we have already suggested that close to 40 per cent of the inflow received during this period got used for acquiring existing industrial assets and their managerial control. There occurred a gradual increase in such M&A in the 1990s. Foreign firms used a larger proportion of their total funds for such acquisition than for capital formation, compared to Indian-owned firms in the private corporate sector, the ratio of fixed capital formation to total uses of funds by foreign firms is lower than that by the domestic companies (Nagaraj 1997). The situation regarding acquisitions is also still quite serious.5

Analysis indicates that much of the realised FDI has come in as fully owned subsidiaries (or branch plants) of their parent companies abroad. Most of them have not issued IPOs in the domestic bourses; hence they are not listed companies. About 40 per cent of the inflow seems to have been used for acquiring existing industrial assets, and their managerial control; and there seems to be a gradual increase in such M&A in the 1990s. Nagaraj (2006) indicated that foreign firms seem to use a larger proportion of their total funds for such acquisitions than for capital formation, compared to Indian-owned firms in the private corporate sector, the ratio of fixed capital formation to total uses of funds by foreign firms is lower than that by the domestic companies. Foreign firms appear to find it a cheaper route to enter a new market, and secure a sizeable market share. In a situation of low share price level, many foreign firms have also been repurchasing their equity to exit from the domestic bourses.

Table 4.9: fDi Markets: Currency FX Rate — US$ for Sectors as per ISIC, January 2003–May 2009

Sector

2003

2004

2005

2006

2007

2008

2009

Total

Metals

19700000

3012000000

7308300000

12072440000

7805820000

10445830000

1505800000

42169890000

Real Estate

293700000

9015000000

102500000

3396270000

2126190000

3036430000

200000000

18170090000

Automotive OEM

740600000

439000000

1131720000

4891300000

3721377500

1483350000

52700000

12460047500

Coal, Oil and Natural Gas

3320600000

2860100000

1738840000

2720930000

38810000

1253850000

11933130000

Aerospace

4800000

3325000000

5866300000

20050000

9216150000

Semiconductors

74400000

766000000

413000000

6778300000

27061363.6364

65000000

8123761363.64

Communications

370100000

370500000

346360000

1810740000

570134482.793

2475630000

1005000000

6948464482.79

Automotive Components

60000000

221000000

96290000

1133420000

3346000000

1647320000

181920000

6685950000

Engines and Turbines

500000

288700000

2300000

825500000

1747000000

3609830000

57600000

6531430000

Software and IT services

642400000

471910000

685410000

3276100000

721637875.584

197900000

108790000

6104147875.58

Electronic Components

329300000

79000000

824130000

687950000

1256607692.31

1924110000

27100000

5128197692.31

Transportation

23300000

69000000

1203000000

731000000

314100000

2606190000

48390000

4994980000

Ceramics and Glass

93000000

20000000

95030000

175200000

3531300000

3914530000

Warehousing and Storage

902000000

58360000

250000000

2551180000

3761540000

Building and Construction Materials

81000000

373000000

111300000

2077580000

67970000

705960000

3416810000

Industrial Machinery, Equipment and Tools

12100000

67500000

216700000

455652000

1032261388.89

835340000

176700000

2796253388.89

Hotels and Tourism

25000000

183000000

1857300000

400000000

 

105470000

2570770000

Food and Tobacco

525700000

85800000

62919000

804710000

275350000

335490000

83570000

2173539000

Chemicals

197000000

99200000

448990000

167870000

188330000

368980000

168920000

1639290000

Pharmaceuticals

2500000

49700000

357430000

453211250

188520000

354530000

 

1405891250

Alternative/Renewable Energy

 

 

25000000

613400000

52660000

470900000

30660000

1192620000

Textiles

2200000

136300000

107170000

218084000

238310000

298650000

77210000

1077924000

Business Services

38948746.13

206200000

59710000

184440000

227118907.7

207290000

19490000

943197653.83

Beverages

10000000

9190000

125000000

465700000

107960000

190210000

10080000

918140000

Biotechnology

72500000

65000000

4000000

545790000

15000000

2430000

159940000

864660000

Financial Services

23716848.919

41000000

268566666.667

154100000

47200000

302420000

837003515.586

Consumer Products

25500000

49300000

29500000

358130000

62200000

95380000

85850000

705860000

Consumer Electronics

51400000

94300000

262670000

125660000

88960000

17500000

640490000

Rubber

89500000

17410000

151770000

342560000

601240000

Non-Automotive Transport OEM

28000000

79000000

64000000

90000000

193190000

133630000

587820000

Leisure and Entertainment

111400000

3710000

2100000

76400000

350000000

543610000

Paper, Printing and Packaging

2360000

83800000

123310000

125360000

334830000

Business Machines and Equipment

58400000

228360000

42200000

328960000

Plastics

67760000

120270000

 

29490000

217520000

Medical Devices

100000

5000000

17500000

1500000

75000000

99100000

Health care

24300000

7000000

28900000

29000000

89200000

Minerals

8000000

7800000

37000000

52800000

Wood Products

11000000

11000000

Space and Defence

5690000

5690000

OVERALL TOTAL

8206165595.05

19209100000

14341185666.7

50024647250

34114839210.9

38808060000

5492530000

170196527723

Source: fDi Markets, fDi Intelligence (2009).

Place of FDI in Private Corporate Investment

Ranganathan and Murthy (2009) provide an estimate of the place of FDI in private corporate investment. They point out that within the private sector, to which practically all the FDI companies belong, the share in assets and PUC in 2000–2001 was at about 28 per cent and 40 per cent, respectively. About 56 per cent of the assets of FDI companies are estimated to be in the manufacturing sector in India. The services sector accounts for 33.3 per cent share in the total. However, the share of FDI companies in the large private manufacturing sector is lower than in the services sector companies. It is even higher in the electricity, gas and water supply sector. They bring out that in the non-manufacturing sector, FDI companies occupy a significant position in India’s private corporate sector.

Ranganathan and Murthy also indicate that in terms of assets the share of newer ones, which have been incorporated in the post-liberalisation period, was 35 per cent. But their share in PUC was substantial at 63 per cent (ibid.). This was especially true in the case of transport equipment and other engineering industries They found the gap to be widest in case of computer software and related activities. Implications of this gap are dependence of these companies on internal resources compared to borrowings, relatively less use of fixed capital and engagement in labour-intensive activities or assembly operations.

Analysed in terms of the position of FDI companies in selected industries (food processing, pharmaceuticals, transport equipment, auto ancillaries, other engineering industries, and information technology), the FDI companies form one-fourth of the total companies in these sectors. The share of FDI companies is somewhat higher only in computer software-related industries, other engineering and transport equipment. In terms of assets, especially with regard to the private sector, FDI companies occupy a prominent position in the transport equipment and other engineering industries.

Contribution of FDI to Employment

Not all types of FDI are likely to create substantial additional employment; only when FDI represents greenfield investments, it generally provides employment. Further, it also needs to be kept in view that when foreign firms compete with local firms, resulting in crowding-out, employment in domestic companies and in the sector as a whole may be reduced. Hence, the magnitude and sign of the employment effect will depend on the industry of investment, mode of entry of FDI and country characteristics. Estimating the employment effect of FDI is difficult because of a lack of data and because of the difficulty to disentangle simultaneous effects, such as indirect effects and employment displacement (UNCTAD 1999). Hence, the empirical evidence on employment effects is very poor (UNCTAD 2005). It is estimated that 50 million people globally are directly employed by foreign affiliates of multinationals, accounting for only 1 to 2 per cent of the global workforce (UNCTAD 1999).

The latest available study of the National Council of Applied Economic Research (NCAER) estimates the total number of people employed in FDI plants in the manufacturing sector in India to be about 1,564,920 (NCAER 2010). This amounts to a share of between 4 and 5 per cent of the total labour force in the formal sector. Two sectors that provide relatively high shares of total employment in FDI plants include chemical products (16 per cent) and growing and processing crops, including tea and horticulture (14 per cent).

During the period between 2003 and 2009, the average number of jobs created per project was 511 in the case of FDI sourced from all the regions for India. The average number of jobs created per project was 508 in the case of FDI projects sourced to India from USA. Between January 2003 and May 2009, Apache from USA created the highest number of jobs, with a total of 40,000. The top 10 companies accounted for 26 per cent of all jobs from the investment projects. A total of 2,380 companies were recorded as investing overseas. IBM from USA was the top company with a total of 35 investment projects announced during January 2003 and May 2009. The top 10 companies accounted for 5 per cent of the investment projects. See Table 4.10 for the sectoral pattern of jobs expected to be created through inward FDI inflows to India during 2003–2009.

Table 4.10: Sectoral Distribution of Jobs Projected to Arise from Inward FDI, 2003–2009

Sector

2003

2004

2005

2006

2007

2008

2009

Total

Software and IT Services

23,146

29,032

22,593

27,639

22,401

17,400

1,225

143,436

Business Services

12,423

11,690

7,043

14,902

17,099

5,450

2,215

70,822

Textiles

 

 

12,000

45,180

6,326

700

500

64,706

Real Estate

 

7

 

33,000

5,505

 

 

38,512

Communications

3,980

4,812

3,444

9,428

4,116

7,011

340

33,131

Financial Services

5,230

3,565

6,428

3,854

9,983

2,882

350

32,292

Automotive OEM

2,430

11

250

11,900

9,206

4,750

800

29,347

Semiconductors

4,962

1,758

1,045

4,992

1,920

700

 

15,377

Industrial Machinery, Equipment, and Tools

429

2,180

986

3,126

3,104

3,644

330

13,799

Electronic Components

1,750

1,360

450

3,000

1,768

4,165

 

12,493

Automotive Components

260

550

880

1,967

3,889

3,160

820

11,526

Business Machines and Equipment

 

5,245

290

4,500

804

 

 

10,839

Metals

310

1,725

3,700

2,120

800

521

 

9,176

Consumer Electronics

 

2,640

 

2,500

2,792

979

 

8,911

Consumer Products

 

 

510

7,645

124

80

 

8,359

Aerospace

 

 

150

440

2,885

1,100

 

4,575

Pharmaceuticals

20

250

155

2,674

843

245

300

4,487

Transportation

1,050

300

40

 

504

2,560

 

4,454

Engines and Turbines

 

 

20

3,500

40

100

200

3,860

Rubber

 

 

 

 

1,849

1,950

 

3,799

Food and Tobacco

60

1,306

425

300

1,380

 

 

3,471

Ceramics and Glass

 

 

 

 

270

2,500

 

2,770

Biotechnology

 

14

12

750

55

700

476

2,007

Alternative/Renewable Energy

 

 

 

 

 

 

2,000

2,000

Non-Automotive Transport OEM

 

 

1,000

4

 

850

 

1,854

Health care

1,200

 

 

62

 

 

275

1,537

Coal, Oil and Natural Gas

 

 

 

1,000

 

 

 

1,000

Warehousing and Storage

700

 

10

 

 

50

 

760

Hotels and Tourism

 

25

219

450

 

 

 

694

Medical Devices

 

 

 

400

11

200

 

611

Beverages

 

150

 

137

 

200

 

487

Chemicals

20

 

220

10

200

15

16

481

Plastics

 

150

 

35

260

 

 

445

Building and Construction Materials

 

 

 

 

416

 

 

416

Paper, Printing and Packaging

 

 

 

179

128

48

 

355

Wood Products

200

 

 

 

 

 

 

200

Leisure and Entertainment

 

 

50

 

 

97

 

147

Minerals

 

 

 

 

 

30

 

30

Space and Defence

 

15

 

 

 

 

 

15

OVERALL TOTAL

58,170

66,785

61,920

185,694

98,678

62,087

9,847

543,181

Source: fDi Markets, fDi Intelligence (2009).

FDI and Regional Development Dimension

Peter Nunnenkamp and Rudi Stracke (2007) indicate that FDI is likely to widen income disparity in India. The concentration of FDI in a few Indian states tends to work against favourable FDI effects spreading across the Indian economy. The regional dissemination of FDI-induced growth is further impaired by the increasing concentration of FDI at the state level since the early 1990s. FDI is heavily concentrated even within states — typically, the three most attractive districts account for more than two-thirds of all FDI projects located in the state as a whole. It is only for relatively rich states that a higher FDI intensity is associated with a significantly higher growth rate in the post-reform era. However, it has become necessary for less developed states to induce economic catching-up processes by drawing on FDI.

Mumbai and New Delhi have been the top performers with the majority of FDI inflows being heavily concentrated around these two major cities. Chennai, Bangalore, Hyderabad, and Ahmedabad are also known to draw significant shares of FDI inflows. In the data provided by the fDi Markets database, Bangalore is the leading destination city having attracted 751 inward investment projects from 563 companies between January 2003 and May 2009. The top 10 destination cities attracted 61 per cent of inward investment projects.

The rise in FDI flows to India has been accompanied by strong regional concentration, and the trend of regional concentration is continuing unabated. See Table 4.11 for the details of regional concentration of FDI for the period between 2008–09 and 2011–12. The top six states, namely, Maharashtra, New Delhi, Karnataka, Gujarat, Tamil Nadu, and Andhra Pradesh, accounted for over 70 per cent of the FDI equity flows to India between 2008–09 and 2011–12. The top two states, i.e., Maharashtra and Delhi, accounted for over 50 per cent of FDI flows during this period. Maharashtra alone accounted for over 30 per cent of FDI flows to India during the same period (Mukherjee 2012).

Markets Served

While FDI in India continues to be local market seeking, its world market orientation has increased in the aftermath of economic reforms. In the data available for the year 2009, fDi Markets reports on the regional markets served for 323 investment projects. 71 per cent of projects were serving the pan-Domestic Only market, 15 per cent the pan-Asia Pacific market, and 11 per cent the pan-Global market (Figure 4.3).

Table 4.11: FDI Equity Inflows to Indian States

 

2008–09

2009–10

2010–11

2011–12

2008–09

2009–10

2010–11

2011–12

 

(US$ million)

(Percentage to Total)

Maharashtra

12,431

8,249

6,097

9,553

45.5

31.9

31.4

26.2

Delhi

1,868

9,695

2,677

7,983

6.8

37.5

13.8

21.9

Karnataka

2,026

1,029

1,332

1,533

7.4

4.0

6.9

4.2

Gujarat

2,826

807

724

1,001

10.3

3.1

3.7

2.7

Tamil Nadu

1,724

774

1,352

1,422

6.3

3.0

7.0

3.9

Andhra Pradesh

1,238

1,203

1,262

848

4.5

4.7

6.5

2.3

West Bengal

489

115

95

394

1.8

0.4

0.5

1.1

Chandigarh

0

224

416

130

0.0

0.9

2.1

0.4

Goa

29

169

302

38

0.1

0.7

1.6

0.1

Madhya Pradesh

44

54

451

123

0.2

0.2

2.3

0.3

Kerala

82

128

37

471

1.3

0.5

0.2

1.3

Rajasthan

343

31

51

33

0.3

0.1

0.3

0.1

Uttar Pradesh

0

48

112

140

0.0

0.2

0.6

0.4

Orissa

9

149

15

28

0.0

0.6

0.1

0.1

Assam

42

11

8

1

0.2

0.0

0.0

0.0

Bihar

0

0

5

24

0.0

0.0

0.0

0.1

Region not indicated

4,181

3,148

4,491

12,782

15.3

12.2

23.1

35.0

TOTAL

27,332

25,834

19,427

36,504

100.0

100.0

100.0

100.0

Top 6 States

22,113

21,757

13,444

22,340

80.9

84.2

69.2

61.2

Top 2 States

14,299

17,944

8,774

17,536

52.3

69.5

45.2

48.0

Source: Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India.

Note: 1. FDI equity inflows include ‘equity capital component’ only.

2. Maharashtra includes Maharashtra, Dadra and Nagar Haveli, and Daman and Diu.

3. Delhi includes New Delhi and part of Uttar Pradesh and Haryana.

4. Tamil Nadu includes Tamil Nadu and Pondicherry.

5. West Bengal includes West Bengal, Sikkim, and Andaman and Nicobar Islands.

6. Chandigarh includes Chandigarh, Punjab, Haryana and Himachal Pradesh.

7. Madhya Pradesh includes Madhya Pradesh and Chhattisgarh.

8. Kerala includes Kerala and Lakshadweep.

9. Uttar Pradesh includes Uttar Pradesh and Uttaranchal.

10. Assam includes Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, and Tripura.

Figure 4.3: Pattern of Markets Served by Inward FDI

Image

Source: fDi Intelligence (2009).

Sample: 323 projects

Location Determinants

In the latest available data for the year 2009, fDi Markets reports the factors determining the location of investment projects for 159 projects. The main location determinant was domestic market growth potential, which was cited by companies as the number one investment motive for 71 per cent of projects. Other leading investment motives included proximity to markets or customers, skilled workforce availability and lower costs (Figure 4.4).

Impact of FDI on growth, domestic investment, exports, and employment

The relationship of FDI inflows with growth is empirically beginning to be assessed in the literature and has been examined for a sample of 107 countries for the 1980s and 1990s. This issue was reviewed by Nagesh Kumar and Jaya Prakash Pradhan (2005) who suggest that they could not find a statistically significant effect of FDI on domestic investment in the case of India. Kumar (2009) puts this aspect to scrutiny in a growth perspective and points out that FDI inflows received by India have been of a mixed type, combining some inflows of crowding-in domestic investments type while others are crowding out domestic investment, with no predominant pattern emerging in the case of India. In the case of East Asian countries such as South Korea and Thailand, the relationship clearly indicated FDI crowding-in domestic investments.

Figure 4.4: Locational Determinants of FDI

Image

Source: fDi Intelligence (2009).

Sample: 159 projects.

By using industry-specific FDI and output data and applying a co-integration framework that integrates long-run and short-run dynamics of the FDI-growth relationship, Chandana Chakraborty and Peter Nunnenkamp (2006) suggest that the impact of output growth in attracting FDI is a relatively stronger than that of FDI in inducing economic growth. At the sector level, it turns out that favourable growth effects of FDI in India are largely restricted to the manufacturing sector, where FDI stocks and output are mutually reinforcing in the long run. Most interestingly, and contrary to the view that booming FDI in the services sector is driving growth in India, feedback effects between FDI and output turn out to be transitory in this sector. If at all, causality in the services sector runs from output to FDI. However, even when these two scholars qualify their results in respect of services on account of investment in services being a recent phenomena and would wait to conclude their findings on the growth impact, they do point out that if IT-related services were more widely spread throughout India rather than being concentrated in a few clusters of export enclaves, it may help stronger spillovers from more efficient services to other sectors.

A number of developing countries have used FDI to exploit the resources of transnational corporations for expanding their manufactured exports. The latest study made on FDI in respect of top 25 market capitalisation-based sectors accounting for 91 per cent of total market capitalisation, 83 per cent of foreign equity and 84 per cent of the total foreign equity in the country by NCAER (2010) reports that FDI firms account for 13 per cent of the total sales turnover and 12 per cent of export by all firms, both domestic firms and FDI. Further, the level of export intensity of FDI firms is only high in sectors like mining of iron ores (80 per cent), basic precious and non-ferrous metals (50 per cent), software publishing, consultancy and supply (31 per cent), textiles (26 per cent), special purpose machinery (26 per cent), wearing apparel (21 per cent), iron and steel (20 per cent), and electrical equipment (18 per cent). India’s manufactured exports have been mainly in low value added categories. A report by the National Science Foundation (cited in Kumar and Gupta 2008) points out that out of advanced technology products worth US$ 238.5 billion imported by USA in 2004, India’s contribution was only US$ 0.32 billion compared to China’s US$ 45.7 billion.6

According to the report of the Krishnamurthy Committee, currently about 50 per cent of the capital good requirements are imported. The compound annual growth rate of such imports between 1993–94 and 2007–08 was 15 per cent. Capital goods imported include telecommunications and electronic hardware. The imports of these goods increased at the compound annual rate of growth (CARG) of 25 per cent between 1993–94 and 2007–08. Ranganathan and Murthy (2009) indicate that while there is no uniformity in the import intensity of sales across various industries and between different categories of companies, it does appear that in industries in which foreign capital has a substantial share, FDI companies tended to be more import-dependent compared to domestic companies.

Coming to the pattern of development of export and import intensities, Sudip Chaudhuri (2009) reports that export intensity of the foreign companies has not increased. It has practically remained constant between 1992–93 and 2005–06. But since import intensity has gone up, net export intensity has increased from a surplus of 1.68 per cent in 1992–93 to a deficit of –4.52 per cent in 2005–06. Net forex intensity, which includes dividend remittances for royalty payments, has also increased from -0.62 per cent in 1992–93 to -7.39 per cent in 2005–06. In comparison, the 1,328 Indian industries have done better. Export intensity in their case has increased from 7.2 per cent in 1992–93 to 13.5 per cent in 2005–06. Further, on making a distinction between older and newer foreign companies, Chaudhuri (ibid.) also found that though the export intensity of the 54 newer companies is significantly higher at 23.9 per cent in 2005–06, their import intensity has also been significantly higher.

Among the industries where import intensities are significantly higher than the manufacturing sector averages of 16.26 per cent are communication equipment (37.37 per cent) and computer hardware (48.79 per cent). However, these sectors have foreign affiliates as key players, and their import intensities are also high in these industries. Some of the industries that are more developed in India thanks to the earlier industrial policy have relatively low import intensities, for example, in commercial vehicles (3.58 per cent), two-wheelers (2.25 per cent) and tractors (1.23 per cent). The industries where import intensities have increased and export intensities are also high now are the areas of pharmaceuticals, chemical machinery and automobile ancillaries where the domestic players are still dominant. It is, therefore, not surprising that Chaudhuri concludes that foreign companies have failed to provide the stimulus expected of them. Foreign capital needs to be regulated to ensure a better outcome.

Even going by the study undertaken by the RBI of finances of FDI companies for the years 2001–02 to 2003–04, which covered 508 companies, it is quite clear that the share of FDI companies in India’s exports continued to be low at around 6 per cent until 2004. FDI companies in the manufacturing sector have been predominantly domestic market-oriented. Ranganathan and Murthy (2009) report on their analysis of data obtained for the same years. They report that among the industries selected, exports are concentrated in computer software and related services and pharmaceutical products. Their combined share was almost two-thirds of the total.

Ranganathan and Murthy (ibid.) also report that the characteristics of some of the top FDI exporters suggest that there is little relationship between their export performance and foreign ownership. Hindustan Lever Ltd, classified as a chemical company, was exporting not just chemicals but also agricultural products. ITC, a leading cigarette company, was found to be exporting mostly agricultural products. Ispat Industries, a company belonging to a non-resident group, accounted for two-thirds of exports of the basic metal group. Except in computer software-related activities and tobacco products, FDI companies have been net losers of foreign exchange. FDI companies did not exhibit superior foreign exchange earning capacity compared to their domestic counterparts. In fact, their performance was considerably inferior. FDI companies depend more on imported raw materials and components.

Bishwanath Goldar and Atsushi Kato (2009) also indicate that other things remaining the same, export intensity is relatively higher in an indigenous private sector firm not belonging to a big business house than in a foreign firm, a public sector firm or a firm belonging to a big business house. Exports have increased mainly in the low value added categories. Again, unlike the East Asian countries, when we analyse the impact on exports, it is clear that India has not been able to exploit the potential of FDI for export-oriented production. The bulk of FDI inflows are market-seeking, coming for tapping the domestic market with the share of foreign affiliates in exports around 10 per cent. India could not impose export obligations on foreign affiliates except for those entering the products reserved for SMEs.

Kumar (2009) also gives a comparative picture of efficiency of resource use or factor productivity in the case of China and India. The data provided by the Bureau of Economic Analysis (BEA) of the US Department of Commerce states that US affiliates are more productive than in India. They have a higher margin on sales due to export orientation in the case of China. Kumar also speculates that they possibly receive the world’s best practice technology and are made to operate at higher levels of efficiency compared to Indian operations that are essentially geared to serve the domestic market.

FDI and the Balance of Payments

The RBI has periodically been publishing figures on the finances of Foreign Direct Investment Companies (FDICs) in which a single non-resident investor has 10 per cent or more shares for different sets of years since the 1990s. The number of firms covered in each year’s selective survey, which provides data for two or more consecutive years for a common set of firms, varies over time. Therefore, the numbers are indicative of trends only. Chandrasekhar and Ghosh (2010) point out that the ratio of imports to exports from FDIC rose continuously and rapidly, for the sample firms analysed, from 79 per cent to 158.5 per cent. They suggest that this trend could also reflect the possibility that reduced restrictions on imports are intensifying the practice of ‘transfer pricing’ or imports from the parent or a third-country subsidiary located in a tax haven at inflated prices, so that profits are ‘transferred’ to firms in low tax locations. Analysis undertaken by them also indicates that there has been a sharp increase in the net outflow of foreign exchange on account of the operation of FDICs in the country between 2002–03 and 2006–07. When the ratio of net foreign exchange earnings to total income (3-year averages) was computed from the figures available for the common set firms, they report that the ratio moved in their sample from a positive 3.4 per cent in 2001–02 to a negative 9.1 per