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Spillovers in Indian Manufacturing Industry

There are certain shortcomings to using econometric analysis to look for spillover effects in the Indian manufacturing industry. This article presents the results of a case study approach. The findings suggest that forward linkages with foreign firms are as important as backward linkages for spillovers to occur. It also finds evidence of export spillovers from forward and backward linkages with foreign firms.

Spillovers in Indian Manufacturing Industry

G Chidambaran Iyer

up channels which the industry agents use but are not visible to the econometrician.1

In order to remedy this possible shortcoming of econometric analysis, we have undertaken a case study approach in this paper. A field study can be useful to both economic theorists and econometricians

There are certain shortcomings to using econometric analysis to look for spillover effects in the Indian manufacturing industry. This article presents the results of a case study approach. The findings suggest that forward linkages with foreign firms are as important as backward linkages for spillovers to occur. It also finds evidence of export spillovers from forward and backward linkages with foreign firms.

I am grateful to K V Ramaswamy of the Indira Gandhi Institute of Development Research for his comments which have benefited this paper. I am also thankful to M H Suryanarayana of IGIDR for constant encouragement. The anonymous referee also made helpful suggestions. I thank V Narayanan, Bombay Chamber of Commerce and Industry for his help in contacting member firms for participation in the survey. I would also like to thank Satyajeet Bhonsale, Sumeet Agrawal, Sudhir Kulkarni, G Badri Narayanan and Naveen Srinivasan for helping me contact other firms. The usual disclaimer applies.

G Chidambaran Iyer (chidambaran.iyer@ gmail.com) is at the Indira Gandhi Institute of Development Research, Mumbai.

Economic & Political Weekly

EPW
november 14, 2009

M
ultinationals play a very important role in innovation and productivity growth, and 98% of the top 700 research and development spenders are multinational corporations (MNCs) (Castallani and Zanfei 2006). Thus domestic firms learn from MNCs on many fronts especially when the latter set up affiliates in their country, since we also know that MNCs have certain internal advantages which domestic firms lack. Domestic firms not only compete with the MNC in its product market but also act as suppliers or buyers to the external firm. Note here that in the spillover literature, the reference firm is the MNC. When the MNC buys from a local firm (LF), the linkage created is called a backward linkage (where the LF is supplier). When the MNC sells to the LF (with the LF as buyer) the linkage created is called a forward linkage.

The probability of useful interaction with the MNC increases when the domestic firm acts as its supplier or buyer since the MNC has obvious benefits in helping its supplier or buyer become more productive and efficient. The channel for spillovers to local suppliers could be (a) transfer of know-how from MNC to the local supplier;

  • (b) stringent quality and time schedule set by the MNC on delivery of products by the local supplier might induce the local supplier to opt for the best technology; and
  • (c) economies of scale benefit for local supplier because of the entry of an MNC and hence increase in demand for its products. Imitation, competition, skills acquisition, and exports are the other channels through which spillovers occur. The extensive empirical literature on spillovers for different types of economies – developing, developed, and transition – finds evidence to be at best mixed (Gorg and Greenaway 2004). Econometric estimations could have certain limitations. For example, these estimations may not be able to pick
  • vol xliv No 46

    (Flaherty 1984). Very few papers have addressed such questions through the case study or survey approach. Broadly speaking, case study literature has focused on the effect of foreign direct investment (FDI) on development, and technology transfer.2 There have been a few case studies for example, Mansfield and Romeo (1980), Gershenberg (1987), and Rhee and Belot (1990) which look at spillovers due to MNCs but other than Kathuria (2000), we are unaware of any paper which has addressed the question through an industrial survey using a questionnaire. In this study, we fill that lacuna in the literature by searching for spillovers to domestic firms because of the presence of foreign firms through an industrial survey. The structure of the paper is as follows: In Section 1, we discuss the framework and literature survey. Section 2 concentrates on the research methodology followed in the study. Section 3 lists the key findings. We discuss our findings in Section 4, and conclude in Section 5.

    1 Framework and Literature Survey

    Nelson and Winter (1982) see the firm as a complex hierarchically structured social organism. It involves interaction between people and exists within changing environmental conditions. A similar hierarchical structure does not mean that firms will respond similarly to a particular environment or that firms with different hierarchical structures might respond differently to the same environment. The way firms respond to their environment will affect their level of success; in other words, a firm’s internal learning and accumulation of skills plays an important role in its success. Firms related vertically need to coordinate extensively with each other. Precise planning of the production schedule requires information on present and possible future prices, technology and quantities. According to Lall (1980), imperfections exist in most non-primary products in the manufacturing industry where technology is not standardised and not well diffused. These imperfections compel buyers and sellers to look out for various other means of achieving coordination. Firms have three ways to achieve the desired coordination. They can themselves produce the product (vertical integration); they can opt for extra-market linkages which overcome most of the shortcomings arising due to the imperfections; and finally, the government can intervene to replace the market.

    There are three distinct stages of linkage creation: (a) Decisions on sourcing of inputs, i e, imports or local procurement;

  • (b) make/buy decision by the firm; and
  • (c) the nature of direct relationship with the supplier. The final stage or decision is based on the technical problems involved, uncertainty about delivery, coordination of future capacities, and agreement on pricing or sharing of revenues. Local firms after establishing a backward or forward linkage with an MNC can use the various
  • channels of spillover discussed earlier to learn something from their foreign buyer or supplier. Case study literature, in particular, has concentrated more on MNCs’ backward linkages rather than on forward linkages.

    Lall (1980) has identified 10 main categories of backward linkages based on a field study of two truck manufacturers in India. MNCs can help suppliers in (a) establishment, i e, direct assistance to prospective suppliers in launching production, whether to enhance access to better, cheaper components or as alternative sources. (b) Location, i e, assistance in setting up facilities near the buyer. (c) Informational, i e, placing firm orders for specified periods to facilitate the supplier’s current production, and planning and also communicating long-term plans to help the supplier’s investment planning. (d) Technical, i e, provision of technical assistance or exchange of technical information to ensure matching of needs. (e) Financial, i e, grants and concessional loans to ensure that suppliers are able to meet their current and future commitments.

    (f) Raw material procurement, i e, assistance to buy materials or direct provision of materials, to overcome uncertainties about their quality and availability. (g) Managerial, i e, training and other help with management and organisation. (h) Pricing, i e, setting up a negotiation procedure to determine prices. (i) Other distributional, i e, allocation of inventory and product development costs, sharing of replacement markets, etc, to distribute revenues by means other than prices. (j) Diversification, i e, assisting suppliers to find other customers at home or abroad to increase their financial stability. MNCs are expected to create these kinds of linkages in less developed countries (LDCs) when they set up a production base. Similarly, various kinds of forward linkages of MNCs with local firms can also be expected. Primary among these would be the activities or linkages of the marketeducating MNC. Market-educating MNCs are generally found in industries that produce capital equipments for production activities in final product industries. These MNCs would have the maximum

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    Neoliberal Subjectivity, Enterprise Culture and New Workplaces: Organised Retail and Shopping Malls in India – Nandini Gooptu

    The Effects of Employment Protection Legislation on Indian Manufacturing – Aditya Bhattacharjea

    Power, Inequality and Corporate Social Responsibility: The Politics of Ethical Compliance in the South Indian Garment Industry – Geert De Neve

    Revisiting Labour and Gender Issues in Export Processing Zones: Cases of South Korea, Bangladesh and India – Mayumi Murayama, Nobuko Yokota

    Defragmenting ‘Global Disintegration of Value Creation’ and Labour Relations – G Vijay

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    november 14, 2009 vol xliv No 46

    NOTES

    benefit from keeping buyers informed about the latest technology available in its product market. After-sales service can be another area where MNCs can help their customers achieve maximum efficiency in using MNC products. These kinds of backward and forward linkages would lead to close interactions between MNCs and local firms leading to additional spillover channels for local firms.

    Lim and Fong (1982) in their case study of the backward linkages generated by three MNCs in Singapore have found that an open economy with minimum host government intervention in the production decisions of firms combined with a technologically dynamic, externally oriented industry can lead to creation of vertical linkages by MNCs. The study finds that over time MNCs prefer increasingly to buy local inputs as they upgrade into more complex technologies. This happens through two stages, the first stage involves international sourcing within a divisible production process, and gives rise to the second stage where there is international sourcing and input production in the developing country. Initially, this might take the form of vertical integration which over time disintegrates as more inputs and processes are subcontracted to suppliers outside the firm.

    Mansfield and Romeo (1980) obtained information concerning the age of technology transferred by US firms in a sample of 65 cases. Their findings confirm that firms transfer their newest technology overseas through subsidiaries rather than through licensing or joint ventures and that the latter channels become more important as the technology gets older. Regarding the leakage of technology to and competitive response by non-US firms, US firms felt that the kind of technology transfer – through subsidiaries, licensing or joint ventures – had little or no effect on how fast the technology leaked out. The study also indicates that the transfer of process technology allows faster leakage and diffusion than does the transfer of a product technology. Reverse engineering was found to be the most frequent channel of technology leak followed by patents and personnel.

    Gershenberg (1987) notes that the most serious manpower constraint in LDCs is

    Economic & Political Weekly

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    november 14, 2009

    the general scarcity of entrepreneurial and managerial ability. MNCs can contribute by training and retaining managers or by training managers who move on to other firms. It is this later or “spread” effect which is the most important contribution of MNCs to the development of an indigenous cadre of managers. The Gershenberg case study of 72 top and middle-level managers employed in 41 manufacturing firms found that a much smaller proportion of all managers trained in MNCs move to non-MNCs than is true of managers employed by other kinds of firms. At least in Kenya, publicly owned firms did better than MNCs in training managers and disseminating that training. In the 11 success stories reported in their paper, Rhee and Belot (1990) note the important role played by transnational corporations (TNC). Their paper on export catalysts for firms in low-income countries also finds various other modes of achieving collaboration between foreign and domestic catalysts. These include technical or marketing agreements and subcontracting arrangements in addition to the conventional FDI from TNCs. Rhee and Belot find that in many cases the initiative for collaboration came from foreign firms. These catalysts also had a powerful diffusion and learning effect on many other companies and entrepreneurs in the given industry and in other industries.

    Efficient diffusion of know-how on critical factors – technical, marketing, and manage ment – needed for entering the world market was not the primary aim of many catalysts since they themselves embodied such knowledge. In some cases, foreign catalysts were interested in expanding and taking advantage of production possibilities not feasible at home, i e, they had the assets but diminishing domestic opportunities to exploit those assets competitively. In sum, foreign and domestic catalysts were able to take the initiative in capitalising on potential new interdependencies stemming from changing comparative advantages.

    In his framework for the determinants of technical change Kathuria (2000) identifies four main agents in the firm’s environment. These are users, suppliers, competitors, and the state. Competitiveness is a consequence of the firm’s technological capabilities and

    vol xliv No 46

    these in turn are shaped by its interactions with its users, and suppliers, by competition from rivals and finally by pressure from state. The various forms of interactions between firms and their environment are pressure from competitors; pressure from users for better quality and low priced products; and non-market mediated flows of information (or “interactions”, as we define in our study) with suppliers, buyers and competitors. These interactions are the sources which help firms improve their performance and induce technical change.

    Kathuria’s study included a primary survey in the Indian CNC Lathe segment and found that externalities like workers’ suggestions, participation in exhibitions and fairs, etc, were the most important factor inducing technical change. Kathuria’s findings suggest that technical change is a collective process involving purchasers, suppliers, competitors and actual producers. The survey results support the Schumpeterian notion of continuous interaction between a firm and its environment.

    We try to find similar interactions or non-market mediated flows of information (Kathuria 2000) between domestic firms and their foreign suppliers, between domestic firms and their foreign buyers, and between domestic firms and their foreign competitors in our study. Buyers pressure local firms to meet high standards in terms of product quality, features and services (Rosenberg 1976). Foreign buyers might pressure their local suppliers equally or more, resulting in improvements for the domestic firms. Watanabe (1983) found that users were an active source of incremental technical change. Thus, userproducer interaction has a strong bearing on product improvement, technological change, and international competitiveness. Similarly, the literature has found that the presence of competitive suppliers implies efficient, rapid, and sometimes preferential access to cost-effective inputs (Porter 1990; Fransman 1986). As these suppliers innovate and upgrade their products, ongoing coordination helps user firms best use the supplier’s technology. User firms also gain access to information, new ideas and insights, and supplier innovations. This behaviour can be expected to increase with foreign suppliers as local firms can benefit because of externalities from the supplier. Competition is acknow ledged to be an important driver of technical change and productivity growth in the industry through the market mechanism and “non-market mediated” interactions.

    2 Research Methodology

    For the purpose of this survey, a qualitative analysis was preferred to quantitative analysis since by definition it is difficult to measure the spillover phenomenon.3 What is generally measured in econometric studies is improvement or fall in a selected variable over a period of time, the reason for which, according to economic theory, is expected to be the spillover phenomenon. Qualitative research which emphasises relationships (Reid 1993) rather than numbers thus seems to be appropriate for our survey. The questionnaire was structured in three parts with the first two parts addressing the effects of the types of linkage and the third part, the effect of competing with a foreign firm.

    The first part of the questionnaire addressed the spillover effects of foreign firms as suppliers. Questions on the effects of having foreign firm buyers were administered in part two. The third part of the questionnaire contained questions on the effects of competing with foreign firms. The questionnaire not only tried to capture the spillover phenomenon but also tried to find if there is movement of employees between local firms and foreign suppliers, buyers, and competitors. Most of the questions were qualitative in nature. The questionnaire was sent to two sets of firms:

    (a) Member firms of the Bombay Chamber of Commerce and Industry (BCCI) were selected randomly, contacted by phone and sent an e-mail questionnaire if they consented to participate. (b) Firms where officials could be reached through a network of friends and colleagues were contacted and the questionnaire was sent to them by e-mail. A request for a personal interview with the official who filled up the questionnaire was also sent to firms. In all, questionnaires were sent to around 200 odd firms of which only 14 responded with appointments for the interview. An initial pilot study was also conducted in the three firms that were the first to agree to participate. The survey period was from March 2006 to July 2006. Domestic firms with plants in Amritsar, Aurangabad, Bharuch, Chennai, Coimbatore, Dadra, Hyderabad, Jalna, Pondicherry, Pune, Thane, Tiruppur, and Waluj participated in the survey. For some firms interviews were conducted at their head office and for some at their plants. Basic details of each firm were confirmed before the interview moved on to the questionnaire. Among those who agreed to the interview, officials for four firms were from top management, for five firms, the officials were from senior management and for the remaining five, officials were from middle management.

    It was understood from the very start of the survey that not all firms would have all three forms of interaction – forward linkages (MNC selling to the LF), backward linkages (MNC buying from the LF) and competition with MNCs. Initially, various kinds of criteria to group firms into possible forward or backward linkage or competition categories were tried but were discarded for want of response and appropriate contact forums in the firms.

    The pilot study also helped clarify the idea of a foreign firm. A firm is defined as foreign firm if foreign equity in that firm is greater than 10%. Initially, before starting the survey, we had thought of a foreign firm as one which had an office or had an affiliate or subsidiary had an office in India through which it conducted its business in the country. The pilot study suggested that many of the foreign firms which supplied to or bought from domestic firms in the Indian manufacturing industry did not necessarily have an office in India. Also given the responses from the first few firms and the lack of forums to contact most of the firms, finding linkages of domestic firms with foreign firms (as defined at the start of the survey) was practically very difficult. Hence firms that satisfied the foreign firm definition but did not have a base in India other than through export (import) of their products to (from) India were also added to the definition of foreign firms for the purpose of the survey.

    3 Key Findings

    Table 1 shows details of firms that participated in the survey. We find that the average age of the firms is around 43 years. The average turnover of the firms in fiscal

    Table 1: Details of Participating Firms

    Firm Age Turnover Technology
    (FY06 in Rs crore)
    1 63 1,800 High
    2 40 200 High
    3 94 14 Medium
    4 19 72 High
    5 44 73 High
    6 41 5 Medium
    7 74 200 High
    8 41 250 High
    9 19 0.75 Medium
    10 49 80 High
    11 14 6 Medium
    12 16 0.6 Medium
    13 46 23 High
    14 46 50 High

    “Technology” refers to production technology level, and is based on the firm’s own self-assessment. Source: Author’s survey.

    year 2006 was around Rs 198 crore. Nine firms assessed their technology level as high, i e, these firms felt that they were almost at the technological frontier in their product markets. All the high-technology firms except one sold their products to foreign firms. The exception firm did not sell to foreign firms because of an

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    november 14, 2009 vol xliv No 46

    NOTES

    agreement with another Indian firm. The remaining five firms which had a medium technology level were not very far from the technological frontier in their product markets but felt that there was scope for improvement on the technological front. We also find that average turnover of high technology firms is higher than that of medium turnover firms.

    Table 2 presents the key findings of the study, i e, the views of firms on how “interactions” with foreign firms affect their performance. From this table we also find that two high-level technology firms and three medium-level technology firms do not have foreign suppliers. All the firms except one have foreign buyers. As stated earlier, this firm does not supply to foreign firms because of an agreement with another Indian firm. We also find that two hightechnology firms and one medium-level

    Table 2: Key Findings of the Survey

    technology firm do not have foreign competitors in their product market.

    4 Discussion

    The 14 cases from varying industries give us a fair idea of the various channels used by domestic firms to go up the productivity ladder. As mentioned before, a backward linkage is created when the MNC buys from the LF, and when the MNC sells to the LF a forward linkage is created. We find that for a domestic firm to move up the productivity ladder, with respect to spillovers, forward linkages are equally important (at least in the Indian context) as backward linkages. Visiting the supplier’s plants to get a better idea of the product is found to be an important channel for spillovers to occur through forward linkages. This is understandable, as the responses suggest because the firms have chosen foreign suppliers for their superior technology. As one of the respondents nicely put it, visits to such plants would give them ideas on how to improve their manufacturing set-up. These visits, in addition to frequent interactions with their foreign suppliers, help give a better understanding of the optimum usage of the suppliers’ products and ultimately help the firm improve its value engineering.4 We also found no instance of any employee leaving a firm and joining a supplier, or vice versa. Export spillovers through a forward linkage were experienced by one firm. In other words, foreign suppliers gave information on possible future export orders. This implies that from the above evidence we can expect productivity and export spillovers to occur because of forward linkages.

    The evidence has also reconfirmed the importance of backward linkages with foreign buyers for spillovers to domestic firms. We found that the technical requirements of foreign buyers are more demanding and different from those of Indian buyers. Due to this Indian firms get a chance to learn or revise their processes, which results in productivity improvements. Stringent production and quality norms and penalties on delivery delay force domestic firms to adopt the best available technology to improve their productivity.5 According to respondents, if foreign buyers were satisfied with their Indian suppliers, they gave general and in some cases, technical suggestions that helped Indian firms make improvements. Here again, we found that employees from Indian firms did not move to foreign buyer firms, or vise versa; and that foreign buyers have, in a few cases, helped Indian firms get more export orders. We also found that both in forward linkages and backward linkages any lesson learnt by the domestic firm was implemented almost immediately and in some cases within the year.

    Firm NIC Code Foreign Suppliers (Forward Linkage) Foreign Buyers (Backward Linkage) Foreign Competitors
    1 2919 Benefited from better technology and Benefited from demand for better Movement of labour to and from foreign
    visit to supplier’s plant. technology and foreign buyers’ references competitors.
    have added new customers.
    2 2519 No foreign supplier Stringent norms help improvement Movement of labour to and from, and have learnt
    of product. from foreign competitors’ product.
    3 2921 No foreign supplier Stringent norms help improvement Foreign competitors have reduced market share;
    of product. however their entry has reduced input costs for a
    few inputs from common suppliers. Learnt from
    competitors’ product.
    4 2925 Benefited from better technology, visit to Benefited due to bigger market due to No foreign competitor
    supplier’s plant, and frequent interactions. the presence of foreign buyers.
    5 2915 Benefited from better technology, visit to Learnt from completely different Learnt from foreign competitors by visits to
    supplier’s plant, and useful suggestions. requirements of foreign buyers. competitors, suppliers and customers.
    6 2919 Benefited from better technology, visit to Stringent norms help improvement and Learnt from foreign competitors, and a few
    supplier’s plant, and interactions. their references have added new customers. employees have moved to their foreign competitors.
    7 2720 Benefited from better technology, visit to International standards help to learn and Movement of employees to and from, and
    supplier’s plant, and interactions. improve the process. emphasis on exports after entry of foreign competitor.
    8 2913 Foreign suppliers have given information Benefited due to better quality demanded Foreign competitors instrumental in the firm
    on export orders. Benefited from better and bigger market due to the presence of entering the export market. Movement of
    technology, visit to supplier’s plant, foreign buyers. Foreign buyers have given employees and common customers have helped
    and interactions. information on possible export orders. learn about foreign competitors.
    9 2922 No foreign supplier Requirements of foreign firms have helped Foreign competitors give insight on export
    to learn and increase product range. Useful markets. Firm reverse engineers foreign
    information given on export orders. competitor’s product.
    10 1810 Foreign suppliers offer better quality Stringent norms and strict delivery schedules No foreign competitor
    products at lower costs. Interactions and have helped improve productivity and
    visit to plants result in useful suggestions performance. General inputs from foreign
    or ideas. buyers have helped.
    11 2520 No foreign supplier Benefited from stringent norms and higher No foreign competitor
    prices. Suggestions have been useful and
    benefited from a bigger market because
    of entry of foreign buyers.
    12 2893 Benefited from better technology Few products developed after suggestions Not affected by foreign competitors as nature of
    or enquiries from foreign buyers. customers are different. Learnt about foreign
    competitors from exhibitions.
    13 2926 No foreign supplier No foreign buyer Foreign competitors have reduced market share.
    14 3430 Better quality and service of foreign suppliers’ Benefited from stringent requirements and Learnt from foreign competitors.
    increases productivity. Interactions with better prices given by foreign buyers.
    foreign suppliers have been useful.
    Source: author’s survey.
    Economic & Political Weekly november 14, 2009 vol xliv No 46 73
    EPW

    Foreign competition, if present, is another reason for spillovers to occur. Almost all firms unless they are at the technological frontier admit that they learn from their foreign competitors through various forms of market interactions like old and new customers, exhibitions, common suppliers, etc; comparison of the competitor’s product performance with their own; and reverse engineering, which helped them improve their productivity. Employee mobility between comfirms reported that they imported better technological products. So this may hint at the fact that many foreign firms at the technological frontier supply to manufacturing firms in India without a production base in the country. If these firms had a production base, spillovers through forward and backward linkages might have been more prominent. This may also suggest that foreign firms which have production bases in India are here for the Indian market and not because they regard India as an optimal production destination from where they can supply the world. Further research would be needed to determine if this inference is indeed true, and if so, why? Also to what extent is it true for industries beyond manufacturing?

    5 Conclusions

    In this study, we searched through an industrial survey, for spillovers that accrue to domestic firms due to the presence of foreign firms. We found that domestic firms which had forward linkages (with the MNC selling to the LF) experienced positive spillover effects. Visits to the supplier’s plants were found to be an important channel for this spillover to occur. Through backward linkages (with the MNC buying from the LF), we found that domestic firms experienced positive spillovers. Positive spillovers were also experienced by domestic firms because of foreign competitors.

    Notes

    Industry”, American Economic Review (papers and proceedings), 74, 64-72.

    Fransman, M (1986): “International Competitiveness, Technical Change and the State: The Machine Tool Industry in Taiwan and Japan”, World Development, 14(2), 1375-96.

    Gershenberg, I (1987): “The Training and Spread of Managerial Know-how: A Comparative Analysis of Multinational and Other Firms in Kenya”, World Development, 15(7), 931-39.

    Gorg and Greenaway (2004): “Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?”, World Bank Research Observer, Oxford University Press, Vol 19(2), pp 171-97.

    Javorcik, B S (2004): “Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages”, American Economic Review, 94(3), 605-627.

    Kathuria, V K (2000): “Role of Externalities in Inducing Technical Change – An Application of Framework to the Indian CNC Lathe Segment” in Technology Transfer, Productivity Spillovers and Technical Change – A Study of Indian Manufacturing Industry (Mumbai: Dissertation, Indira Gandhi Institute of Development Research).

    Lim, Y C L and P E Fong (1982): “Vertical Linkages and Multinational Enterprises in Developing Countries”, World Development, 10(7), 585-95.

    Lall, S (1980): “Vertical Inter-Firm Linkages in LDCs: An Empirical Study”, Oxford Bulletin of Economics and Statistics, 42(3), 203-26.

    Mansfield, E and A Romeo (1980): “Technology Transfer to Overseas Subsidiaries by US-based Firms”, Quarterly Journal of Economics, 95(4), 737-50.

    Moran, T H (2005): “How Does FDI Affect Host Country Development? Using Industry Case Studies to Make Reliable Generalisations” in T H Moran, E M Graham and M Blomstrom (ed.), Does Foreign Direct Investment Promote Development? (Washington: Institute for International Economics).

    Nelson and Winter (1982): “An Evolutionary Theory of Economic Change” (Cambridge: Harvard University Press).

    Pack, H (2006): “Econometric versus Case Study Approaches to Technology Transfer’” in B Hoekman and B J Smarzynska (ed.), Global Integration and Technology Transfer (New York and Washington: Palgrave Macmillan and World Bank).

    Porter, M E 1990): The Competitive Advantage of Nations (New York: Macmillan).

    Reid, G C (1993): Small Business Enterprise: An Economic Analysis (London: Routledge).

    Rhee, Y W and T Belot (1990): “Export Catalysts in Low-Income Countries: A Review of Eleven Suc

    petitors (both domestic and foreign) also occurs and some firms said that they find ex-employees of foreign competitors to be much better trained than somebody at the same level from a domestic competitor. We also found that in few markets foreign competitors have tried to increase their market share by bringing their costs down either by assembling locally made components and/or having a flexible price policy.6 Only few firms admitted the influence of foreign competitors in entering the export market. Here again, we find that lessons learnt by firms are implemented almost immediately and in some cases within a year.

    A point noted from the survey, what was not related to our question but needs to be mentioned, is that most domestic

    1 Interaction between a buyer and supplier with no recent business deals but a long-term relationship or visits to supplier plants could be some examples.

    2 See Moran (2005) for an excellent survey of the effects of foreign direct investment on development and Pack (2006) for survey on case studies on technology transfer.

    3 Spillovers occur where the production functions of producers are affected not only by their market activities, but also by the activities of other economic agents (producers or consumers) (Stewart and Ghani 1991).

    4 These interactions are more useful when the technology mismatch is reduced, according to one of the respondents.

    5 This effect of norms and penalties is cited in literature, for example Javorcik (2004). 6 These are also possible reasons for negative spillover effects.

    References

    Castellani, D and A Zanfei (2006): Multinational Firms, Innovation and Productivity (Cheltenham: Edward Elgar), p 1.

    Flaherty, M T (1984): “Field Research on the Link between Technological Innovation and Growth: Evidence from the International Semiconductor

    november 14, 2009

    cess Stories”, World Bank Discussion Papers, WDP-72.

    Rosenberg, N (1976): Perspective on Technology (Cambridge: Cambridge University Press).

    Stewart and Ghani (1991): “How Significant Are Externalities for Development?” , World Development, 19(6), 569-94.

    Watanabe, S (1983): “Market Structure, Industrial Organisation and Technological Development: The Case of Japanese Electronics Based NC Machine Tool Industry”, Working paper 2-22 (Geneva: International Labour Organisation).

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