Technology transfer by foreign firms and the utilization of competencies within Indian industry

Abstract

This article evaluates whether the changing presence of foreign firms in India has had an impact on the performance of India’s industrial sector by impacting on the utilization of intangible capabilities within firms. Foreign firms bring in technological skills and capabilities and these are transferred by a spillover process to all of Indian industry. The results show a strong relationship between the growing presence of foreign firms in India and measures capturing the utilization of varieties of competencies in Indian industry. Thus, the notion that foreign firms’ capabilities can spillover to other sectors of industry finds support in the data.

Appendix

1.1 Details of the annual survey of industries

The history of industrial statistics in India unfolds as follows. Though the first Factories Act was enacted in India in 1881 and revised in 1891, 1911, 1922 and 1934, the importance of collecting comprehensive industrial statistics was not realized until 1942. The Industrial Statistics Act 1942 was passed in that year and it empowered the Government of India to collect various industrial statistics from establishments registered under the then Indian Factories Act 1934. The Directorate of Industrial Statistics was set up in 1945 to co-ordinate and supervise the collection of statistics through industrial census operations and to compile and publish their results. An annual census of 29 industry groups of these 63 groups was conducted from 1946 to 1956 under the provisions of the Industrial Statistics Act of 1942 and the Census of Manufacturing Industries (CMI) Rules of 1945 framed there under.

Based on the recommendations of the National Income Committee, a Sample Survey of Manufacturing Industries (SSMI) was started in 1950 covering all the 63 industry groups on a sample basis. Subsequent to the passing of Collection of Statistics Act 1953, which replaced the Industrial Statistics Act of 1942 in 1956, the CMI continued on voluntary basis for the years 1957 and 1958. The SSMI also continued up to 1958. All the reports from the manufacturing census from 1946 to 1958 were published. Although the CMI covered factories employing 20 or more workers using power in any manufacturing process, there has been year-to-year variation in the geographic area covered and the response rate. The CMI published information on capital (fixed capital, working capital and depreciation), employment (workers and persons other than workers), man-hours, payment to each category of employees along with the value of benefits and privileges, inputs (fuels, materials and total), the value of output of products and by-products and net value added.

Although the Collection of Statistics Act of 1953 came into force on November 10th, 1956, the Collection of Statistics (Central) Rules framed under the same Act came to be notified in January 1960, providing for a comprehensive Annual Survey of Industries (ASI) in India as from 1959. Thus the ASI replaced both the CMI and SSMI as from that year. Since 1959, the survey is being conducted annually under the statutory provisions of the 1953 Act and 1959 Rules, except in Jammu and Kashmir where it is conducted under the state Collection of Statistics Act 1961 and the rules framed there under in 1964. The ASI extends to the entire country except the states of Arunachal Pradesh, Mizoram, Sikkim and the union territory of Lakshadweep.

The ASI data relate to the organized sector of manufacturing industry and have seen prior use. The factory sector summary is used as the data-source for this study. From the data set, labor and capital inputs as well as output measures can be identified. The advantage of using this data is that information for the entire Indian industry is available. This includes information on firms owned by the governments of the various states in the Indian Union which are also substantial players in the industrial arena, and whose performance has been empirically analyzed in only a limited way. In particular, the enterprises owned by the state governments run substantial operations in the field of transport services and power generation, though they also undertake an extraordinarily large variety of other activities. Joint sector enterprises have a particular presence in the field of hydrocarbons, which is a sector of economic importance to the country and where government presence in ownership was sought to be attained for the purposes of ensuring economic security.

The characteristic of this particular data-base is that data are aggregate because of the reporting policies of the Department of Statistics of the Government of India. However, the aggregation issue is unavoidable since information on a key variable, on firm-level employment, is just not available for private sector firms from any source whatsoever. In fact, the availability of employment data is one of the unique strengths of the ASI system. Hence, any comparative study of efficiency and performance has to use a data-base such as this. Aggregate data also helps avoid any sample-selection biases, since data on the entire industrial population is considered for comparative performance and efficiency assessment purposes.

The ASI coverage and the time-series data yield rich information on the entire population of enterprises making up the organized industrial sector of India. The data generated by the ASI constitute the most crucial component of industrial statistics in India. According to the Department of Statistics, the industrial sector is broadly classified into organized and unorganized sectors. These institutional categories are found in all the three major groups of industries, namely, mining and quarrying, manufacturing, and electricity generation, transmission and distribution. The ASI covers organized segments of the last two groups and excludes mining and quarrying from its purview.

Services and activities such as cold storage, water supply and repair of motor vehicles and of other durable goods are also covered under the survey, as they are incidental to manufacturing process. Some other servicing industries like motion picture production, personal services like laundry services and job dyeing are also covered under the survey, though their data are not tabulated as these industries do not fall under the scope of industrial sector as defined by the United Nations. Defense establishments, oil storage and distribution depots, and services such as restaurants, hotels, cafes, computer service centers and technical training institutes are also excluded from the purview of the survey.

The ASI does not cover the unorganized or unregistered manufacturing sector of Indian industry. The ASI, however, covers all factories registered under sections 2 m (i) and 2 m (ii) of the Factories Act 1948, which are factories employing 10 or more workers with the aid of power and those employing 20 or more workers without the aid of power, respectively, on any day of the preceding 12 months. In 1973–1974 a new and expanded system of National Industrial Classification was introduced by the Central Statistical Organization (CSO), subsequent to the publication of the International Standard Industrial Classification in 1968 by the United Nations Statistical Office (UNSO). It resulted in a major overhauling of the classification system as from 1973–1974. The data since that time period adhere to this industrial classification scheme. All concepts and definitions have been uniformly applied for over twenty five years.

The ASI frame of reference is based on the list of registered factories maintained by the Chief Inspector of Factories (CIF) in each state, and those maintained by licensing authorities for indigenous tobacco and cigar establishments and electricity undertakings. The ASI frame gets revised from time to time by deletion of de-registered factories and inclusion of newly registered ones. Initially, the ASI was being revised once every two years until 1981–1982. Between 1982–1983 and 1988–1989, the frame was revised once in four years. From 1989–1990 onwards, the frame is revised once in three years. But new registrations are added in the existing frame every year, and the regional offices of the Field Operations Directorate (FOD) of the CSO, which keep close liaison with the offices of CIF in the states, update the frame every year.