Technology Development Programmes and Behaviour of Firms

Proposal for M. Phil Dissertation

Under the guidance of

Prof. K. Narayanan

Anil Philip,

M. Phil Final Year

 Technology Development Programmes and Behaviour of Firms
The role of technology in the development and growth of firms and thus the economy is
quintessential. Recent studies analyzing the differences between nations in economic growth
and development emphasize the crucial role of technology and innovation in promoting
growth (Grossman and Helpman, 1991; Helpman, 1998). As shown by the neoclassical
growth models, high growth of per-capita income, namely income per person cannot be
sustained without technical change (Romer, 1994). There is now a consensus among
economists working in the area of economic growth that high investment rates alone in the
absence of technological change will not sustain high growth rates in income, because returns
to capital will only diminish in the long run. In other words, increase in one of the factors of
production, capital in this case without a corresponding increase in other factors will merely
result in a decrease in the return to capital. Hence only technological change can sustain high
growth. Some studies also show that FDI contributes to growth (Blomstrom, Lipsey and
Zejan, 1996). These studies argue that FDI brings new technologies and knowledge and
knowledge transfer contributes to growth. Helpman and Trajtenberg (1998) consider general
purpose technologies1 as ‘engines of growth’

Schumpeter (1942) was one of the very first economists to make a distinction between
economic growth and development. He argued that growth in the sense of producing more of
the same range of commodities is not possible as markets are bound to become saturated and
growth rates of products have never been exponential. Development, on the other hand,
consisted of production of new goods or new methods of producing the existing goods,
discovery of new sources of material and markets. Research and development, innovation and
technological advance, therefore played a crucial role and Schumpeter gave technology
development the vital role in economic development (Denison, 1985).

Several studies have highlighted the key role played by technology accumulation and
assimilation in the growth and performance of firms in developing countries (Felipe, 1999).
The fact that technology accumulation by developing country firms who do not innovate at
the global technology frontier is largely incremental and adaptive has been emphasized (Bell
& Pavitt, 1993). This recent literature has implications for analysing the economic
performance of firms in developing countries. Recent theoretical models, in particular those
in the evolutionary tradition, have demonstrated that incremental technology accumulation

1
Technologies that are all pervasive, that has potential for continued technological advances and has
complementarities with their user sectors. See Rajan Y.S. and N.S. Siddharthan (2002)
can have a positive impact on firm-level efficiency and productivity. Empirical research on
this issue, however, is limited. While micro-econometric research on industrialized countries
has shown technology accumulation involving formal research and development (R&D) to
promote efficiency at the firm level (Hanusch & Hierl, 1992; Caves & Barton, 1990), these
methodologies have rarely been used to investigate the economic impact of informal
technology accumulation in developing countries. Some qualitative case studies of individual
firms in developing countries have shown technology accumulation to be positively related to
firm performance (Katz, 1987; Dahlman & Fonseca, 1987). Nelson and Pack (1999) showed
that technological effort of firms is the critical element that enabled them to successfully
initiate new industries, absorb new equipment and achieve phenomenal growth rates. Hattori
(1999) among other studies also highlights the notable role of technology assimilation in
explaining the growth of income in countries like South Korea.
In the case of developed countries like USA, Denison (1985) and Jorgenson (2001) have
credited high growth rates in national income mainly to technological advances. Thus with
regard to the crucial role of innovations and technology in promoting the growth of national
income and the performance of firms, empirical studies done for both the developed and less
developed countries, by and large support the conclusions of the theoretical models.

In the particular case of India, its founding fathers had realized the importance of technology
in promoting development and thus was adopted the Scientific Policy Resolution (1958). It
clearly mentions the role of technology in fostering the development of the economy. The
early Indian experience however in the implementation of Science and Technology policy
have been fragmented and compartmentalized. The number of rules and regulations
multiplied and so did the planning and monitoring institutions (Rajan and Siddharthan, 2002).
However in the later part of the 1960s and 1970s, agricultural Science and Technology
system was able to absorb technologies of high yielding varieties developed abroad and in
house and thus gain self sufficiency in food grains. Similarly in the case of the Indian
pharmaceutical industries, the advancement of technology development is quite obvious with
them mastering processing technologies, high number of patents and of course having made
their presence felt in many parts of the world (Mc Kinsey Report, 2007). However in Small
and Medium Enterprises (SMEs), the level of technology accumulation and development in
India is quite low as compared to other developed and developing countries (Rajan and
Siddharthan, 2002). There is no doubt that SMEs have emerged as an effective means to
promote industrialization by also contributing significantly to the creation of employment,
resource mobilization and income generation. In the sense that in a large firm, economies of
scale are not possible in all forms and scales of industrial production, SMEs comprise an
important scale of production, which the large firms may not be able to operate. The success
of large companies depends, in varying degrees, on the assistance they receive from small
firms.

Rothwell and Dodgson (1994) list advantages and disadvantages of SMEs and large firms as
far as innovation is concerned. They concluded that SMEs advantages are mainly
behavioural, such as entrepreneurial dynamism, internal flexibility and responsiveness to
changing circumstances, while those of the large firms are primarily material, such as
financial and technological resources. However small firms perform various activities with
less expertise than large firms (Freel, 2000). For example small size of the firms limits the
possibilities to capture fully the gains of innovation (Cohen and Klepper, 1994). Also small
firms limited access to finance is a hotly debated barrier to innovation (Freel, 2000; Carsons
et al, 1995).

Technology transfer and development expenses have to be borne ultimately by the private
firms, and the government should therefore develop the capability of that sector. As long as
SMEs are not prepared to undertake such a responsibility to address the needs of the
consumer, a partnership should be formed between the government and the SMEs. This is
where the role of the government stands in a regulatory state like India. By introducing
institutional reforms in the structure and behavior of the system that governs the firm’s
performance, the government can extend its support to develop in house technology and for
technology transfer and thus speed up the entire process of industrialization. How can this
happen? This is possible through a carefully mixed regulatory method of technology
intermediation, soft financial assistance to technology or to import new technology and to
finally commercialize these technologies for mass production. Already, different government
institutes/agencies and other autonomous bodies have started extending support by way of
loans, research information and by forming a wide network of research institutes. One such
example is the role that TIFAC (an autonomous organisation under Department of Science
and Technology) plays in fostering technology development in the Indiain Industry. This is
what this study would like to analyse- whether the firms which have received the benefits of
such an institutional reform have successfully gone on to produce commercially viable
technology. This study would not be able to show the impact of such institutional reforms to
advance technology development on the economic performance of the country but it can help
to show the change in the behavior of the firm with respect to market competitiveness and
thus performance, R&D and thus innovation and its ability to scale up and form networks to
capture an appreciable market share.

1.1 Objectives of the study

The objectives of the study can be elucidated as follows:
1. To analyze the role of technology intermediation by a comprehensive review of
literature.
2. To analyze whether those firms that have received institutional support have
gone on to produce commercially viable technology thereby increasing the
competitiveness of such firms in the Indian context.

1.2 Plan of Action

Technology intermediation should ideally go beyond the steps of technology actions
and technology funding and should extend to create new markets. The focus of this
study lies in analyzing whether such institutional reforms as technology development
reforms has successfully helped in developing commercially viable technology and thus
create newer markets or not? To check for such an instance, data could be arranged
from the Department of Scientific and Industrial Research (DSIR) New Delhi. A cross
section of firms that have received such institutional reforms can be studied and can be
shown whether a positive correlation occurs between technology intermediation and its
ability to create newer markets by successfully producing commercially viable
technology. Alternatively a basic questionnaire can be prepared for a sample of firms
(mostly SMEs) which could bring out the changes in the behaviour of firms. But solely
depending on a questionnaire, can have a negative effect as it could compromise on the
quality of data collected in such manner. Hence the best way to go about such a study in
my opinion would be to have a combination of data set and a basic questionnaire along
with a case study study research so that a preliminary study of the effect of such
programmes can be seen. It would also help in showing whether such institutional
reforms have brought about a behavioral change in firms to innovate and practice in In-
house R&D along with other behavioral changes mentioned earlier.
References

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