TECHNOLOGICAL ACQUISITION AND INVESTMENT - LESSONS FROM RECENT INDIANEXPERIENCE

Most of the existing studies on investment functions ignore the role o f technology acquisition in influencing investment decisions. This stu dy argues that technology acquisition will decisively influence invest ment behavior modernization, and expansion plans of firms. However, ca pability of the firms to acquire technology differs considerably. Foll owing the Schumpeterian paradigm, we maintain that the entrepreneur's decision to invest and expand would depend on the technological opport unities available. The main role of the entrepreneur in the Schumpeter ian framework is to exploit an invention or new technology in introduc ing new processes and products. The policy regime in India prior to 19 85 did not permit the firms to take advantage of technological opportu nities created abroad in introducing new technologies and expanding th eir capital base. The reforms introduced since 1985, for the first lim e, permitted the Indian firms to expand their product range, introduce new technologies, and increase their capacities without obtaining pri or official sanction. This study, therefore, examines the role of tech nology acquisition in influencing investment decisions of private corp orate films in the aftermath of Indian economic reforms introduced in 1985. Using pooled cross-section data for 1987-88 to 1989-90 on a samp le of 325 large corporate firms from seven industries, the present stu dy examines the interfirm differences in investment behavior. The focu s is on the impact of the first phase of economic reforms introduced i n India post-1985. The model specified in the study postulates that ac quisition of new technology made possible by economic reforms brings d own costs and boosts demand. This increases the profit rate for firms using new technology. Technology acquisition per se takes place throug h technology imports via licensing or arms-length purchase of technolo gy through the market, intrafirm transfer of technology by way of fore ign direct investments, and direct import of capital goods embodying n ew technology. The process is facilitated by R&D expenditures. Empiric al tests of the model carried out for each industry separately indicat e that interfirm differences in the investment rate at the firm level are due to a number of factors. Opportunities to import machinery and license technology through arms-length purchase of technology influenc e the investment rate positively as these expenditures promote acquisi tion of technology. In other words, a government policy aimed at disco uraging technology imports would also deter the growth of firms. Gover nment policy before 1985 did hinder technology imports. This was partl y to protect indigenous technology and partly to conserve foreign exch ange. The results of the study further show that in-house R&D expendit ures promote capacity expansion. This is despite the fact that most sa mple firms had small R&D budgets. Firms with R&D units are better plac ed to locate new technology and adapt it to suit Indian market conditi ons. This facilitates exploitation of technological opoortunity leadin g to expansion of capital stock. However, the ability of a firm to exp loit technological opportunities depended, to a considerable extent, o n the age of its plants and machinery. This is because firms with olde r machinery and plants find the switch to new technology more difficul t as most of their equipment and machinery are not suitable for modern ization. The results of the study show that firms with machinery of re cent vintage modernize and expand their capital base, using new techno logy, since it is easier for them to make the change. These empirical results have several policy implications for decision-makers in both t he public and private sectors. The policymakers can draw inferences ab out the positive impact of the economic reforms on the capacity expans ion and growth of firms. This, perhaps, provides a justification for t aking the reform process to its logical end. Because economic reforms facilitate technology acquisition and capacity expansion, decision-mak ers ought to initiate the reform process in other spheres where it is yet to commence. Furthermore, modernization of plant and machinery and technology acquisition are a continuous process. The cost of moderniz ing a plant with dated machinery will be very high as older, outdated machinery is not compatible with the current vintage. An upgrade, ther efore, is difficult if not impossible. Interruption of a technological upgrade due to changes in government policy ranging from total ban on technology imports to liberal import would enhance the cost of techno logy acquisition. The empirical results also indicate that even modest R&D activities facilitate the identification, location, and importati on of relevant technology. Thus, firms with in-house R&D units grew fa ster. In countries like India, vigorous encouragement of R&D ought to be on the policy agenda of both corporate and government policy framer s. Though our sample deals with Indian firms, it has relevance for oth er countries, because in most countries higher growth rates are being registered in industries that have been experiencing rapid technologic al development with better technological opportunities. Further, in a given country, firms that went in for acquisition of new technology in vested more. (C) 1998 Elsevier Science Inc.