We are indebted to participants in a research seminar at the Indian Institute of Management at Ahmedabad, to A.N. Siddarthan, Bibek Debroy, Niranajan Rao, and Michael Gestrin, to Alok Garg and Yona Han for research assistance, to the Fulbright Senior Scholars Program for financial support, and to the Indian Council for Research on International Economic Relations, New Delhi, for facilities support. 
 

KNOWLEDGE TRANSFER TO DEVELOPING COUNTRIES AFTER WTO 
THEORY AND PRACTICE IN INFORMATION TECHNOLOGY IN INDIA 
  
Abstract 

In this study we examine theoretically the effect of the new WTO rules on the transfer of knowledge by multinational corporations to businesses in emerging market economies. We suggest that the amount and type of knowledge transferred depends on decisions of MNCs about the mode of their participation in international business (trading, licensing, direct investment, or strategic alliances). We suggest that the new WTO rules will change some of these decisions. We illustrate our theoretical propositions by using case study data from three foreign invested companies in the information technology sector in India. Our preliminary indications are that improved intellectual property protection will have little effect on knowledge transfer to India, but that new WTO liberalizations of trade and investment rules will increase wholly owned subsidiaries and trade, which will increase knowledge transfer but decrease knowledge absorption. 
 
KNOWLEDGE TRANSFER TO DEVELOPING COUNTRIES AFTER WTO 
THEORY AND PRACTICE IN INFORMATION TECHNOLOGY IN INDIA 

  
Table of Contents 
Abstract 
I. The Issues 
II. The WTO Agreements 
III. Knowledge: What It Is and How to Measure It 
IV. Analytical Model 
V. Research Design and Empirical Methods 
VI. Information Technology in India: Government Policy and Industry Structure 
VII. Business Perspectives from Indian Operations Sources 
Tables and Figures 
Appendices 

KNOWLEDGE TRANSFER TO DEVELOPING COUNTRIES AFTER WTO: 
THEORY AND PRACTICE IN INFORMATION TECHNOLOGY IN INDIA 

I. THE ISSUES 

At the turn of the century, multinational corporations face an unprecedented change in the international business environment. The conclusion of the Uruguay Round that resulted in the creation of the World Trade Organization established a new multilateral framework that extended the liberalization of international trade and investment into new domains. For the first time, rules are in place to cover foreign direct investment as well as foreign trade, trade in services as well as trade in goods, and intellectual property rights (see United Nations 1995 for an explanation of WTO provisions). National governments are making substantial public policy changes to conform to the WTO requirements. 

At the firm level, a significant change in management thinking is taking place: the recognition of knowledge as a major factor determining international business competitiveness. Traditional strengths in product-market positioning are being supplemented with concern to create and utilize knowledge as an enduring, less imitable source of competitive advantage. The ongoing globalization of business and the rise of alliance capitalism place the management of knowledge squarely in the center of business strategy. 

The new WTO rules, not coincidentally, address the management of knowledge, especially the transfer of knowledge in international business transactions. This is self-evident in the regulations that affect intellectual property rights. It is also apparent in the WTO information technology agreement, and indirectly in the liberalization of foreign direct investment as well as in the general principle of transparency. 

The transfer of knowledge, or technology, has always been of particular interest to developing countries. Some of these countries, and the previously industrialized countries of central and eastern Europe and the former Soviet Union, are emerging market economies that offer new trade and investment opportunities for multinational corporations. These formerly partially closed economies are changing from decades of central planing, socialist development, and state ownership of industry to more open market economies, capitalist development, and privatization of industry. They are making dramatic changes in their national policies that affect international business. Accordingly, the scope for change in the transfer of knowledge from multinational corporations to emerging market economies is very large as well as very important. However, exactly what change actually takes place depends on decisions made in the MNCs; they are the economic agents that significantly influence the type, method, and rate of knowledge transfer. 

The role of MNCs in technology transfer and the economic development of less-developed countries has been a contentious issue, especially in the 1950s and 1960s. The debate has been quiescent recently, but is certain to be rejoined precisely because of the centrality of knowledge in both the new WTO framework and the new thinking about business strategy. 

A widespread expectation is that the liberalization of trade and investment policies by governments will increase transfers of knowledge from MNCs to emerging market economies. The reasons are straight-forward. Liberalized trade and investment means more trade and investment and therefore more knowledge transfer, and better protection of intellectual property rights means more willingness on the part of MNCs to transfer knowledge. 

However, a closer look raises doubts. If the new WTO rules cause MNCs to change the mode of their participation in international business, e.g., from direct investment to trade or from joint ventures with local companies to wholly owned subsidiaries, then knowledge transfer might be decreased. If the new public policy framework facilitates strategic alliances among global oligopolists that local companies in emerging market economies cannot join, then knowledge transfer to them might be decreased. 

Alternatively, public policy changes at the macro level might have little effect on micro business decisions made according to direct influences from costs, prices, and market competition. In any event, knowledge transfer may depend mostly on the ability of the host country to receive it rather than the willingness of the MNC to send it. 

The research question to be investigated is: How is the transfer of knowledge by multinational corporations to foreign operations in emerging market economies affected by the new rules on international trade and investment? The new rules include the provisions of the WTO agreements and the accompanying changes in national government policies. In seeking answers to this research question, our immediate purposes are to assess the knowledge outcomes for foreign business operations and for host economies that follow from the WTO initiatives, and to improve understanding of firm-level decision making. 

In the paper that follows, we describe the new trade and investment policies embodied in WTO and in national government policies. We define knowledge and its measurement. We suggest how the decisions of multinational corporations determine knowledge transfer. To do so, we develop a theoretical framework and deduce propositions for empirical investigation. We make use of field research conducted among foreign-related businesses in India to suggest preliminary answers to the research question. 
 
II. THE WTO AGREEMENTS 

The conclusion of the Uruguay Round of multilateral negotiations in Marrakesh created the World Trade Organization in January 1995. The WTO breaks new ground in the liberalization of international business transactions by bringing three new domains into its rule-making: Foreign direct investment, trade in services, and intellectual property rights. The WTO applies three general principles established in previous trade agreements to these new domains, which are most favored nation, national treatment, and transparency. The WTO contains five agreements that contain new rules that are relevant to the substance of knowledge transfer issues. They are trade-related intellectual property rights (TRIPs), general agreement on trade in services (GATS), trade-related investment measures (TRIMs), subsidies and countervailing measures (SCMs), and the information technology agreement (ITA). We explain the main provisions of these agreements below (see Table 1 for a summary and list of sources). 

Trade-Related Intellectual Property Rights (TRIPs) 

TRIPs requires that governments provide national treatment and most favored nation status for intellectual property rights transactions, it sets out specific standards for each of several types of intellectual property, and it requires governments to establish enforcement procedures. The specific standards include patent protection for both products and processes for 20 years, copyright protection for 50 years, trademark and service mark protection for 7 years (renewable), integrated circuit design and industrial design protection for 10 years, and trade secrets protection. In addition, anti-competitive practices in licensing contracts that violate intellectual property rights are subject to legal remedies. All of these specific standards and the enforcement procedures have implementation deadlines. 

General Agreement on Trade in Services (GATS) 

GATS covers both trade and foreign direct investment in services (but not goods) (and is therefore misnamed by the omission of an I after the T). It distinguishes four modes of services supply, including exports and imports, tourism, and expatriates, as well as foreign direct investment in services. Like TRIPs, GATS requires most favored nation status as a general obligation, but it permits many exceptions. For example, regional free trade pacts do not have to treat all nations the same, nor does government procurement itself. Other general obligations include transparency of services trade and investment measures, and prohibition of restrictive business practices. 

The rest of GATS consists of sector-by-sector agreements. These sectoral agreements should provide market access for foreign companies, national treatment, and unrestricted international payments. One of the sectors for which WTO agreement has been reached is telecommunications. The essential provision is that governments agree to provide access to public networks and services to all suppliers of telecommunications except broadcast and cable radio and television companies. However, developing countries may impose conditions. Another one of these sectors is termed basic telecommunications, for which an agreement was reached only in February 1997. Aside from applying to several different services from those covered in the prior telecommunications agreement, this new agreement requires countries to permit foreign ownership of telecommunications facilities and it asks for pro-competitive internal regulatory principles. 

Other sectoral agreements in GATS are country-by-country. A member country offers specific commitments for specific industries. The commitments from a country may apply to only one industry, or they may apply to all industries in the country (the latter are termed horizontal commitments). There need be no commonality among the various countries' commitments. 

Trade-Related Investment Measures (TRIMs) 

Trade-related investment measures are incentives or requirements imposed by governments that affect foreign direct investments, usually via the trade that flows from them. The TRIMs agreement in WTO covers investment in manufactured goods, but not other goods or services. It contains strong provisions with implementation deadlines. TRIMs prohibits local or domestic content requirements in production, it prohibits trade balancing requirements and foreign exchange neutrality requirements, and it prohibits domestic sales requirements tied to export sales. 

Subsidies and Countervailing Measures (SCMs) 

Subsidies are defined as financial contributions provided directly or indirectly by a government which confer benefits to certain enterprises. The WTO agreement prohibits some subsidies (red light subsidies), and limits others (amber light subsidies), but permits still others (green light subsidies). In particular, the WTO agreement bars export subsidies that are contingent on export performance or local content (this is therefore also a TRIMs-like provision), though the least-developed countries are exempted from this rule and may provide such subsidies. The agreement also bars domestic subsidies that are tied to the use of domestic rather than imported goods. Other subsidies are permitted but may be countervailed depending on their size and application. Some subsidies are not only permitted, but may not be combated. 

Perhaps in recognition that these rules taken together contain several possibilities for conflicting interpretations, a "permanent group of experts" is established to make determinations prior to formal dispute settlement. 

Information Technology Agreement 

The information technology agreement, reached in December 1996 (two years after the Uruguay Round was finished), covers trade in information technology products accounting for 80 percent of all world trade in these types of products. The requirement of member countries is to eliminate all tariffs on products contained in the list of the agreement by the year 2000. The two main product categories are telecommunication equipment and computer equipment. 

The Role of National Government Policies 

The WTO is a membership organization whose multilateral agreements are made effective in the public policies of its member countries. Decisions of MNCs about managing knowledge in their foreign business operations depend on the way in which national governments implement WTO agreements, and on national public policies that need not all be responses to WTO. Therefore we need to understand the regulations of a particular country that apply to a particular industry in order to study empirically the transfer of knowledge. 
 
III. KNOWLEDGE: WHAT IT IS AND HOW TO MEASURE IT 

Everyone knows generally what knowledge is, and a definition is scarcely necessary. In this study, knowledge is the outcome of interest that must be measured in some way, so we briefly discuss what it means. The closest synonym for knowledge is information, but that does not capture the full meaning. Information is a neutral or positive term that denotes facts and data. Knowledge implies understanding. It incorporates a portion of wisdom, learning, intelligence, know-how. Knowledge is multidimensional. 

In this study we do not distinguish knowledge from technology. However, some researchers maintain differences in the meaning of these two similar concepts, and so we mention them briefly here. Technology often refers to the physical sciences and implies hardware, although those restrictions are not necessary. We can speak of hard technology and soft technology, the latter including social sciences, and therefore organizational knowledge. To some, technology is concrete and is applied immediately to tasks, whereas knowledge is somewhat more abstract and useful far into the future. We use the term knowledge in this paper to cover all of these meanings. 

Types of Knowledge 

In the management literature, knowledge has been discussed according to several alternative dichotomous types (see, for example, Inkpen 1996, Kogut and Zander 1993). The most useful type for our purpose is to describe knowledge as either explicit or tacit. Explicit knowledge is articulated, codified, and tangible. It is communicated by formal language. Examples of explicit knowledge include data bases, operating manuals, and blueprints. On the other hand, tacit (or implicit) knowledge is unexpressed, and it is only partly conscious while remaining partly intuitive. It is harder to learn and to share with others than explicit knowledge. Examples of tacit knowledge are the some of the manual skills of craftsmen and the interpersonal skills of successful supervisors. Clearly the ability to transfer knowledge varies with its explicitness, and so does the method to be used for accomplishing the transfer. 

There are two other ways to characterize knowledge dichotomously. Product knowledge is the specifications and performance features that characterize a good or service, or "what" knowledge, while process knowledge is "how" knowledge - how to design, engineer, manufacture, or distribute a good or service. Embodied knowledge is contained within a product or process and cannot be separated from it even though it might be explicit, while disembodied knowledge is free-standing knowledge that is detachable from the product or process whether or not it is explicit or tacit. 

The transfer of knowledge from a multinational corporation to a foreign operation cannot simply be reckoned by a single quantitative indicator of its amount. Unless we restrict our inquiry to a single, narrow, homogeneous case, we require multiple metrics for multiple dimensions of knowledge. 

Dynamics of Knowledge Transfer 

It is incomplete to describe what knowledge is unless we also explore how it is changed. Knowledge transfer is dynamic. Knowledge can be adapted when it is transferred, absorbed by the recipient to varying degrees, and it can be created as well as transferred. 

Knowledge transfer across countries as well as across companies is not likely to be a purely mechanistic process. Instead the knowledge that is transferred is likely to be adapted to some extent in order to fit better the local circumstances. Not even McDonald's franchises are managed exactly the same way in all the different countries to which this company knowledge is transferred. Differences between home country and host country in national culture, and differences between home company and host company in company culture are likely to motivate adaptations in the knowledge that is transferred (Newman and Nollen 1996). Differences in production technologies, labor and capital resources and costs, infrastructure, consumer market characteristics, and national cultures all imply differences in appropriate technologies and therefore adaptation of knowledge along with its transfer. 

In the case of emerging market economies, the question of adaptation leads also to the question of knowledge absorption. Here the potential for conflict between MNC and host country is present. The MNC's interest often is to retain for its own exclusive use the knowledge that it considers to be a proprietary asset, and therefore it will transfer knowledge only if it can do so without loss. The explanation of foreign direct investment in terms of internalization is built on this idea. 

But the interest of the host country often is to utilize the transferred knowledge beyond the original purpose for which it was transferred - to generalize the knowledge and apply it to other products or processes, or to learn the knowledge and make it indigenous and independent of its original foreign source. If the transferred knowledge has value to the host country beyond the immediate business relationship in which it was transferred, then the knowledge is absorbed. 

A third aspect of the dynamics of knowledge transfer is the potential for knowledge creation. Business relationships between MNCs from advanced industrialized countries and companies in emerging market economies will not customarily have knowledge creation as an objective in the same way that strategic alliances between similar companies in similar countries often do. Nevertheless, knowledge might be created in a sequential fashion from these relationships. 

Measures of Knowledge 

The measurement of knowledge that is transferred from one firm or one person to another is fraught with difficulties. Because knowledge is multidimensional, multiple measures are desirable. If knowledge is context-specific - if its value depends on the situation - then the measures of knowledge may change from one case to another unless the cases are quite homogeneous. Even in a given case, one piece of knowledge may have more value than another and thus needs to be weighted unequally. For example, knowledge that is critical to firm performance and difficult to obtain is especially valuable. 

We begin by examining the channels through which knowledge flows. Some channels are communication media, either oral or written. Two such media are the exchange of unique messages between individuals (by telephone, e-mail, fax, or memo), and the dissemination of documents in common to a wider audience (such as newsletters, papers, and journals). (These examples and some of those to follow are found in Appleyard 1996, Inkpen 1996, and Inkpen 1995.) These media can transfer explicit, disembodied knowledge. 

Two other methods for transferring knowledge rely on the movement of people rather than messages. Groups of people can gather at meetings or conferences at one firm or another or at a third location to transfer knowledge even if there is another ostensible purpose for the conference. Individuals can make one-on-one visits to another firm. An engineer might work alongside a colleague in a foreign location for a few days or weeks, or an expatriate manager might spend three or five years abroad. These methods, like on-the-job training, can transfer tacit, process knowledge. However, they are not ideal as measures of knowledge transfer because they measure inputs - amount of knowledge sent, or knowledge transfer opportunities - rather than outputs, or amount received or learned. 

An output-oriented measure of knowledge that has been used empirically is patent citations (Almeida 1996). If one individual or firm cites another's patent in his or her own new patent application, we presume that the knowledge contained in the earlier patent has been transferred. Other potential measures in a similar vein include technology agreements, marketing agreements, and supplier agreements among firms that contain drawings, manuals, or business plans that are apprehended by all signatories. 

A conceptually ideal output measure of knowledge transfer would be a quantitative report of changes in business operations such as labor productivity, product quality, or unit cost, or changes in financial results such as sales revenue, profitability, or market share. A major drawback to this type of measure is that it is determined by multiple causes, only one of which is specific instances of knowledge transfer. 

Finally, a qualitative indicator of knowledge transfer is expert opinion. We can ask managers to rate the amount of knowledge transferred. This technique is scientifically acceptable if suitable questions can be devised, respondents obtained, and scales created. 
 
IV. ANALYTICAL MODEL 

To understand how the amount and type of knowledge that MNCs transfer to emerging market economies changes because of international trade and investment liberalizations, we examine two foreign market entry decisions made by MNCs: the objectives for their entry, and the modes of their participation. 

Business Objectives and International Business Modes 

If the MNC's objective is to invest abroad for efficiency-seeking reasons (e.g., to locate R&D activities abroad, or to establish a strategic alliance to take advantage of a partner's competence), then knowledge transfer itself is a primary focus. However, if the firm's investment objective is market seeking or raw material seeking, or if an investment is made to avoid government-imposed trade barriers, then knowledge transfer has a secondary role (Brewer 1993). 

The modes of international business participation include exporting and importing, licensing, foreign direct investment in joint ventures or wholly owned subsidiaries, and non-equity strategic alliances or contractual agreements. Knowledge transfer possibilities differ among these modes. For example, exporting can transfer explicit, embodied, product knowledge only. Foreign direct investment can transfer explicit or tacit knowledge about products or processes that is embodied or disembodied. Absorption of knowledge will be larger in joint ventures than in wholly owned subsidiaries (Table 2). If we combine differences in knowledge transfer possibilities by mode with effects of WTO agreements on choice of mode, we can predict changes in knowledge transfer outcomes (Figure 1). 

Inferences from Theories of International Trade and Investment 

The WTO agreements lessen government intervention, strengthen the operation of free markets, and improve safeguards for private property. They require governments to provide national treatment and improve transparency. Ricardian international trade theory argues that the result will be more trade as businesses pursue newly available opportunities that arise from lower tariffs, fewer trade restrictions on investments, and fairer competition with domestic firms as the international business environment becomes more stable, predictable, and open. Moreover, the composition of trade should be altered to favor exports of knowledge-intensive products and services by MNCs from advanced industrialized countries that are relatively knowledge (or human capital) abundant, according to factor proportions theory. 

Among theories to explain foreign direct investment, one of the principal arguments is the internalization concept. MNCs enter foreign markets by investing in wholly owned subsidiaries in order to obtain returns from their proprietary knowledge. This knowledge is internalized rather than sold externally (by licensing) either because the return is higher or the risk of loss of knowledge in another mode (such as joint venture or strategic alliance) is too great (Dunning 1993). 

If we look into the provisions of the WTO agreements in the light of trade and investment theories, we see conflicting implications for knowledge transfer. 

TRIPs. The TRIPs provisions should generally increase the interest of foreign firms that possess valuable proprietary knowledge to do business in emerging market economies because their knowledge will be better protected from the risk of loss. However, some modes of participation will be benefited more than others. Licensing will be particularly benefited because it is the outright sale of explicit disembodied knowledge services. The TRIPs requirement to grant process as well as product patents expands the domain for safeguarded licensing. TRIPs also favors direct investment in joint ventures rather than wholly owned subsidiaries. Disembodied product and process technology that is transferred into a joint venture by a foreign MNC parent is subject to absorption by the local partner because of its involvement in management and is therefore subject to the risk of loss. TRIPs reduces this risk in principle. Investment in wholly-owned subsidiaries does not encounter this potential problem, and thus gets less of a gain from TRIPs. Strategic alliances are favored like joint ventures for the same reason (Table 3). 

GATS. The GATS agreement will stimulate direct investments and alliances as modes of participation in international business more than exporting or licensing simply because many services cannot be traded but rather must be produced where they are consumed (only one of the four GATS modes of supply is trade). The GATS requirements for market access and unrestricted international payments in industries for which countries make commitments to WTO will increase especially direct investments in wholly owned subsidiaries and majority-owned joint ventures to the extent that limitations on foreign equity stakes are raised or removed. If 100 percent or 51 percent equity stakes are made possible where previously only minority joint ventures were permitted, some MNCs will choose wholly owned subsidiaries or majority owned joint ventures. The effect of these switches in mode induced by GATS will be to increase the amount of knowledge transferred but to reduce knowledge absorption by the host country. 

TRIMs. The TRIMs agreement, by eliminating domestic content and trade balancing requirements, means that foreign-invested operations will not have to make components locally. Thus foreign direct investments that were operated to conform with these requirements now can decrease in size and number. Instead, imports of components from home country to host country operations will increase. These actions will reduce knowledge transfer, especially disembodied knowledge that is adapted and absorbed, including both product and process knowledge. On the other hand, fewer restrictions on foreign investment generally will induce new investments, but primarily in "screwdriver" assembly plants that would transfer a minimum amount of knowledge. 

SCMs. The SCMs agreement bars export subsidies and therefore takes away an advantage of direct investments and strategic alliances established by foreign MNCs as export platforms; these modes and objectives are therefore discouraged by SCMs. Domestic subsidies that are contingent on the use of domestic rather than imported goods are also barred; this liberalization favors the trade mode. SCMs also subjects some domestic subsidies to countervailance, which will enable foreign companies to serve local markets without artificial disadvantage, in all modes. 

ITA. The Information Technology Agreement, by eliminating tariffs on imports of telecommunication and computer products, will switch some international business participation from investment to trade to the extent that direct investment was motivated in the first place by the avoidance of trade barriers. The transfer of knowledge, except explicit embodied knowledge, will consequently be reduced. However, to the extent that trade and investment are complements rather than substitutes, investment will increase, and thus the overall effect of reduced tariffs on knowledge transfer is in doubt. 

In summary, the new WTO agreements will stimulate trade and licensing, both of which are limited in the amount and type of knowledge transferred. The effects on foreign direct investment are theoretically mixed. Both TRIMs and SCMs might cause less investment, for which trade is substituted, but both may also increase investment via other mechanisms. In any event, WTO rules in GATS favor wholly-owned subsidiaries and majority-owned joint ventures among FDI modes. The implications for knowledge transfer are mixed. Some WTO agreements favor the growth of strategic alliances. By protecting intellectual property and reducing government subsidies, the risk-sharing and cost-sharing advantages of alliances, especially those that focus on research and development, are magnified while the chance of loss of proprietary assets is diminished. 

Although strategic alliances have high knowledge-transferring potential, they may not achieve the transfer for some emerging market economies. Strategic alliances among MNCs tend to be organizationally complex, they operate via cybernetic knowledge creation-diffusion feedback processes, and they are intensive in tacit knowledge (Ostry and Gestrin 1993). It is difficult for companies from developing countries to participate in these alliances that require considerable company and country investment in infrastructure-like "absorptive capacity." In addition, strategic alliances may themselves adopt restrictive or anti-competitive private business practices. 

Modern additions to trade theory, not so far considered, focus on the role of market imperfections, the strategies of large oligopolists, and the competitiveness of domestic industries. The WTO promises to reduce some market imperfections via improved intellectual property rights and reduced subsidies, and in this way to generally improve the functioning of markets. However, the effect of WTO on the market structure and performance of domestic industries cannot be predicted in general and awaits empirical study. 

Propositions 

The key proposition to be empirically investigated is that liberalizations in government trade and investment policies, stimulated in part by new WTO rules, will change the decisions of MNCs about the mode of their participation in international business and therefore change the amount and type of knowledge transferred. Specifically, 

1. TRIPs will result in more explicit disembodied knowledge transfer via more licensing, and more knowledge transfer of all types via more FDI in joint ventures and strategic alliances
2. Both TRIMs and ITA will result in less knowledge transfer and absorption via less direct investment for which trade is substituted, unless overall trade-investment complementarity dominates
3. The effect of GATS on knowledge transfer is uncertain; it will increase the transfer via more direct investment and alliances, but the transfer of tacit knowledge that is absorbed will be decreased because of more wholly owned subsidiaries.

To examine the propositions we need original firm-level data that is specific to both industry and country. The industry must be specified because some WTO rules are industry-specific, and because national government policies on trade and investment vary by industry. The country must be specified because some WTO rules and most implementation timetables vary according to the economic development status of the country. In addition, national governments can meet WTO requirements in a variety of ways, especially GATS requirements. 

We choose the information technology sector, consisting of the telecommunication and computer industries, because it is one of the few sectors for which a GATS agreement in the WTO has been reached, and therefore new rules exist for it. It is a global high technology industry that produces both goods and services. It previously encountered many restrictive public policies. We choose India because it is a big emerging market economy that has recently undertaken substantial liberalization measures, both unilaterally before WTO rules were put into place, and in response to WTO rules since 1995. India is a WTO member. Because India has a stratum of highly qualified scientists and engineers, absorptive capacity in human resources should not be a constraint, and in fact knowledge creation in India, not just transfer to India, should be a realistic possibility. 

Empirical research is carried out initially in a small number of intensive case studies of business collaborations between MNCs and Indian companies. This type of field research is suitable for analyzing managerial decisions of complex problems, and it will enable the analytical framework to be developed further and hypotheses and measurements to be refined. Subsequently survey research is to be conducted so that quantitative data can be statistically analyzed. In this paper we report on the first results from company case studies. 
 
VI. INFORMATION TECHNOLOGY IN INDIA:GOVERNMENT POLICY AND INDUSTRY STRUCTURE 

In this section, we summarize the current status of Indian government policy on trade and investment, especially as it affects the information technology industry. Until 1991, India was to a large extent a closed economy with bans against imports of many products, very high tariffs on many other products, maximum foreign equity stakes of 40 percent on direct investments, and licensing requirements to engage in almost any business activity. Most of the current policies stem from the start of reforms in 1991 (some reforms were initiated by the government of Rajiv Gandhi in the mid-1980s). We also review the structure of the information technology sector in India (a more complete description of both, with sources, is given in the appendices). 

Indian Trade and Investment Policy 

Foreign Direct Investment. For many industries, foreign direct investments in joint ventures with foreign equity stakes ranging from 50 to 74 percent are automatically approved by the Reserve Bank of India. Telecom and computing equipment produced in joint ventures with up to 51 percent foreign equity is automatically approved. Other investments must be specifically approved by the Foreign Investment Promotion Board. Foreign investments in telecom and computing equipment can reach 100 percent via this route. Foreign investment in telecom services businesses is limited to 49 percent for basic services and for cellular mobile services and radio paging services, and to 51 percent for other value-added services, all by specific FIPB approval. In the computer services and engineering services businesses, the maximum foreign equity stake is 51 percent. 

There are no domestic content or trade balancing requirements for telecom or computer investments, although there are for other industries such as motor vehicles and consumer goods industries. The rupee exchange rate is flexible and market determined, and is fully convertible on current and capital account for foreign investors, though not for Indians. Telecommunication is regarded as infrastructure and therefore enjoys fiscal benefits such as tax holidays and concessional import duties. 

Technology transfer is officially encouraged and considered as part of foreign direct investment proposals in India's GATS commitments, although there are some restrictions on payments for foreign technology. 

Imports and Exports. Imports of capital goods used in manufacturing carried a flat 20 percent tariff in 1997, which could be reduced to 10 percent or zero if certain export targets were met. The tariff on telecom parts and subassemblies was 30 percent in 1997. The average tariff over all imports was 33 percent in 1997. India signed the Information Technology Agreement in 1997, which mandates tariff reductions to zero by the year 2000 for listed telecom and computer equipment. 

Quotas that restrict imports of many products still exist, mainly for consumer goods. Several telecom products, such as cellular telephones and pagers, are subject to quotas and require a license from the government to import. These quotas are the subject of a dispute settlement procedure in WTO; they must be removed by WTO rules, and the dispute is about the timetable. 

Intellectual Property Rights. Indian intellectual property rights protection, though perceived to be very poor in surveys of business people (Mansfield 1994), appears to meet WTO standards in most respects except patents and, perhaps, enforcement. India will need to grant product patent protection for pharmaceuticals, chemicals, and food products, which are not covered now, and lengthen process and product patent life to 20 years. 

Indian Information Technology Sector 

The definition of the telecommunication industry in accordance with WTO terms is the transmission of voice or data messages from senders to receivers by electromagnetic means. The industry manufactures products that are equipment for transmission (such as cables), switching, and end users (such as telephones). The industry supplies two types of services: basic services that simply transmit but do not change the form or content of the customer's information (such as voice telephone and fax), and value-added services in which the telecom company changes the form or content of the customer's information or stores and retrieves it (such as voice mail, e-mail, and mobile cellular telephone (see Figure 2). 

The telecommunication industry in India is sizable, with total expenditure on telecom services and equipment of $6.5 billion in 1995 (Voice & Data 1997). It is an industry of opportunity since India has one of the lowest telephone densities in the world, and growth has been rapid since the 1991 liberalizations Basic telecommunication - local and domestic long distance telephone and fax service through fixed wires - is provided by government monopolies. However, one private company is being licensed to compete with the government monopoly to provide local telephone (but not domestic long distance) service in each of India's states and principal cities. Basic international telecom services are provided by another government monopoly, which will continue until at least until the year 2004. 

Value-added telecommunication - email, cellular mobile telephone, radio paging, satellite data transmission - was first available in India in 1995, and is supplied by private sector companies, most of whom are joint ventures with foreign MNCs. However, international value-added services are restricted by the requirement to use the government monopolist's facilities. 

The telecom industry is regulated by a new government agency established in 1997 that is intended to be independent of the government's interests in providing telecom services. 

The computer industry includes hardware and software products and consulting and training services. Hardware includes desktop and laptop computers, workstations, servers, and mainframes, and peripheral devices such as printers and networking products. Software includes system software and applications software. 

In India the computer industry had revenues of $3.7 billion in 1996-97, with software constituting a slightly larger share of the total than hardware (Dataquest 1997. More than two-thirds of Indian software output was exported, and it was a major factor in total Indian exports. The computer industry grew at a rapid rate - about 38 percent - in 1996-97, with software growth leading the way. Several of India's leading computer companies are joint ventures with foreign MNCs or have non-equity technology collaborations. 

VII. BUSINESS PERSPECTIVES FROM INDIAN OPERATIONS 

The experiences of foreign-invested companies in the information technology business in India yield insights into entry mode and knowledge transfer issues. In this paper we analyze case study information from three joint ventures and wholly owned subsidiaries operating in India, which are described in the three paragraphs below. The sources are personal interviews with 3-6 top managers in the Indian business and its Indian and U.S. parent companies in 1997, and company documents. 

Hughes Escorts Communications Ltd (HECL) is a joint venture that started operations in February 1995. It is 51% owned by Hughes Network Systems (HNS), which is the maximum foreign stake permitted, and 49% owned by Escorts Group. HNS is a unit of Hughes Electronics, which is owned by General Motors. The Escorts Group is India's 20^th biggest business conglomerate. It has a diverse range of manufacturing businesses, including telecom equipment, many of which are conducted with foreign collaborators. HECL's business is to provide shared hub satellite transmission of data and fax domestically for business customers in India using VSATs (very small aperture terminals). 

Sprint RPG India Ltd is a 50-50 joint venture between Global One and RPG Enterprises, formed in 1994. The foreign parent company, Global One, is a joint venture among Sprint (U.S.), Deutsche Telekom, and France Telecom. RPG Industries, the Indian parent, is the 5^th largest diversified business conglomerate in India. Sprint RPG's main business is to provide email service within India for business customers using leased lines. Sprint RPG does not export any services, and does not import parts or services except for maintenance services from Sprint and maintenance parts from Tandem, the supplier of the computers that power the email service. 

HCL-HP was formed in 1991 formed as joint venture between Hewlett Packard (HP), which took a 26% blocking minority stake (the maximum foreign stake permitted then was 49 percent), and Hindustan Computers Ltd. HP is one of the largest computer companies in the world, and HCL is India's largest computer maker and marketer. HCL-HP's main business was to assemble and market computers, ranging from entry-level personal computers to high-end servers and work stations. In 1992, HCL-HP invested $3 million to build a new manufacturing facility for computers. In 1997 the equity joint venture ended and was converted to a non-equity strategic alliance. HP bought out HCL's interest and created Hewlett Packard India Ltd as a wholly-owned subsidiary (investment rules had been relaxed to permit 100 percent foreign-owned companies in the computer industry). HP India stopped assembling computers in India, and instead became a marketing organization for its computers that it imported. HCL is the exclusive distributor for all HP computers. In addition, HCL reorganized itself into separate operating companies, one of which was HCL Consulting, an R&D profit center formed out of the technology activities of HCL-HP. 

Mode of Participation 

Based on three sets of company experiences, it appears that joint ventures were chosen - before WTO came into effect but after Indian liberalizations had begun - because of market reasons and Indian government regulations. Company managers at HECL and Sprint RPG explained the decision process in a market that is very foreign to western companies: 

Knowledge Transfer 

The amount and type of knowledge that foreign companies transfer to Indian business operations depends on their degree of control over the business and on the value of the knowledge. In the information technology industry, the protection of intellectual property rights is not a primary concern, even in India, according to three case studies. Rather, the management of knowledge depends on competitive market place considerations. 

Hughes has proprietary aspects of its data transmission technology. Some of this knowledge resides in software that was invented by Hughes and is patented in the U.S. (it cannot be patented in India) or is a trade secret. Hughes licenses this technology to HECL for use in Indian business operations in return for payment of a fixed fee and a royalty rate. But Hughes managers are not very concerned about the protection of intellectual property that is transferred to HECL, for two reasons. First, Hughes has majority ownership and management control. Second, loss of bits of proprietary knowledge is not a competitive threat. 

For Indian companies like Escorts, liberalization of trade policies means that in the future the incentive to form joint ventures with foreign companies to obtain technology will be diminished. An Escorts Group manager said, 

Sprint is phasing out the use of this software in the U.S., and therefore will stop maintenance support of it. This change raises questions about how the software can be supported and maintained in India in the future? Should Global One transfer all of the source code to the joint venture? What happens to this technology if the joint venture breaks up? A Global One manager said, 

Hewlett Packard transferred considerable technology to HCL-HP in its early years. Much of it was tacit process knowledge carried by movement of people. A senior HP manager was the head of manufacturing at HCL-HP for 3½ years and an HP expatriate was head of R&D at HCL-HP. Several other HP technical experts were located in India, and teams of 10 HCL-HP engineers regularly spent 3 to 12 month periods at HP's European headquarters in Germany. 

Almeida, Paul. 1996. "Knowledge Sourcing by Foreign Multinationals: Patent Citation Analysis in the U.S. Semiconductor Industry", Strategic Management Journal, vol. 17 (Winter Special Issue), pp. 155-165. 

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Brewer, Thomas L. 1993. "Government Policies, Market Imperfections, and Foreign Direct Investment," Journal of International Business Studies, vol. 24, no. 1 (1st Quarter), pp. 101-120. 

Brewer, Thomas L. 1993. "Foreign Direct Investment in Emerging Market Countries," Ch. 7 in Oxelheim, Lars (ed.), The Global Race for Foreign Direct Investment, pp. 177-204. Berlin: Springer-Verlag. 

Brewer, Thomas L. and Young, Stephen. 1998. The Multilateral Investment System and Multinational Enterprises. Oxford: Oxford University Press. 

Brewer, Thomas L. and Young, Stephen. 1996. "Investment Policies in Multilateral and Regional Agreements: A Comparative Analysis," Transnational Corporations, vol 5, no 1 (April), pp. 9-36. 

Brewer, Thomas L. and Young, Stephen. 1995. "The Multilateral Agenda for Foreign Direct Investment: Problems, Principles, and Priorities for Negotiations at the OECD and WTO," World Competition, vol. 18, no. 4 (June), pp. 67-83. 

Buckley, Peter J. 1996. "Government Policy Responses to Strategic Rent-Seeking Transnational Firms, presented at conference on Globalisation et Regionalisation, Universite Paris-I Pantheon-Sorbonne (May) 

Cantwell, John. 1991. "A Survey of Theories of International Production," in Pitelis, Christos N. and Sugden, Roger (eds.), The Nature of the Transnational Firm. London: Routledge (pp. 16-64). 

Cantwell, John. 1989. Technological Innovation and Multinational Corporations. New York: Blackwell. 

Caves, Richard E. 1996. Multinational Enterprise and Economic Analysis (2^nd ed.). Cambridge: Cambridge University Press. 

Chen, Edward (ed.) 1994. Transnational Corporations and Innovatory Activities. London: Routledge (for the United Nations). 

Dunning, John H. 1993. Multinational Enterprises and the Global Economy. Wokingham, England: Addison-Wesley. 

Dunning, John H. 1995. "Reappraising the Eclectic Paradigm in an Age of Alliance Capitalism," Journal of International Business Studies, vol. 28, no. 3 (Third Quarter), pp. 463-491. 

Dunning, John H. 1993. The Globalization of Business. London: Routledge, Ch. 8, Cross-Border Technology Alliances (pp. 190-219); Ch. 9, The Prospects for Foreign Direct Investment in Central and Eastern Europe (pp. 220-241) 

Grant, Robert M., 1966. "Toward a Knowledge Based Theory of the Firm," Strategic Management Journal, vol. 17 (Winter Special Issue), pp. 109-122. 

Inkpen, Andrew C. 1996. "Creating Knowledge Through Collaboration," California Management Review, vol. 39, no. 1, pp. 123-140. 

Inkpen, Andrew C. and Dinur, Adva. 1996. "Knowledge Management Processes and International Joint Ventures." Glendale, AZ: Thunderbird Business Research Center Discussion Paper 96-4. 

Inkpen, Andrew. 1995. The Management of International Joint Ventures: An Organizational Learning Perspective. London: Routledge. Chs. 5-7, 10 (pp. 46-89, 121-127) 

Kim, Linsu. 1991 "Pros and Cons of International Technology Transfer: A Developing Country's View," in Agmon, Tamir and Von Glinow, Mary Ann (eds.), Technology Transfer in International Business. New York: Oxford University Press (pp. 223-239). 

Kogut, Bruce and Zander, Udo. 1993. "Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation," Journal of International Business Studies, vol. 24, no. 5 (Fourth Quarter), pp. 625-645. 

Mansfield, Edwin. 1994. Intellectual Property Protection, Foreign Direct Investment, and Technology Transfer, Discussion Paper No. 19. Washington DC: International Finance Corporation. 

Ostry, Sylvia and Gestrin, Michael. 1993. "Foreign Direct Investment, Technology Transfer, and the Innovation-Network Model," Transnational Corporations, vol. 2, no. 3 (pp. 7-30). 

Pucik, Vladimir. 1991. "Technology Transfers in Strategic Alliances: Competitive Collaboration and Organizational Learning," in Agmon, Tamir and Von Glinow, Mary Ann (eds.), Technology Transfer in International Business. New York: Oxford University Press, pp. 121-138). 

Rugman, Alan M. 1980. "A New Theory of the Multinational Enterprise: Internationalization versus Internalization," Columbia Journal of World Business, vol XV, no. 1 (Spring), pp. 23-29. 

Sauve, Pierre. 1994. "A First Look at Investment in the Final Act of the Uruguay Round," Journal of World Trade, vol. 28, no. 5 (October), pp. 5-16. 

Sauve, Pierre. 1995. "Assessing the General Agreement on Trade in Services: Half Full or Half Empty?" Journal of World Trade, vol. 29, no. 4 (August). 

Siddarthan, N.S. and Safarian, A.E. 1997. "Transnational Corporations, Technology Transfer, and Imports of Capital Goods: The Recent Indian Experience," Transnational Corporations, vol. 6, no. 1 (April), pp. 31-50. 

Smith, Alister. 1995. "The Development of a Multilateral Investment Agreement at the OECD: A Preview," in Green, Carl J. and Brewer, Thomas L. (eds), International Investment Issues in the Asia Pacific Region and the Role of APEC. NewYork: Oceana. 

United Nations, Centre on Transnational Corporations. 1987. Transnational Corporations and Technology Transfer: Effects and Policy Issues. New York. United Nations. 

World Investment Report 1995. 1995. Transnational Corporations and Competitiveness, Chapter III, Access to Resources. New York: United Nations, (pp. 149-168). 
Table 1 
Summary of WTO Agreements 
 

WTO SECTIONS AND MAIN PROVISIONS

TRIPs - Trade-Related Aspects of Intellectual Property Rights

Basic principles:   National treatment and Most favored nation status provided

Specific standards:  Patents protected for products or processes for 20 years from filing date, effective with 1995 filings.  Copyrights protected for 50 years, including software, databases, recordings, performances, and broadcasts (20 years); rental rights reserved for copyright holders.  Trademarks and service marks protected for 7 years, renewable indefinitely; canceled if not used for 3 years; compulsory licensing and linking of foreign trademark to local trademark prohibited.  Integrated circuit designs protected 10 years; compulsory licensing of semiconductor technology barred   Industrial designs protected for 10 years.  Trade secrets protected from unauthorized use.  Anti-competitive practices in licensing contracts that violate intellectual property rights may be remedied, and restrictive business practices by intellectual property holders may be prevented.

Enforcement:  Fair and equitable procedures established, with civil legal channels and criminal prosecution of infringers, cease and desist orders, payment of damages, and impoundment and destruction of goods.

Timetable:  Developing countries implement by January 2000; least developed countries by January 2006

GATS - General Agreement on Trade in Services

Four modes of services supply defined:  Cross-border supply (exports and imports; e.g., money transfer by banks, consultant's report on disk)  Consumption abroad (consumer moves to country of supplier; e.g., tourism)  Commercial presence (supplier moves to country of consumer; e.g., foreign direct investment)   Movement of natural persons (supplier's employee moves to country of consumer; e.g., expatriates)

General obligations established:  Most favored nation status provided, but with exceptions specified by countries for certain sectors for 5-10 years, regional free trade pacts, and government procurement.  Transparency promoted - measures affecting services trade and investment to be made publicly available at "inquiry points" to be established by January 1997; changes to be notified to WTO.   Restrictive business practices by monopoly service suppliers that distort competition and restrain trade to be eliminated; monopoly suppliers cannot act contrary to MFN.   Harmonized international standards for authorizing, licensing, certifying suppliers encouraged not req'd.

Specific commitments offered by countries for certain sectors (positive lists)   that may include restrictions and exceptions (negative lists).   Market access to be provided by changes in domestic regulatins in sectors for which commitments made.  International payments for current or financial account transactions are to be unrestricted in all sectors for which commitments are made except for balance of payments reasons.  National treatment can be extended or not, sector by sector, with conditions and qualifications allowed.   Developing countries can offer fewer liberalizations and impose more limitations (e.g., by requiring joint ventures or technology transfer in foreign investments).   Sectoral commitments (as of March 1998):  Telecommunication: Access to public networks and services is to be provided to all suppliers except broadcast and cable radio and television (access means no quotas, preferably no limits on foreign equity stakes in direct investments); developing and least developed countries may impose conditions to improve their domestic infrastructure and international trade participation. [Details differ from country to country.]  Basic telecommunication (commitments made by 69 countries in February 1997):  Access to public basic and international telecom networks and services and satellites is to be provided on a reasonable and nondiscriminatory basis.  Foreign ownership or control of telecom services and facilities is permitted.  Pro-competitive regulatory principles are guaranteed.  [Details for each country's specific commitments differ from country to country.]  Other sectors included in GATS are maritime services, air transport, and financial services

TRIMs - Trade-Related Investment Measures - incentives or requirements applied to foreign investment in manufactured goods that affect trade

Measures inconsistent with principles of national treatment or elimination of quotas are prohibited:  Local content requirements are prohibited.  Trade balancing requirements (exports=imports) are prohibited.  Foreign exchange neutrality requirements are prohibited.  Domestic sales requirements tied to export sales are prohibited  Subsidies contingent on export performance are prohibited (see section on subsidies and countervailing measures), but not export performance requirements themselves.

Timetable:  Developing countries must implement by January 2000; transitional economies by January 2002

SCMs - Subsidies and Countervailing Measures - financial contributions provided directly or indirectly by a government which confer a benefit to certain enterprises (e.g., grants, loans, loan guarantees, tax credits, government purchases, price supports).

Prohibited subsidies (red light subsidies):  Export subsidies contingent on export performance or local content  Timetable: Developing countries implement by January 2003; least developed countries exempted.  Domestic subsidies that are contingent on the use of domestic rather than imported goods.   Timetable: Developing countries implement by January 2000; least developed countries by January 2003.  Permissible subsidies that may be countervailed (amber light subsidies) - subsidies that are specific to particular companies, industries, or regions, and cause serious injury to domestic industry in other WTO member countries (e.g., subsidies that exceed 5% of product value or forgive corporate debt or cover operating losses more than once).   Permissible subsidies that may not be countervailed (green light subsidies) - subsidies that are not specific and are paid on the basis of objective economic criteria (e.g., subsidies for industrial research and environmental protection; subsidies less than 2% of value or 4% of import volume) by developing countries may not be investigated for countervailing duties.   Permanent Group of Experts is established to make determinations prior to dispute settlement

Information Technology Agreement (December 1996)

Eliminate tariffs on information technology products by year 2000.  Telecommunications equipment: telephones, cordless handsets, answering machines, videophones, fax machines, pagers, switches, magnetic tapes, laser discs, transmission apparatus (but not radio or television broadcasting apparatus), antennas, capacitors, resistors, liquid crystal devices, light-emitting diodes, transistors, photocells, smart cards, optical fibre cables, photocopiers.  Computer equipment: portable computers, workstations, mainframe computers, supercomputers, peri-pherals and parts such as flat panel displays, cathode ray monitors (but not televisions), plotters, multi-media devices with speakers or microphones, modems, hard disk drives, compact disk drives, semiconduc-tors, semiconductor manufacturing equipment, integrated circuits, microprocessors, wafers, calculators.

Notes: 

Definitions: Most favored nation status means that no nation, WTO member or not, can be treated less favorably than another. National treatment means that treatment for foreign entities (advantages, favors, privileges, or immunities) can be no less favorable than that afforded to a country's own nationals. Transparency refers to a nation's laws, regulations, rules, and enforcement, and is intended to promote stability and predictability. 

Summaries of regulations are incomplete. The Uruguay Round also includes sections on (1) Tariff reductions, (2) Anti-dumping, (3) Safeguards or escape clauses, (4) Dispute settlement procedures, (5) Agriculture trade, and (6) Textiles and apparel trade. 

Souces: 

Brewer, Thomas L. and Young, Stephen. 1996. "Investment Policies in Multilateral and Regional Agreements: A Comparative Analysis," Transnational Corporations, vol. 5, no. 1 (April), pp. 9-35. 

Evans, Phillip and Walsh, James. 1994. The EIU Guide to the New GATT. London: Economist Intelligence Unit, 1994 

General Agreement on Tariffs and Trade. 1994. Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts. Geneva: GATT Secretariat 

General Agreement on Tariffs and Trade. 1994. Uruguay Round of Multilateral Trade Negotiations, Annex 1b, General Agreement on Trade in Services, vol. 29. 

Schott, Jeffrey J. 1994. Uruguay Round: An Assessment. Washington DC: Institute for Int'l Economics 

United Nations Centre for Trade and Development, International Trade Centre of the World Trade Organization, and Commonwealth Secretariat. 1995. Business Guide to the Uruguay Round. Geneva. 

U.S. International Trade Administration. 1994. "Uruguay Round Update." Washington DC: U.S. Department of Commerce. 

Table 2  
Potential for Knowledge Transfer in Different International Business Modes  
(x mark indicates that the knowledge feature is capable of being transferred or achieved by the specified international business mode)  

 
KNOWLEDGE                     INTERNATIONAL BUSINESS MODE 
FEATURE 

	Exporting	Licensing	FDI-WOS	FDI-JV	Alliance
Type of Knowledge
Explicit	x	x	x	x	x
Tacit			x	x	x
Product	x	x	x	x	x
Process		x	x	x	x
Embodied	x		x	x	x
Disembodied		x	x	x	x
Knowledge Dynamics
Adaptation			x	x	x
Absorption		x		x	x
Creation		x	x	x	x

 

Table 3  
Hypothesized Relative Effects of WTO Agreements on International Business Mode  
(x  mark indicates benefit for the international business mode relative to others;  
minus mark indicates disadvantage for the mode)  
  

WTO agreements provide:	Trade	License	FDI-WOS	FDI-JV	Alliance
Trade-Related Intellectual Property Rights  Standards for patents, copyrights, trademarks, integrated circuits, industrial designs, trade secrets  Bars to anti-competitive practices in licensing contracts that violate intellectual property rights  Enforcement procedures and penalties		x           x               x		x                            x	x                           x
General Agreement on Trade in Services  Market access, unrestricted international payments, and national treatment for sectors with commitments made  Telecommunication sector: Access to public networks and services by foreign companies, foreign ownership of services and facilities, and pro-competitive regulations			x            x	x   (>51%)        x   (>51%)
Trade-Related Investment Measures  Bars against local content, trade balancing, and foreign exchange neutrality requirements, and domestic sales tied to export sales among manufactured products	x		x   -	x   -
Subsidies and Countervailing Measures  Bars against export subsidies  Bars against domestic subsidies contingent on use of domestic rather than imported goods  Other subsidies specific to companies, industries, regions that are >5% of product value, forgive debts, or cover losses may be countervailed	x        x		-         x	-         x	-         x
International Technology Agreement  Elimination of tariffs on telecommunications and computer products	x
Reduction of tariffs	x

  
Figure 1 
Model to Explain Effects of WTO Rules on Knowledge Transfer 

  
Figure 2  
Description of Telecommunication Industry in Conformance with WTO Definitions  
 
  

		Telecommunication Transmission of voice or data messages from senders to receivers by electromagnetic means
Products Switching equipment including exchanges Trasmission equipment (e.g.,cables, modularos, microwave radios Terminal or end user equipment (e.g., telephones, faxes, pagers)
Basic Telecommiunication Services Transmission of customer's infromation without changing form or content voice telephone telex and telgraph fax leased circuits data transmission satelite systems				Value-added Telecom Services Value added to customer's information by supplier by changing form or content or by storage or retrieval voice mail email cellular mobile telephone radio paging video conferencing data processing, storage, retrieval

 
Sources: 

"The WTO Negotiations on Basic Telecommunications," 17 February 1997, http://www.insidetrade.com/ sec-cgi; "The National Telecommunication Policy of India," in "The Indian Budget '96-'97." 

APPENDIX I 
INDIAN TRADE AND INVESTMENT POLICY 

Indian trade and investment policy for the information technology sector consists of the Indian response to its WTO obligations that affect all industries, and that apply to the telecommunication and computer industries specifically. The policy framework also consists of Indian trade and investment policies, and industrial policies that regulate these industries, apart from WTO rules. 

Foreign Direct Investment 

The "National Telecom Policy" of May 1994 contains a statement of principle about foreign direct investment. It recognizes the need to attract foreign investment because private investment will be needed to supply resources not available from government funds or internal resources. It says that India should become a major manufacturing base and exporter of telecom equipment. 

Foreign Equity Stakes. Foreign direct investments with equity stakes up to 74 percent are automatically approved by the Reserve Bank of India for nine industries. Foreign equity stakes up to 51 percent are automatically approved for another 48 industries, including telecom and computer equipment, and investments up to 50 percent are automatically approved for another three industries. However, telecom services are not among any of these (Table 4). Investment proposals for other industries are reviewed by the Foreign Investment Promotion Board, and most are approved within four to six weeks. Foreign investment in telecom equipment businesses may reach 100 percent with FIPB approval. About 90 percent of all foreign investment proposals go through the FIPB approval route. Some industries continue to be reserved for the small scale sector (not telecom or computers), in which foreign equity stakes cannot exceed 24 percent unless three-quarters of the enterprise's output is exported. 

India's specific commitments under GATS list maximum foreign equity stakes in telecommuni-cations and related industries. Foreign investments in the value-added telecom services industry require specific government approval and are limited to a 51 percent foreign stake, except for radio paging and cellular mobile telephone services in which it is 49 percent. The maximum foreign ownership in basic telecom services is 49 percent. In the computer services and engineering services industries, the FDI stake is a maximum of 51 percent. 

There is no domestic content requirement for telecom investments (there is in other industries such as motor vehicles). National treatment is accorded, except that foreign companies pay a 48 percent income tax rate while Indian companies pay 35 percent. India is a member of the Multilateral Investment Guarantee agency of the World Bank, so foreign investments are insured against expropriation or nationalization. 

Telecommunication is treated as infrastructure in foreign direct investment approvals, and is eligible for fiscal benefits including a five-year tax holiday and concessional import duties (see below). 

Export Oriented Units can be created and Export Processing Zones have been established (seven of them) that permit 100 percent foreign equity in any industry and provide incentives such as no import quotas, licenses, or tariffs; no excise tax on locally sourced inputs; a five year income tax holiday; and no income tax on export earnings after the tax holiday. Electronic Hardware Technology Parks and Software Technology Parks have been established for export-oriented units. However, export processing zones have attracted relatively little foreign investment (Debroy 1997). 

Foreign Exchange and Payments. The rupee exchange rate is market-determined, although the Reserve Bank of India engages in considerable exchange rate management periodically. The rupee is convertible on current account and on capital account for foreign investors. Both profits and capital disinvestments may be repatriated freely. However, full capital account convertibility has not been achieved because transactions by Indian investors are restricted. There are no trade balancing or foreign exchange neutrality requirements except for 22 major consumer goods industries (including motor vehicles, food products, electronics, and white goods) for which dividend repatriation must be balanced with foreign exchange earnings. In other payments regulations, automatic approval is given for technology fees up to Rs.10 million payable as part of foreign direct investments. Indian companies may raise funds from international capital markets. 

Technology Transfer. According to the National Telecom Policy, technology inflow should be made easy by public policy, and India should not lag behind in getting the full advantage of new technologies. Indigenous technology is to be encouraged, including funding for indigenous R&D. In cases of public tenders, the usefulness of technology for future development is one of several criteria for winning a tender. Pilot projects are encouraged to access new technologies systems in basic and value-added telecommunica-tions. In India's horizontal commitments under GATS, preference in all industries will be given to foreign firms with the best technology transfer terms in joint venture proposals with government enterprises. 

There are some technology transfer restrictions in the details. Lump sum payments for technology transfer may not exceed $2 million after taxes for automatic approvals. Foreign technicians who are not part of a foreign collaboration may be hired not longer than 12 months and paid no more than $1,000 per day; total Indian company payments to foreign companies may not exceed $200,000 per year. 

Imports and Exports 

Quotas and Licenses. Imports of capital goods and components used in manufacturing are not subject to quotas and do not require licenses, including second-hand capital goods (with a life of five years), except for a few items on a negative list. This is in sharp contrast to the pre-reform period when as recently as 1990 over 80 percent of all imports were subject to licensing. However, foreign direct investments that qualify for automatic approval must import new and not used plant and equipment if any is imported. 

Imports of consumer goods (goods that can directly satisfy human needs without further processing) are heavily restricted. There are four categories of restrictions: (1) Prohibited imports (zero quotas), which is a short list of 16 animal products with religious significance; (2) Restricted imports, which are 2,339 products that can be imported only if a license is granted by the government against a quota that can be zero (these are mainly consumer goods, fertilizer, petroleum products, textiles and clothing, and agricultural products; (3) Products whose import requires a special import license to be obtained from the central government (there are 733 products on this list as of 1997); and (4) Canalized imports, which may be imported only by the government (there are 102 products on this list as of 1997). All other products, numbering about 7,300 in the current classification system, are on an open general list, which means that no quantitative restrictions apply (Debroy 1997). 

The Government of India negotiated with the WTO in 1997 about a timetable for removing these quotas, or quantitative restrictions, as they are termed in India, which it must do for WTO compliance. The U.S., joined by the EU and Japan, had filed a complaint against India about the pace of Indian compliance. 

Among telecom products, import licenses are required to import telephone instruments. Tradeable licenses (special import licenses) are required to import cordless telephones, telephone answering machines, transceivers, pagers, cellular telephones, satellite receivers, and video telephones. Import of other telecom equipment including fax machines is not subject to quotas. 

Tariffs. The import tariff on capital goods is a flat 20 percent, but it may be reduced or waived for imports of raw materials used for export production. The tariff is 10 percent for import of capital goods contingent on an export performance requirement to export four times their value in five years, and the tariff is zero if six times the value of the capital goods is exported within eight years and that value exceeds $200 million. The import tariff on telecommunications parts and subassemblies was 30 percent as of 1996/97, down from 35 percent a year earlier (the compound year comes from the goverrnment's budget year that runs from March - February). The average tariff over all imports in 1995/96 was about 45 percent; in 1996/97 it was 33 percent. The maximum tariff was 50 percent in 1995/96 and 40 percent in 1996/97. However, two separate and temporary tariff surcharges imposed in during 1997 for fiscal reasons added five percent to most tariffs (except for duty-free imports). 

India signed the WTO Information Technology Agreement in 1997, which mandates tariff reductions to zero by the year 2000 for listed telecom and computer equipment. Another important trade provision is that export profits are exempt from income tax, and export commissions of up to 10 percent are permitted. 

Intellectual Property Rights 

Indian copyright law was changed in 1994 to improve protection of performer's rights (the law provides rental rights for video cassettes, and protection for works transmitted by satellite or cable), limit judicial discretion to levy penalties, speed up prosecution at the state level, strengthen local police search and seizure authority, and establish a Copyright Enforcement Advisory Council to develop policy. 

Trademarks are accorded national treatment. It is planned to include servicemarks in Indian statutes (they are currently given non-statutory court protection). The use of foreign marks is permitted but requires registration that can be denied. Business collaborations that include foreign investment and technology transfer are more likely to be permitted to use foreign marks. 

Patent protection will be brought into conformance with TRIPs requirements by extending product patent protection to the food, chemicals, and pharmaceuticals industries (previously there was only process patent protection in these industries for 7 years), and by extending product patent life from 14 years to 20. During the transition period to year 2005, exclusive marketing rights will be granted for a five year period. 

The maximum recurring royalty payment and patent license payment is 8 percent of selling price after taxes for export sales for a maximum of 7 years, and 5 percent for domestic sales. Royalties and lump sum payments are taxed at a 20 percent rate. 

Extended protection of industrial designs from 5 years initially with two further 5 year renewal periods is under consideration. 
APPENDIX II 
INDIAN TELECOMMUNICATION INDUSTRY 

The telecommunication industry worldwide is large and fast growing. Telecom revenues worldwide in 1995 were estimated to be $602 billion, up seven percent over the previous year. The industry accounts /for more than two percent of world GDP. About 20 percent of the telecom industry's output of products and services is exported, with a growth rate more than double that of the overall industry. It is a global industry, increasingly characterized by cross-border strategic alliances among service providers such as Global One and Unisource. The leading equipment manufacturers - Lucent, Motorola, Ericsson, Alcatel, Siemens, Nortel, NEC, and Nokia represent a range of countries. 

The telecommunication industry was dominated in the past by monopoly public utilities, often state-owned. Now the industry is being deregulated and privatized. While less than half of global telecom revenue was open to competition in 1997, close to 90 percent of the business is expected to be competitive after a few years, due partly to WTO (Financial Times, September 10, 1997). 

The telecommunication business in India is sizable, growing, and changing. In physical terms, the number of telephone lines totaled 14.1 million in 1997, which made India the14^th biggest in the world. In financial terms, the total expenditure on telecommunication services and equipment in India was $6,500 million in 1995, which accounted for one percent of the world market. Telecom service revenue in India exceeds its Asian neighbors such as Indonesia, Singapore, Malaysia, and Thailand, and among European countries, India exceeds Denmark, Norway, Greece, and Poland. 

These fairly big numbers occur because India is a big country, but its telecom market is only beginning to be developed. In terms of telephone density, India has one of the lowest figures in the world: 1.3 connections per 100 people in 1996, compared to a worldwide average of about 10 and a Chinese figure of 1.7 (the U.S. has about 58 connections per 100 people). Growth in the telecom sector has been very rapid during the five years since the liberalizations of 1991. The number of telephone lines has doubled, telephone density has doubled, and international telephone traffic has tripled. 

Along with growth has come change. Until the mid-1980s, both the provision of telecom services and the production of equipment were entirely state-owned and controlled. Since then a measure of competition has been introduced, private companies including foreign multinational corporations have entered the business, and a range of value-added services has been launched. 

Basic Telecommunications. Local and domestic long distance telephone, telex, telegraph, and fax service through fixed wires are provided by government monopolies. An agency of the central government, the Department of Telecommunications (DoT), operates in all regions of the country except in Mumbai and Delhi, and a separate government-owned monopoly enterprise, Mahanagar Telephone Nigam Ltd. (MTNL), created in 1986,supplies services for Mumbai and Delhi. MTNL had sales revenue of Rs 30 billion in 1995 (about $860 million) and profits before tax of Rs 9.8 billion (about $280 million). 

However, the government is converting local basic fixed wire telephone service (but not long distance) into a duopoly by licensing one private company to compete with DoT in each of 18 "circles", which are geographic regions corresponding roughly to Indian states. This initiative was launched in 1995 with public tenders, and service began in October 1997 in Madhya Pradesh. The introduction of competition in basic local telephone service is remarkable, but it has been slow to develop in part because of regulatory and technological issues and uncertainties about fees to be paid by licensees to the government. Although the government relaxed some its conditions, some bidding companies subsequently had second thoughts about the economic viability of the business and were slow to commit funds and launch service. Nine consortia of companies were awarded licenses in 13 circles, but only four had paid license fees as of mid-1997. 

Basic international telecommunication services are provided by a separate government enterprise, Videsh Sanchar Nigam Ltd. (VSNL) (The Hindi words translate into Foreign Communication Company). VSNL had sales in 1996 of Rs 51.9 billion (about $1.5 billion), which was an increase of 17 percent from 1995, with profits before taxes of Rs 8.4 (about $240 million). Employment at VSNL was 2,800 in 1995. 

Value-Added Telecommunication. Value-added telecommunication services such as e-mail, cellular mobile telephone, radio paging, and satellite data transmission were first available in India in 1995. For cellular and paging services where the number of providers is technically limited by the availability of radio frequencies, the government awarded licenses to companies by a public tender process in 1994. Mobile cellular service is provided by two private companies in each of the four metros and 18 other circles (Table 5). All of these companies are joint ventures between Indian and foreign MNCs. Radio paging service was separately licensed to 19 companies in 27 cities; service began in 12 cities in 1995. For services where there is no technical limitation on the number of firms in a market, such as e-mail and satellite data transmission, there are several firms providing each service nationwide. These are joint ventures with foreign MNCs. 

International value-added telecom remains a state monopoly operated by VSNL. VSNL provides international leased lines, television relays, video conferencing, satellite communications, packet-switched data transmission, electronic data interchange, e-mail, and internet access. Although there are other internet service providers, each much use the gateways that VSNL controls. Private firms may use their own networks, but all depend on VSNL facilities. Of VSNL's total revenue, one-third came from DoT and two-thirds from foreign telecom companies; 92 percent of VSNL revenue was earned from basic telephone service. The Government of India will evaluate the monopoly status of VSNL by the year 2004. 

Regulation. Until 1997, DoT was both a telephone service provider and regulator. In January 1997, a new independent regulatory agency, Telecom Regulatory Authority of India (TRAI) was created, reporting to the Indian parliament. 

Equipment. Telecommunications equipment manufacture was formerly done only by two government-owned companies, Indian Telephone Industries and Hindustan Teleprinters Ltd. Equipment manufacture was opened to the private sector in 1984 and opened to foreign-invested companies in 1991. 

Table 4  
Industries and Equity Stakes That Qualify for  
Automatic Foreign Direct Investment Approval in India  
 

Industries	Maximum Foreign Equity Stake (%)
Mining services, some metals industries, electric power generation, construction, water transport, warehousing, other manufacturing industries not listed below, notably scientific instruments and optical equipment	74
Some metals and metal products industries; boilers, turbines, and engines; electrical equipment; transportation equipment and services; machinery and machine tools; industrial instruments; fertilizers; chemicals; pharmaceuticals; paper; rubber products; glass; ceramics and industrial diamonds; building materials; carbon products; food processing; textiles; software; business services; tourism	51
Three mining industries	up to 50

  

Note: Foreign investments in other industries require approval from Foreign Investment Promotion Board 

Source: Government of India, Indian Investment Centre, Foreign Investment Policy of the Government of India. New Delhi, May 1997. 

Source: Dataquest (India), vol XV, no. 13, July 1997 
 
Table 9 
Biggest Computer Companies in India in 1996/97 
 

Company	Business	Revenue  ($ million)
HCL Group -- HCL-HP, HCL Consulting, NIIT (National Institute of Information Technology) [6], other foreign-invested joint ventures	Hardware, consulting, training, software	473
Tata Sons -- Tata Consultancy Services [2], Tata Information Systems Ltd [5] (joint venture with IBM), Tata Infotech Ltd [11], other companies	Consulting, software, hardware, training, services	464
Wipro Infotech (joint venture with Acer[1]	Hardware, software	270
Tandon Group -- JTS Technology [3], Advance Technology Devices [19], Tancom [20], other companies	Hardware (disk drives)	262
PCL (Pertech Computers Ltd) [4]	Personal computers, servers	208
Hewlett Packard India Ltd [7]	Personal computers, printers	166
IBM (included in Tata above)	Hardware, software	160
Intel		100
Compaq	Importer of personal computers	100
Digital Equipment India Ltd [8]	Hardware	89
Acer (included in Wipro Infotech)	Hardware, software	74

Note: Dollar figures are converted from rupees at Rs 36 per $. 
Source: Dataquest (India), vol XV, no. 13, July 1997