The Impact of Imported and Domestic Technologies on Productivity: Evidence from Indian Manufacturing Firms

Proponents of trade liberalization in developing countries often argue that one of is most important benefits is that is enables firms in developing countries to access the international knowledge base by importing technology in both disembodied form (i.e. as technological know-how) as well as embodied form (i.e. embodied in imported capital goods). Opponents of trade liberalization argue otherwise. In addition to doubting that there are significant gains to be had from utilizing foreign technologies in developing country contexts, they believe that imports of technology dampen local efforts at developing new technology with negative consequences for local capabilities and long-run growth prospects. This paper utilizes panel data on a sample of Indian manufacturing firms for the years 1977-87 to examine these views. Production function estimates reveal that imported technologies, especially those of disembodied nature and obtained through contractual arrangements with foreign firms, impact productivity positively and significantly. Firms own R&D efforts, on the other hand, are note very productive. Finally, while domestically produced capital goods impact productivity positively and significantly, their impact appears to stem from the technological know-how imported by domestic producers of capital goods. Although these findings support the optimism of liberalizers that foreign technologies represent an important opportunity for productivity enhancement for developing country firms, the estimates of this paper also lend support to the notion that a liberal import policy will dampen local efforts at developing new technologies. More specifically, the estimate several that firms do not need to undertake significant R&D efforts to utilize imported technologies effectively. Thus, taken together their results suggest that while firms in India's recently liberalized economic environment will be able to raise their productivity by importing greater amounts of foreign technologies, they will also have less incentives to carry out their own R&D. To the extent that local efforts at R&D are a "good" to be encouraged, the challenge for public policy will be to devise policy tools that are able to boost local R&D, but not through a trade policy which blocks an important and direct channel by which firms can raise productivity.