Solution Set

Fourth Semester (MBA) May 2008 Global Competitiveness and Strategic Alliances Paper Code: MS 232
Maximum Marks: 60 Q.1 (a) Critically analyse the Porters Demand framework. Ans: Porters Diamond Framework Strategy consultants occasionally use Porter's five forces framework when making a qualitative evaluation of a firm's strategic position. However, for most consultants, the framework is only a starting point or 'check-list' they might use. Like all general frameworks, an analysis that uses it to the exclusion of specificities about a particular situation is considered naive. Porter's Five Forces include three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers, bargaining power of customers. Each of these forces has several determinants: The threat of substitute products The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand). buyer propensity to substitute relative price performance of substitutes buyer switching costs perceived level of product differentiation The threat of the entry of new competitors Profitable markets that yield high returns will draw firms. The results is many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition). the existence of barriers to entry (patents, rights, etc.) economies of product differences brand equity switching costs or sunk costs capital requirements access to distribution absolute cost advantages learning curve advantages expected retaliation by incumbents government policies The intensity of competitive rivalry

For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc. number of competitors rate of industry growth intermittent industry overcapacity exit barriers diversity of competitors informational complexity and asymmetry fixed cost allocation per value added level of advertising expense Economies of scale Sustainable competitive advantage through improvisation The bargaining power of customers Also described as the market of outputs. The ability of customers to put the firm under pressure and it also affects the customer's sensitivity to price changes. buyer concentration to firm concentration ratio bargaining leverage, particularly in industries with high fixed costs buyer volume buyer switching costs relative to firm switching costs buyer information availability ability to backward integrate availability of existing substitute products buyer price sensitivity differential advantage (uniqueness) of industry products RFM Analysis The bargaining power of suppliers Also described as market of inputs. Suppliers of raw materials, components, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources. supplier switching costs relative to firm switching costs degree of differentiation of inputs presence of substitute inputs supplier concentration to firm concentration ratio threat of forward integration by suppliers relative to the threat of backward integration by firms cost of inputs relative to selling price of the product This 5 forces analysis is just one part of the complete Porter strategic models. The other elements are the value chain and the generic strategies. Criticisms Porter has been criticised by some academics for inconsistent logical argument in his assertions. [1] Critics have also labelled Porter's conclusions as lacking in empirical support and as justified with selective case studies.[2] [3] [4]

(b) Write a short note on trends in application affect the competitiveness of information technology sector of India? Ans: Enterprise resource planning (ERP) is the planning of how business resources (materials, employees, customers etc.) are acquired and moved from one state to another. An ERP system is a business support system that maintains in a single database the data needed for a variety of business functions such as Manufacturing, Supply Chain Management, Financials, Projects, Human Resources and Customer Relationship Management. An ERP system is based on a common database and a modular software design. The common database can allow every department of a business to store and retrieve information in real-time. The information should be reliable, accessible, and easily shared. The modular software design should mean a business can select the modules they from different vendors, and add new modules of their own to improve business performance. Ideally, the data for the various business functions are integrated. In practice the ERP system may comprise a set of discrete applications, each maintaining a discrete data store within one physical database need, mix and match modules. Some organizations typically those with sufficient in-house IT skills to integrate multiple software products choose to implement only portions of an ERP system and develop an external interface to other ERP or stand-alone systems for their other application needs. For example, one may choose to use human resource management system from one vendor, and the financial systems from another, and perform the integration between the systems themselves. This is very common in the retail sector[citation needed], where even a mid-sized retailer will have a discrete Point-of-Sale (POS) product and financials application, then a series of specialized applications to handle business requirements such as warehouse management, staff rostering, merchandising and logistics. Ideally, ERP delivers a single database that contains all data for the software modules, which would include: Manufacturing Engineering, Bills of Material, Scheduling, Capacity, Workflow Management, Quality Control, Cost Management, Manufacturing Process, Manufacturing Projects, Manufacturing Flow Supply Chain Management Inventory, Order Entry, Purchasing, Product Configurator, Supply Chain Planning, Supplier Scheduling, Inspection of goods, Claim Processing, Commission Calculation Financials General Ledger, Cash Management, Accounts Payable, Accounts Receivable, Fixed Assets Projects Costing, Billing, Time and Expense, Activity Management Human Resources

Human Resources, Payroll, Training, Time & Attendance, Rostering, Benefits Customer Relationship Management Sales and Marketing, Commissions, Service, Customer Contact and Call Center support Data Warehouse and various Self-Service interfaces for customer, suppliers and employees. (c) How would rupee appreciation effect the competitiveness of information technology sector of India? Ans: This year, however, most IT stocks have under-performed. With the appreciation of the rupee, most IT companies have reported profits below last years levels. Mega acquisitions in the news have been in non-IT space. With BFSI (banking, financial services and insurance) segment contributing to a large percentage of Indian IT exports, will a slowdown in the U.S. affect India adversely? Analysts are predicting that the global IT spends will slow down in 2008. Is Is the party over for Indian IT industry? And, will the sheen go off in the next few years? Unmindful of these pressures, the IT majors, however, are adding headcounts like there is no tomorrow (see graphics). Global majors such as IBM today have 20 per cent of their global workforce in India. Do these developments portent some new trends? An appreciating currency is a natural corollary of a booming economy with rising exports. The high value of the deutschemark when Germany was the trendsetter for the world economy in the 1960s and the 1970s, the high value of yen in the 1980s when Japan Inc seemed set to take over the world and dollars high value in the later part of 1990s when the U.S. economy brooked no competition these were sources of immense pride for their respective countries. The rupee has not only appreciated against the dollar (12-13 per cent), but also against the pound sterling and euro, during the last six months. FDI (foreign direct investment) inflows, foreign portfolio inflows and growing Indian economy are among the reasons for the strong rupee. The heart-burn on the rupees appreciation against the dollar is due to the fact that most of the countrys external trade is invoiced in dollar and any change in the dollars rupee value has a disproportionate effect on various stakeholders. The rising rupee is likely to hit Indian mid-size software services providers because of their thin margins. Margins are impacted to the extent of 0.5-0.6 per cent for every rupee increase against the dollar, depending on the business mix, says Subbu D. Subramanian, Director and Senior Vice-President (Manufacturing and Automotive group), Saytam Computer Services. As a part of our strategy to offset the impact of the appreciation of the Indian rupee, we are increasing our employee utilisation levels, and we were able to successfully further increase our global utilisation rates from 63 per cent to 65 per cent, says Chandrasekaran, President and Management Director, Cognizant Technology Solutions. Mr. Chandrasekaran says, We do not hedge. And our rupee expenditure is about 30 per cent of our total expenses. We have not hedged so far because there is an implied cost to hedging. Besides, we have several short-term levers to pull, which have the natural ability to offset the effects of rupee appreciation. The U.S.-based competitors depend on their Indian subsidiaries to

control costs, and their competitiveness will also be hit by the rupee appreciation, says Mr. Subramanian. d) Explain any one of the following (i)Co-specialiasation Co-specialization is the value-added process of combining previously separate resources, positions, skills, and knowledge. Partners contribute unique and differentiated resources. Healthcare organizations who need to refocus on a narrower range of core skills may explore cospecialization as an approach to develop new services. (ii) Value Creation In Strategic Alliances Ans: Competitive Strategy and Financial Analysis Winners and losers - the evidence Four fundamental shareholder value principles Why synergies may not be enough

Framework for examining industry attractiveness of target companies Identifying sources of competitive advantage Alternative valuation approaches Shortcomings of earnings Determining the maximum price to pay - the shareholder value approach

Financial Analysis, Performance Measurement, and Negotiation Estimating value drivers and establishing hurdle rates for the target Testing assumptionsgetting beneath the cash-flow forecasts Critical success factors Recognizing potential deal killers Stock market signals to management Linking acquisition analysis to post-merger performance Value-based performance measurements Positional vs. principled negotiations Preparing for and managing the negotiation process Managing for Value and Post-Merger Integration Managing for value creationa corporate case study Successful restructuring and post-restructuring strategy Choosing the most appropriate post-merger approach How does the integration process affect value creation? Strategic Alliances Costs and benefits of joint ventures, licensing agreements, and other strategic alliances Strategic alliances vs. mergers and acquisitions Creating and managing domestic and international strategic alliances Search Process and Making Shareholder Value Theory Work

Shareholder value approach to security analysis Shareholder value theory in action Other aspects of value creation

(iii) National System of Innovation 1. National System of Innovation (NSI) A generic definition of the NSI is that this a cluster or network of interacting public and private organizations within a specific country focused on the nurturing and the development of the science and technology space within the borders of that particular country. There are a number of definitions that are used to define the NSI, the most widely used are those quoted by the OECD publication National Innovation Systems (1997), namely:

The network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies. (Freeman, 1987) The elements and relationships which interact in the production, diffusion and use of new, and economically useful, knowledge ... and are either located within or rooted inside the borders of a nation state. (Lundvall, 1992) A set of institutions whose interactions determine the innovative performance ... of national firms. (Nelson, 1993) The national institutions, their incentive structures and their competencies, that determine the rate and direction of technological learning (or the volume and composition of change generating activities) in a country. (Patel and Pavitt, 1994) That set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artefacts which define new technologies. (Metcalfe, 1995)

The NSI is set to address the following issues outdated technology and technology support used by many SMMEs failure rates of start-up and entry into value-added areas by SMMEs access to competitiveness and business support promotion of innovative ideas Priorities of the NSI The key priorities of the NSI Improvement of competitiveness Improving the quality of life Ensuring environmental sustainability Work on human resource development Ensure community development through technology transfer instruments Structures of the NSI (towards creating an effective NSI) The DST, DTI and Science Councils are responsible for the development and implementation of an effective NSI.

The NSI also has 12 centres of which 4 are funded by the DTI

Q.2 Discuss the major initiatives undertaken to develop competitiveness through cluster development in India. Ans: CLUSTER DEVELOPMENT AND BDS PROMOTION: UNIDOS EXPERIENCE IN INDIA THE UNIDO CLUSTER APPROACH Before reflecting on our experience in BDS-related initiatives within the Indian Cluster Development Project, the approach is explained in detail. This chapter introduces the reader to the rationale behind the approach in section 2.1, and presents a brief introduction to the methodology implemented in various Indian clusters in section 2.2. Rationale SSE clusters constitute ideal targets for a SSE support agency (Mead & Liedholm 1998, OECD 1998). The concentration of largely homogenous enterprises within a relatively limited geographical area facilitates the intervention because of their similarity of needs and support requirements, speeds up the dissemination of best practices because of the pervasiveness of demonstration effects, and allows for a distribution of the fixed costs of interventions among a large number of beneficiaries. This is true for under-achieving clusters as well as for the best performing ones. However, underachieving clusters are characterized by environments where information does not flow easily and where the various actors are not accustomed to talking with one another. In stark contrast with their counterparts in the more successful clusters in well-performing clusters, especially in developed countries, entrepreneurs in under-performing clusters rarely if ever meet one another, do not usually have on-going relationships with BDS providers and are not accustomed to presenting articulated calls for actions to the local policy makers. On the contrary, these clusters are more often than not characterized by extremely fragmented knowledge, latent conflicts, and an absence of discussion fora. The SSEs in these clusters therefore have very poor perceptions about the feasibility of joint actions. The UNIDO cluster approach has been developed to address the knowledge fragmentation, lack of co-ordination and joint action which characterizes underperformingclusters, and is suitable for the purpose of overcoming these in-built obstacles. It is based upon the realization that the lack of communication among the various cluster actors and their skepticism towards joint endeavors are often deeply entrenched within traditional business practices and that the latter cannot be replaced without the investment of significant resources. The private sector (SSE, BDS providers) is unlikely to provide these resources because of the public nature of the goods and services needed to overcome knowledge fragmentation and poor co-ordination. Awareness- and trust-building initiatives, the dissemination of best practices within an audience of scarcely motivated SSE owners, the creation of suitable discussion fora and ultimately of a governance framework for the cluster as a whole are all activities whose outcome is not only subject to a a high degree of uncertainty but are also largely indivisible and largely non excludable (i.e. once provided are available to all). As a result, profit-motivated agents should not be expected to invest a great deal of their resources for the realization of such activities.

The cluster approach aims to achieve these outcomes by helping the various cluster actors to develop a consensus-based vision for the cluster as a whole and by strengthening their capacity to act upon such a vision. The first component is aimed mainly at reducing the fragmentation of knowledge, but also provides an extremely valuable opportunity to draw attention to a common and often very innovative agenda, so that each cluster actor (and above all SSE owners) has an opportunity to test the reliability and trust-worthiness of its partners on a fresh ground. The second component of the approach aims at enabling the various cluster actors to overcome traditional practices and put in place a sustainable, autonomous governance framework that will keep dynamizing the local economy long after UNIDO will have withdrawn from the cluster. The Methodology The methodology implemented in India addresses both the vision- and capacity building objectives discussed in the previous section. This section emphasizes the three phases which each cluster project is expected to undergo over its lifetime, namely: __Preparation of a diagnostic study and formulation of a cluster action plan; __Implementation of pilot and strategic projects; and The self-management phase. It must be stressed, however, that the boundaries between the various phases are not strictly defined and that all phases contribute to vision- and capacity building. In India the implementation of the three phases centres on a Focal Point based in Delhi, currently comprising of four national consultants. These consultants have been trained by UNIDO in the principles of clustering and networking. They are responsible for the implementation of these phases, for encouraging the exchange of experiences among clusters, and for supporting the Indian Government in its efforts to promote a national cluster development programme. At the cluster level, the Focal Point forges working partnerships with one or more institutions (NGOs, producers consortia/associations, BDS providers) not only to facilitate the implementation of the various initiatives, but also to pass on the skills and competence acquired as a result of the UNIDO training and the hands-on experience gained in the pilot cluster. A key tool for cluster development is the diagnostic study. This study gathers previously dispersed and fragmented knowledge about the economic and social conditions of the cluster and its development potential, as well as the state of inter-firm relationships and the existing institutional support mechanisms. The diagnostic study also provides a valuable opportunity to enforce awareness about the approach and to promote trust among the cluster actors. Moreover, it helps to identify potential leaders from within the cluster and, more generally, the suitable counterparts to assist implementation. The diagnostic phase ends with the preparation of a broad action plan for the cluster. This document is drafted by the Focal Point together with key cluster representatives and offers a vision around which to gather the support and collaboration of the various cluster actors. The preparation of such a plan is the essential first step in developing long term local capacities for responding to evolving economic and technical circumstances, rather than as a once-for-all prescription. The first draft of the cluster action plan is thus a working document which must be revised as more information about the cluster is disclosed and on the basis of the results of the initial interventions. Nevertheless, it is expected that the information gained as a result of the diagnostic study and the joint preparation of the action plan (especially concerning the competitive position of the cluster in the national and international market) will suffice to identify the potentialities of the cluster as well as the key obstacles which prevent it

from taking up the opportunities provided by the globalisation of the Indian economy. As these obstacles are identified, a key task of the Focal Point is to help the partners institutions to priorities them (both in terms of their importance and of the capacity of the cluster actors to jointly tackle them) and to identify the initiatives which can relieve them including the utilization of existing BDS and the development of new ones. The elaboration of an action plan is meant as the initial step to the development of pilot projects where groups of firms sharing similar constraints (networks7) are formed and specific initiatives are formulated and implemented. During this phase, co-operation starts bearing concrete results to the participating enterprises. The initiatives are generally of a commercial and/or promotional kind (e.g. joint participation in fairs, joint purchase of raw materials, design of a collective catalogue). The idea is to generate visible results (although of a short-term nature) to engender optimism and trust. At the same time, the pilot projects consolidate willingness of the networks and associations to undertake long-term strategic initiatives around an increasingly. The term network refers to a group of firms that co-operate on a joint development project, complementing each other and specializing in order to overcome common problems, achieve collective efficiency and conquer markets beyond their individual reach. shared vision for the cluster as a whole. These projects generally entail an increase in the degree of specialization by process and/or by product of the firms involved (e.g. restructuring or creation of common service facilities, new product lines, common brands). It is at this stage that the involvement of both technical and financial institutions becomes essential and that the initiatives are meant to contribute more directly to the creation of capacities at the cluster level. UNIDO therefore ensures that the networks/associations supported by the projects can draw assistance from the available institutions. This task often implies upgrading the capacity of BDS providers or even initiating their establishment, especially in clusters characterised by a relatively weak support framework. Finally the intervention gives way to a self-management phase, as the networks/associations gain greater autonomy from UNIDOs assistance and the capacity to undertake further joint activities independently. It is during this phase that it becomes possible to test whether the earlier investment on vision- and capacity building has delivered the expected results and if the cluster approach has won the endorsement of the various cluster actors. Self management is not always easily achieved. Often the networks/associations tend to lean on UNIDOs assistance for a longer time than initially envisaged. In order to avoid dependency the work plan established by the cluster actors and the Focal Point must have a specific time frame. The cluster actors thus know from the beginning that they can count on assistance only for a limited period of time. As the various networks/associations develop, UNIDOs intervention shifts towards softer co-ordination and a progressive transfer of responsibilities to the cluster actors is ensured.

BDS-RELATED INITIATIVES WITHIN THE CLUSTER APPROACH The rationale behind the cluster development project is to strengthen the capacity of the various cluster actors to develop a collective vision of the opportunities they face, and to seize these opportunities through coordinated collective initiatives. The interaction between UNIDO and the key cluster actors has shown that the structural problems faced by the clusters are not primarily related to the inefficiency (i.e. lack of competition) of the existing BDS markets (e.g. vocational training, book-keeping, technology transfer, etc.). On the contrary, the inability to seize upon a more ambitious vision for the cluster as a whole is generally related to the absence of certain types of BDS markets, for example in the fields of export consultancy, internet technology, bulk purchasing, and joint product marketing, although they would be the most beneficial. These are areas where potential suppliers are often unwilling to customize their services to the requirements of SSEs, while potential customers are unclear about the need for such services. In other words, the absence of this type of BDS stems from the lack of an effective demand as well as of a suitably customized supply. As pointed out in section bridging such a gap requires the provision of a variety of public goods that are not spontaneously forthcoming either from the BDS suppliers or from the SSEs within the cluster. The UNIDO approach towards BDS-related initiatives involves a simultaneous effort on the demand side (through the articulation of the demand by the SSE owners for BDS presently unavailable in the clusters) and on the supply side (through the design of BDS customized to the needs of the cluster SSEs and in line with the emerging vision for the cluster as a whole). On the same issue, it needs to be emphasised that capacity building cannot be confined to a once-andfor-all initiative such as the identification/provision of a BDS previously unavailable to the cluster SSEs. On the contrary, the aim is to enable the various cluster actors to tackle new challenges and to seize upon more ambitious visions on a sustainable basis. Such an objective involves, for example, strengthening the capacity of the SSE owners to convey their requests to the BDS providers, lowering the risk perceived by BDS providers in doing business with SSEs, enabling BDS providers and SSE owners to identify institutional partners able and willing to cofinance the development of new BDS, and identifying more effective procedures to assess BDS impact. Lastly, it is important to stress that UNIDO has tried to avoid, to the extent possible, the subsidisation of BDS costs out of the conviction that the various cluster actors will no fail to perceive the economic viability of commercial BDS provision if they have been sufficiently sensitised to the value of such services. When subsidies were provided, they were aimed at startups providing innovative BDS (e.g. access to new technology cum training, quality management). On the contrary, significantly less support was available for BDS strengthening the commercial capacities of the SSEs or, more generally, to initiatives with an immediate impact upon the profitability of the latter (e.g. participation in fairs, product design). The following table gives an indication of the declining degree of subsidization over time with reference to the support provided to the Calico Printers Cooperative Society Ltd. (CALICO) in Jaipur. As a general rule, subsidies are granted to the business associations rather than directly to the SSEs. The opposite strategy has indeed delivered disappointing results as illustrated by the following case: in the hope to boost the SSEs confidence about export markets, UNIDO agreed to subsidise the participation of one of the Jaipur export consortium members to a major Italian fair. It was expected that this exporter would discuss his impressions and disseminate his findings to his peers upon returning from the trip, thus dynamising the consortium. However, the

results were not in line with the expectations: not only did the exporter fail to share his experience, but a great deal of conflict also broke up within the consortium as all other members felt discriminated against build systemic capacities for the whole cluster. Articulation of demand As mentioned in section 2.1, underachieving SSE clusters are often characterized by extreme fragmentation of knowledge and lack of trust. This feature can be so pervasive that the various cluster actors fail even to perceive their inter-dependence, and therefore the scope for mutual collaboration and interaction. Largely as a result of the lack of mutual trust and of suitable for a, cluster actors hold wholly incompatible perceptions of how the cluster operates and what its potential might be. This is the reason why the diagnostic study discussed in Section 2.2 cannot consist merely of a simple collection of accounts from the different cluster actors. On the contrary, this preliminary study must provide an opportunity to combine information and to compare incompatible or scarcely overlapping pictures. Ultimately, the diagnostic study must enable the cluster actors to come up with a new vision for the cluster as a whole, a task which inevitably requires all of them to be willing and able to re-interpret their visions in light of the knowledge disclosed by the other cluster actors. The experience of UNIDO indicates that it only becomes possible to identify the real needs of the cluster SSEs and to act upon them (for example through the provision of previously unavailable BDS), as a result of this exercise. It is clear that this exercise can only be undertaken if the entrepreneurs trust one another. Q.3 Explain the significance of effective policy of science, technology and innovation to faster competitiveness of Indian industry? Ans: Science and technology have profoundly influenced the course of human civilization. Science has provided us remarkable insights into the world we live in. The scientific revolutions of the 20th century have led to many technologies, which promise to herald wholly new eras in many fields. As we stand today at the beginning of a new century, we have to ensure fullest use of these developments for the well being of our people. Science and technology have been an integral part of Indian civilization and culture over the past several millennia. Few are aware that India was the fountainhead of important foundational scientific developments and approaches. These cover many great scientific discoveries and technological achievements in mathematics, astronomy, architecture, chemistry, metallurgy, medicine, natural philosophy and other areas. A great deal of this traveled outwards from India. Equally, India also assimilated scientific ideas and techniques from elsewhere, with openmindedness and a rational attitude characteristic of a scientific ethos. India's traditions have been founded on the principles of universal harmony, respect for all creation and an integrated holistic approach. This background is likely to provide valuable insights for future scientific advances. During the century prior to Independence, there was an awakening of modern science in India through the efforts of a number of outstanding scientists. They were responsible for great scientific advances of the highest international caliber. In the half century since Independence, India has been committed to the task of promoting the spread of science. The key role of technology as an important element of national development is also well recognised. The Scientific Policy Resolution of 1958 and the Technology Policy Statement of 1983 enunciated the principles on which the growth of science and technology in India has been based over the past several decades. These policies have emphasized self-reliance, as also sustainable and equitable development. They embody a vision and strategy that are

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With the encouragement and support that has been provided, there is today a sound infrastructural base for science and technology. These include research laboratories, higher educational institutions and highly skilled human resource. Indian capabilities in science and technology cover an impressive range of diverse disciplines, areas of competence and of applications. India's strength in basic research is recognized internationally. Successes in agriculture, health care, chemicals and pharmaceuticals, nuclear energy, astronomy and astrophysics, space technology and applications, defense research, biotechnology, electronics, information technology and oceanography are widely acknowledged. Major national achievements include very significant increase in food production, eradication or control of several diseases and increased life expectancy of our citizens. While these developments have been highly satisfying, one is also aware of the dramatic changes that have taken place, and continue to do so, in the practice of science, in technology development, and their relationships with, and impact on, society particularly striking is the rapidity with which science and technology is moving ahead. Science is becoming increasingly inter- and multi-disciplinary, and calls for multi-institutional and, in several cases, multi-country participation. Major experimental facilities, even in several areas of basic research, require very large material, human and intellectual resources. Science and technology have become so closely intertwined, and so reinforce each other that, to be effective, any policy needs to view them together. The continuing revolutions in the field of information and communication technology have had profound impact on the manner and speed with which scientific information becomes available, and scientific interactions take place. Science and technology have had unprecedented impact on economic growth and social development. Knowledge has become a source of economic might and power. This has led to increased restrictions on sharing of knowledge, to new norms of intellectual property rights, and to global trade and technology control regimes. Scientific and technological developments today also have deep ethical, legal and social implications. There are deep concerns in society about these. The ongoing globalisation and the intensely competitive environment have a significant impact on the production and services sectors. Because of all this, our science and technology system has to be infused with new vitality if it is to play a decisive and beneficial role in advancing the well being of all sections of our society. The nation continues to be firm in its resolve to support science and technology in all its facets. It recognizes its central role in raising the quality of life of the people of the country, particularly of the disadvantaged sections of society, in creating wealth for all, in making India globally competitive, in utilizing natural resources in a sustainable manner, in protecting the environment and ensuring national security. POLICY OBJECTIVES Recognizing the changing context of the scientific enterprise, and to meet present national needs in the new era of globalisation, Government enunciates the following objectives of its Science and Technology Policy: o To ensure that the message of science reaches every citizen of India, man and woman, young and old, so that we advance scientific temper, emerge as a progressive and enlightened society, and make it possible for all our people to participate fully in the

o o

o o

o o

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development of science and technology and its application for human welfare. Indeed, science and technology will be fully integrated with all spheres of national activity. To ensure food, agricultural, nutritional, environmental, water, health and energy security of the people on a sustainable basis. To mount a direct and sustained effort on the alleviation of poverty, enhancing livelihood security, removal of hunger and malnutrition, reduction of drudgery and regional imbalances, both rural and urban, and generation of employment, by using scientific and technological capabilities along with our traditional knowledge pool. This will call for the generation and screening of all relevant technologies, their widespread dissemination through networking and support for the vast unorganized sector of our economy. To vigorously foster scientific research in universities and other academic, scientific and engineering institutions; and attract the brightest young persons to careers in science and technology, by conveying a sense of excitement concerning the advancing frontiers, and by creating suitable employment opportunities for them. Also to build and maintain centres of excellence, which will raise the level of work in selected areas to the highest international standards. To promote the empowerment of women in all science and technology activities and ensure their full and equal participation. To provide necessary autonomy and freedom of functioning for all academic and R&D institutions so that an ambience for truly creative work is encouraged, while ensuring at the same time that the science and technology enterprise in the country is fully committed to its social responsibilities and commitments. To use the full potential of modern science and technology to protect, preserve, evaluate, update, add value to, and utilize the extensive knowledge acquired over the long civilizational experience of India. To accomplish national strategic and security-related objectives, by using the latest advances in science and technology. To encourage research and innovation in areas of relevance for the economy and society, particularly by promoting close and productive interaction between private and public institutions in science and technology. Sectors such as agriculture (particularly soil and water management, human and animal nutrition, fisheries), water, health, education, industry, energy including renewable energy, communication and transportation would be accorded highest priority. Key leverage technologies such as information technology, biotechnology and materials science and technology would be given special importance. To substantially strengthen enabling mechanisms that relate to technology development, evaluation, absorption and upgradation from concept to utilization. To establish an Intellectual Property Rights (IPR) regime which maximises the incentives for the generation and protection of intellectual property by all types of inventors. The regime would also provide a strong, supportive and comprehensive policy environment for speedy and effective domestic commercialisation of such inventions so as to be maximal in the public interest.

o o

To ensure, in an era in which information is key to the development of science and technology, that all efforts are made to have high-speed access to information, both in quality and quantity, at affordable costs; and also create digitized, valid and usable content of Indian origin. To encourage research and application for forecasting, prevention and mitigation of natural hazards, particularly, floods, cyclones, earthquakes, drought and landslides. To promote international science and technology cooperation towards achieving the goals of national development and security, and make it a key element of our international relations. To integrate scientific knowledge with insights from other disciplines, and ensure fullest involvement of scientists and technologists in national governance so that the spirit and methods of scientific enquiry permeate deeply into all areas of public policy making.

It is recognized that these objectives will be best realized by a dynamic and flexible Science and Technology Policy, which can readily adapt to the rapidly changing world order. This Policy, reiterates India's commitment to participate as an equal and vigorous global player in generating and harnessing advances in science and technology for the benefit of all humankind. The Rationale for Science and Technology Policy In a globalising world economy the comparative advantage based on endowments of basic factors of production, like natural resources, has become less important. An abundance of traditional factors of production raw materials, energy, and unskilled labour is not enough to guarantee long-term success. Rather, it is continuous innovation and improvement in productivity that are crucial. In this wise, national competitive advantage is not inherited it has to be created. And as most of the innovative activity takes place in private enterprises, a countrys international competitiveness is a question of how competitive its firms are, how its industries perform in world markets, how its institutions are organized and how successfully its science, technology and industrial policies affect the performance of firms and industries. While it is the private sector that constitutes the engine of innovation, national policies create environments that can encourage or constrain the ability of firms to innovate. The more innovative firms are, the more they are profitable and the more value-added they create in a nation. It is, therefore, vital for countries to put in place policies to create an effective and efficient national innovation system (NIS). Four conditions need to be met for building an effective national innovation system. These are: a) strong and competitive pressures on domestic firms; b) the presence of high quality human capital; c) well developed links between industry, institutions and academia; and d) openness and access to foreign technologies. These determinants of an NIS indicate that innovation involves far more than science and technology. It cannot be denied, however, that a forward-looking S&T policy can be developed to foster an appropriate mix of these determinants. Indeed, the first step towards, and the necessary pre-requisite to, any good NIS is an effective S&T policy. In recognition of this, all advanced and industrializing countries consciously foster an S&T policy.

The pressures of international competition have made both knowledge creation and exploitation vital for business success. As a result, the internationalisation of R&D has increasing relevance for strategic management of companies and the strengthening of national innovation systems. The globalisation of R&D is establishing deep roots for several reasons. Firstly, changing geopolitical infrastructures are creating new opportunities for synergistic R&D activities across national frontiers. Secondly, rapidly changing technologies are no longer constrained by geographical boundaries. Thirdly, increasing complexities of technological systems are making it imperative to generate and implement knowledge in emerging fields quickly and collaboratively. Fourthly, the need for brainpower with an ever-increasing sophistication is being met by identifying and employing people with the appropriate skills at appropriate locations wherever they may be. International R&D strategy is thus emerging to meet these challenges. To this end, firms in developed countries and increasingly in some developing countries are being driven to take advantage of world-wide science and technology resources. These factors have spurred the growth of science and technology developments in those nations, which have conducive environments. Israel, Taiwan, Singapore, South Korea and, to a lesser extent, Ireland, have made substantial progress in upgrading their innovative capacity and, as a result, have become beneficiaries of foreign investments in science and technology ventures. Although countries such as India, China and Malaysia, have increased investments in areas related to science, technology and innovation at New Science, Technology and Innovation Developments In India modest levels, there is little doubt that some of these, especially China and India, are potential scientific powerhouses. Trends in STI Developments in India Market-oriented Reforms in India India is experiencing an economic renaissance. Economic reforms introduced by the Rao administration in 1991 in the wake of serious macroeconomic difficulties have taken root and a major restructuring of the economy, albeit slow, is continuing. With a population of over 1000 million including an estimated middle class of about 250 million people, Indias domestic market potential among developing countries is second only to Chinas, and close to all countries of the Association of South East Asian Nations (ASEAN) combined. After independence in 1947, the early leaders of India committed themselves to a policy of industrialization based on selfreliance. For almost four decades after independence, India pursued an isolationist and importsubstitution strategy across all its sectors. This produced large and inefficient enterprises, many of them state-owned and unaccustomed to competition. The result was an economic growth typically of 3.5% per year (equivalent to 1% growth per capita) what had become known as the Hindu rate of growth. From the early 1980s, a growing consensus emerged in favour of economic liberalization. Powerful vested interests, including leaders of protected industry, unions and politicians, ensured that early initiatives were limited to little more than incentives to exporters, minor industrial deregulation and some simplification of the tax regime. The modest changes led to an average growth of 5.3% a year, which was not only much higher than that of the decades before but was also better than the growth performance of all developing countries put together. The high degree of protection from foreign competition and the basic problem of erosion of competitiveness of Indian exports continued. However, a more activist policy to achieve a depreciation of the real effective exchange rate was pursued with a view to boosting exports. The fiscal policies of the Central Government also became expansionary in the 1980s to support growing expenditure on account of sharply rising interest payments and expenditures on defence and subsidies. The gross fiscal deficit of Central Government increased from 6.2% in 1980/81 to 8.4% by 1990/91. The rate of inflation of 8.2% was stable but the current account deficit rose from 2.5% in 1985/86 to 3.3% in 1990/91. The Gulf War in 1990 precipitated a

balance of payment crisis and this was not helped by the political instability at the beginning of the 1990s, which combined to cause a collapse of international confidence in the ability of the government to manage the economy. This caused external commercial loans and inflow of nonresident Indian (NRI) capital to dry up. The stage was set for a possible international default. Despite emergency borrowing from the International Monetary Fund (IMF), the level of exchange reserves dropped to just over $1 billion, barely sufficient to finance imports for a fortnight. The rate of inflation accelerated to double digits (10.30%) from 7.4% a year earlier. By August 1990, inflation had shot upwards to 17%. It was within this background that the newly elected Government of Mr Rao launched a programme of ambitious economic reforms in July 1991. The reforms were designed within an overall dual strategy whereby fiscal adjustment aims to achieve macroeconomic stability were combined with structural reforms in industrial, trade and financial policies to strengthen growth capacity and international competitiveness of Indian industry. The main tenets of the reforms included: The opening up of more sectors to private investment and participation power, steel, oil refining and exploration, road construction, air transport, telecommunications, ports, mining, pharmaceuticals and financial services. encouragement of FDI with majority equity, except in a few strategic sectors, and portfolio investment. Red tape was significantly reduced. De-licensing of most industries to encourage competition. Domestic investment in defence-related items was permitted. Trade liberalization. Some import quotas were converted into tariffs, and the tariff system was simplified to reduce the number of bands and achieve a reduction in overall rates. As of 2001 (April), quantitative restrictions (QRs) on imports have been removed. The taking out of state control some aspects of business decision-making such as the location of new enterprise and technology transfer. The exchange regime was liberalised, with the devaluation of the rupee by 22% against the US dollar in two instalments in July 1991. A market-determined exchange New Science, Technology and Innovation Developments In India rate was introduced in March 1993 and current account convertibility in August 1994. (the rupee is, however, not yet fully convertible on the capital account). Reform of capital markets. Private mutual funds, country funds and foreign institutional investors (FIIs) were all made active investors. Since 1991, the reform agenda has been progressed at every annual budget to bring the Indian economy into closer integration with the rest of the world. Trends in Indias Science and Technology Policy It has long been recognised that investment in science and technology makes substantial contribution to economic growth in terms of higher growth rates of an economys total factor productivity (Abramovitz, 1956, Denison 1962 and Solow, 1957, among others). In addition to direct returns, huge (positive) externalities have also been found to be associated with it (Abramovitz, 1989). Taking cognisance of the importance of technologys role in development, advanced countries nurture continuing development of science and technology and most developing countries adopt R&D policies in the early phases of their development. Science and Technology policy constitutes an integral part of a nations overall industrial policy (Barber and White, 1987). While the former shapes the pace and direction of technology development, the latter determines the nature of demand. This section reviews the evolution of Science and Technology policy in India since independence. Science and Technology policy of any nation is carved within the background of overall industrial policy. If anything, S&T policy is supposed not only to give meaning to, but more importantly, to ensure achievement of the goals of industrial policy. It is therefore the thrust and direction of industrial policy that determines the

tenets of any S&T policy, although it must be said that R&D may lead to results that may also change the course of industrial policy. Even so, S&T policy has almost always been driven by the goals of industrial development policy. This section therefore describes the development strategy adopted by the government in the various phases of development and analyses the accompanying S&T policy. Two strands of S&T policy have existed policies related to technology transfer from abroad through formal modes such as FDI, technology licensing and capital goods imports and domestic technology generation policies. Part of these reforms has been the re-enactment of a science and technology policy more suited to the achievement of the goals of building a prosperous nation. The Industrial Policy Statement of 1991 had, among its objectives, the aim of injecting the desired level of technological dynamism into Indian Industry and the development of indigenous competence for the efficient absorption of foreign technology. It also expressed the hope that greater competitive pressure will induce our industry to invest much more in research and development than they have been doing in the past. The intention was to create a national innovation system (NIS) that was in sharp contrast to that prevailing prior to the July 1991. The national innovation system of a country is the set of institutions, policies and organisations and the interactions between them that determine the level of innovation arising from that country. While the increase in globalisation has resulted in some dilution of the importance of the boundaries of the nation-state from an economic perspective, the NIS continues to be an important determinant of a nations economic performance. After independence in August 1947, the Indian Government, under Jawaharlal Nehru set itself the task of socio-economic transformation of the country through a process of central planning. Science was given considerable importance in the development Plans, as its significance in national development was recognised. Nehrus firm belief that science and technology could play a major role in bringing both material and cultural benefit to the people of India may be summed up in a statement he made prior to independence and in the preamble of the very first S&T policy document prepared in 1958 under his guidance. And I hope with Lord Rutherford that in the days to come, India will again become the home of science, not only as a form of intellectual activity, but also as a means of furthering the progress of her people New Science, Technology and Innovation Developments In India a) Trade and Foreign Direct Investment. Since 1991, successive governments have progressively reduced tariff protection and simplified India's restrictive import licensing regime. Tariffs have been reduced from an average of 71 percent in 1993 to a current average of 20 percent. Also the number of items subject to import licensing has been reduced, albeit with an emphasis on industrial and capital goods. There is still need for further reforms in the import-licensing regime and in the tariff structure, which remains complex and high in several industries. India has simplified its foreign investment regime and opened up a number of sectors to foreign direct investment. Foreign participation of up to 51 or 74 percent can take place automatically in the manufacturing sector. Production in the foodmanufacturing sector has grown rapidly following increased investment. In this sector, up to 50 and 100 percent participation is allowed automatically for foreigners and non-resident Indians. Permission for controlling equity in automobile manufacturing has triggered a high rate of investment. The gap between FDI approvals and out-turns remain stubbornly high, with the latter representing less than one-third of the former, at best. Greater transparency and speed in decision-making could promote a more efficient and productive out-turn

b) The Environment (Montreal Protocol) The Montreal Protocol on substances that deplete the ozone layer is a landmark international agreement designed to protect the stratospheric ozone layer. The treaty was signed in 1987, by 24 original members, and substantially amended in 1990 and 1992. The original list of members has expanded to 175. The Protocol stipulated the phasing out of compounds that deplete the ozone layer by 2000 (2005 for methyl chloroforms). India acceded to the Protocol on 17 September 1992. In 1993, it proposed a detailed country programme to phase out ozone depleting substances (ODS) in a manner that will not put undue economic burden on both consumers and industry. Such a stance obviously causes delay in meeting international obligations but India intends not only to meet its obligations but also continue to contribute to the formulation and implementation of policies to achieve the provisions of the treaty. c) The TRIPS Agreement. While India takes several issues (see below) with the trade-related aspects of intellectual property rights (TRIPS) agreement, it has taken steps to meet some of the provisions New Science, Technology and Innovation Developments In India and intends to meet the deadline provided to developing countries. The TRIPS Agreement is based on the recognition that increasingly the value of goods and services entering into international trade resides in the know-how and creativity incorporated into them. As table 7 shows, technology goods have greatly expanded their share of global trade, from 54 percent in 1976 to 72 percent in 1996. The TRIPS agreement, therefore, seeks to provide minimum international standards of protection for such know-how and creativity in the areas of copyright and related rights, trademarks, geographical indications, industrial designs, patents, layout designs of integrated circuits and undisclosed information. It also contains provisions aimed at the effective enforcement of such rights and provides for multilateral dispute settlement. Transitional periods by which developed, developing and least-developed countries should meet obligations under the Agreement are respectively January 1996, January 2000 and January 2006. Q.4 Demonstrate the process of integration in the strategic alliances by taking up any organization of your choice. Ans. Integration: The selection of a partner depends on self analysis, the personal side of a relationship and compatibility. Compatibility depends on the common experiences, values, principle and future aspirations of the partners. A partner has components such as incorporating specific joint activity, commitment to expanding the relationships and clear signs of continuing independence for all partners. Once a partnership is created, many conflicts can arise, such as problems of broader involvement, discovery of differences and resentments, relationships can try to integrate at the following five levels: Strategic integration discuss the goals and changes in each company Tactical integration middle-level personnel involved in developing plans or joint activities. Operational integration timely access to information, resources or people to complete the tasks Interpersonal integration creating interpersonal relations Cultural integration mutual awareness of the skills and cultures of the partners

Stages of an Alliance There are four process stages in the formation and operation of an alliance: Strategy Development the focus is on the development of resource strategies for production, technology and manpower. This has to be aligned to the objectives of corporate strategy alliances. Partner assessment the attempt to assess the strengths and weaknesses of a partner and understand a partners motives for alliance formation. Contract negotiations it is necessary to have realistic objectives, defining each partners contributions and rewards. It is also necessary to incorporate termination clauses, penalties for poor performance and arbitration procedures. Alliance Operations this is concerned with the managements commitment, and liking of budgets and resources with priorities. The elements of the different stages of an alliance are described below: Development stage Anticipation of alliance business risks Examination of the plan for analytical soundness Laying down of clear objectives and goals Rigorous resources planning Realistic feasibility study Partner Assessment Stage Realistic partner selection criteria Partners resources capability gap Partners strengths/weaknesses Knowledge of partners experience Strategies to accommodate partners management styles Contract Negotiation Stage Parties rights and obligations Partners negotiating history Realistic objectives of all parties Defining resources contributions Termination and penalty clauses Operation Stage Results meeting the original plan Budgets linked with strategies priorities Caliber of resources in the alliance Performance linked to pay and investment Alliance implementation and impact While the above are common elements in this stage, there are at the same time differences in operation between experienced and unexperienced firms as follows: Anticipation of business risks from an alliance Careful examination of an alliance business plan for analytical soundness Realistic alliance feasibility study Linkage of budgets to resources and strategic priorities Knowledge of partners alliance experiences

Rigorous resource planning Coupling pay and investment with performance measures.

Q.5 Critically review the internationalization process of automobile firms of Indian origin and identify the bottlenecks in their journey towards global competitiveness. Ans: The automobile industry in India is the tenth largest in the world with an annual production of approximately 2 million units. India is expected to overtake China as the world's fastest growing car market[1] in terms of the number of units sold and the automotive industry is one of the fastest growing manufacturing sectors in India.[2] Because of its large market (India has a population of 1.1 billion; the second largest in the world), a low base of car ownership (25 per 1,000 people[2]) and a surging economy, India has become a huge attraction for car manufacturers around the world.[3] Though several major foreign automakers, like Ford,Suzuki,GM,and Honda have their manufacturing bases in India, Indian automobile market is dominated by domestic companies. Maruti Suzuki is the largest passenger vehicle company, Tata Motors is the largest commercial vehicle company while Hero Honda is the largest motorcycle company in India. Other major Indian automobile manufacturers include Mahindra & Mahindra, Ashok Leyland and Bajaj Auto. The automotive industry directly and indirectly employs 13 million individuals in India. The industry is valued at about US$ 35 billion contributing about 3.1% of India's GDP (nominal). India's cost-competitive auto components industry is the second largest in the world. In addition, India's motorcycle market is also the second largest in the world with annual sales of about 5 million units. The Automobile Industry performance in all its sectors has been encouraging. According to an Assocham study, the global component industry is likely to go up to about USD 1.9 trillion by 2015. Out of this USD 700 billion is expected to flow to low cost countries (LCC). This would present an enormous business opportunity for auto component manufacturers in India as tier 2 or tier 3 suppliers. Tier 1 suppliers are looking to set up manufacturing facilities in India due to its cost advantage and the availability of skilled labour and qualified engineers.

o India in world automobile market:

Two wheelers - 2nd largest in the world Commercial Vehicle - 4th largest in the world Passenger car- 11th largest in the world Year-on-year April Change (%) 7.60

GROWTH OF AUTOMOTIVE INDUSTRIES April 2008 Commercial vehicles 33,271 April 2007 30,914

Passenger cars 98,740 Multi-purpose vehicles 9,070 Utility vehicles 22,203 Two-wheelers 616,038 Scooters/scooterettes 81,002 Motorcycles/step-through 501,592 Source: Society of Indian Automobile Manufacturers

84,283 6,118 16,862 570,381 72,369 463,091

17.10 48.20 31.70 8.00 12.00 8.30

As Indian automobile sector has grown and matured, Indian auto components industry is also showing a rapid growth, with a rate of 15% to become an estimated production of US$ 10 billion. The huge demand from domestic and international auto companies has seen this sector emerging as one of the fastest growing manufacturing sectors in India and globally. The Auto components industry is divided into five segments: Engine parts Drive Transmission & Steering Parts Suspension & Brake Parts Electrical Parts Body and chassis In 2006-07 total export from automotive component industry was USD 3 billion and as per report by ACMA this will increase to USD 5 billion in 2008-09 & in the next seven year it will touch to USD 20 billion marks. Today India's share in global auto component market is 0.3 % which will set to increase to 3-4 %.

Key advantages:a)The country provides skilled and cheap labor. b) An Indian company has started working with automation so as to meet world standard. c) Due to adaptation of quality control tools like TQM, TPM etc. manufacturing cost reduced significantly. d) Less government obstacles for set up business in India.

Competitive Advantages Low labour costs (low labour costs pulls down the total cost of production, typically in assembled parts such as clutches and lighting equipment). For instance, wage rates in India are currently 60% cheaper than that in developed markets. Less stringent environmental regulations (environmental regulations have rendered the production of parts like castings cost prohibitive in developed countries). For instance, the metal casting process generates dust and it is estimated that foundries in Europe and USA on account of stringent environmental compliance spend roughly 5-6% of their sales on pollution control. Such costs are almost negligible in countries like India and other Asiatic

nations. Low minimum economic scales and possession of established technology (as in castings and forgings). Given these competitive advantages, India is therefore widely regarded as having an advantage in terms of low labour costs, strong engineering skills, and machining and processing capabilities. Hence, labour intensive and assembly-oriented components are likely to be sourced from India. The exports of the automotive component manufacturers are targeted at the following groups of buyers: International vehicle majors such as Volkswagen, Volvo and so on. Exports are largely to their operations in developing countries since these manufacturers do not find it cost effective to source components from their own plants or from other local units. For instance, domestic component manufacturers such as Bharat Forge, Rico Auto, Sundaram Fasteners supply directly to global OEMs. Vendors who supply to component manufacturers like Delphi, Dana Corporation and Valeo. As an example, recognising the cost advantage involved, most global OEMs such as Ford, General Motors and Volvo, and Tier-I companies such as Navistar and Cummins have set up international purchase offices in India in the last 2-3 years, to source components and export them to their global plants. In the last couple of years, many global automobile manufacturers have identified India as a manufacturing base for some of their models, which are then exported to other countries. For instance, in the passenger car segment, Hyundai's Santro Xing and Suzuki's Alto are being exported. Two-wheeler manufacturers Yamaha Motors and Honda Scooters are also exporting some of their models. Similarly, Indian OEMs such as Bajaj Auto (World Bike 125cc), TVS Motors and car companies such as Tata Motors (City Rover) and M&M (Scorpio) are also exporting fully built vehicles. As components form more than 50% of their cost of manufacture, the export of vehicles increases the demand for domestic auto components. The replacement market, which accounts for a large proportion of the exports of components from the Indian market. This is due to the fact that a significant portion of the Indian components is exported for the replacement markets for out-of-production models in these countries. As Tier-I vendors located in these countries meet the demand for current models, the production of components for out-of-production models is outsourced to countries like India. Challenges faced by Indian component exporters In comparison with the total size of the global auto component market of more than US$1.2 trillion, Indian component exports are miniscule at US$1.8 billion in FY2006. Although the growth in the export of components is much higher than the growth in domestic markets, Indian exports have not been able to capture a larger market due to various hurdles faced by Indian component manufacturers. For instance, the forging market offers a huge scope for untapped exports. Bharat Forge is now venturing into passenger car segment of the forging

market (Ford Motors) in USA. Product liability clause Most international OEMs also enforce a product-liability clause, which stipulates that suppliers will be charged punitive damages in case of a line stoppage or product recall caused by supply of defective components. As per industry reports - for instance if Ford or Delphi suffers a line stoppage due to a vendor problem, the punitive damage could be as high as USD 5000-15000 per minute. This factor significantly constrains Indian companies from dealing directly with large international OEMs. Lead time in winning international contracts is high In the case of export contracts from international OEMs, the lead time from the request for quotation till the time of commencement of actual supplies can be as high as 3-4 years. However, once a contract is won, the entry barrier for other competing vendors is high. Maintaining cost competitiveness and ensuring faster responses Global OEMs require vendors to commit to a 5-10% reduction in prices every year. Besides ensuring cost competitiveness, component vendors are required to scale up their production to meet increasing demand. Cyclicality in Demand The pattern of growth in the auto ancillaries is cyclical and is directly related to the growth in the automotive industry. Currently, the cycle is on the upswing but there is a perceived uncertainty with the sustainability of the upswing, given the expected lower growth in automotive production during FY2007. Small Size by Global Standards Supply Characteristics While the Indian automotive components industry has the ability to produce a wide range of products, it currently lacks depth. With a size of close to US$10 billion, the Indian components industry is very small by global standards. In rupee terms, the automotive components industry reported a turnover of Rs. 440 billion in FY2006. Of this, the organised sector accounted for 80% of the total value of production with the rest coming in from the unorganised sector. Fragmented Industry Even though the Indian automotive components industry is relatively small by global standards, there are close to 425 players in the organised sector and over 5,000 in the unorganised sector competing against each other for market share. The share of the organised sector has increased over time. Players in the organised sector supply the vehicle manufacturers directly. Most component manufacturers and OEMs have also increased their distribution systems to make their products widely available. Although some of this "unofficial" production goes to minor vehicle manufacturers, particularly the assemblers of two- and three-wheelers, the bulk goes to the replacement market. Market Share Concentration The automotive components industry is a combination of different product segments, with each segment having a different market structure. However, the number of companies present in each segment differs because of the difference in the level of technology requirement. Although each product segment has a large number of players, a few players in each segment

dominate the automotive components market. No single company is a prominent player in more than one product segment. This is because of the differences in technology and market characteristics for each segment. However, there are a few groups with various companies in different product segments. Geographical Concentration of Component Makers In a bid to lower freight charges and facilitate faster delivery, automotive components manufacturers are located largely around their OEM customers. This is particularly so since most of them are directly supplying to the OEM producer. The Northern region, which hosts OEM manufacturers such as Maruti, Hero Honda, Escorts, Eicher, LML, Swaraj Mazda and Punjab Tractors, has the maximum number of automotive components manufacturers with a share at 41%. The Western region, which has OEM manufacturers such as TELCO, Bajaj Auto, Kinetic and M&M, follows next, with 32% of the components manufacturers being based there. Size of Unorganised Sector During FY2006, this sector accounted for around 20% of the total component production of Rs. 440 billion. Compared with the around 425 large and medium-sized component units in the organised sector, the number of unorganised small units exceeds 5,000. Many of these unorganised units are located in the northern states of Delhi and Haryana. The number of players in the unorganised sector varies widely across products because of a number of factors. Unorganised players are more likely to be involved in the production of low technology products having lower production complexity, such as gaskets, engine valves, pistons and sheet metal parts. The Counterfeit Components Market

The Indian automotive components market has long been affected by the presence of a large spurious-parts market. Spurious automotive components are a great threat to the domestic automotive components industry. The small units engaged in counterfeiting enjoy cost advantage, as they usually do not pay the taxes. The organised sector players, on the other hand, have to contend with a tariff structure. The spurious-parts market is particularly thriving for automotive components in the commercial vehicles segment followed by cars and two-wheelers. Often, the spurious parts used in the replacement market are reconditioned versions of original components. International Sourcing of Technology Almost all the prominent players in the Indian automotive components industry have links with at least one international player. They operate in one of the three ways: as a subsidiary of an international company; as an Indian joint venture with an international company; or in a technical tie-up with an international company. The liberalisation of the Indian automotive industry in the 1990s served to usher in global automotive players into the country. However, following the liberalisation, the Government stipulated that the automotive joint ventures would have to achieve 70% indigenisation within five years. This local-content requirement (which has since been abolished) had necessitated improvements in technology and production quality of the Indian automotive components

industry. Rising Quality Consciousness The average quality of automotive components produced in India has been improving gradually, particularly during the past few years. Significantly, eight Indian companies currently hold the Deming Prize for quality. Besides the decline in end-of-the-line rejection rates, customer level rejection rates have also come down significantly for Indian automotive component manufacturers. International companies maintain their customer rejection rate at an average 200 PPM. In the recent past, certain Indian companies have attained a customer rejection rate of up to 500 PPM, with a few attaining even a zero customer level rejection rate. With the stakes for the OEMs getting higher, the pressure on component manufacturers to improve quality has gone up. The stringent quality norms imposed by the OEMs have forced Indian companies to upgrade their facilities. Increasing Focus on Productivity The increasing pressure on the margins of the OEMs has translated into increasing pressure for the component manufacturers to deliver at lower cost. This has forced component manufacturers to enhance productivity through various techniques.

Q.6 compare and contrast the competitiveness ranking methodology of world economic forum and IMD, Switzerland. Introduction Michael Porter developed a comprehensive approach to national competitiveness, the so-called diamond model, in his book entitled the Competitive Advantage of Nations (Porter, 1990). As its title suggests, the book may be meant to replace the Wealth of Nations (Smith, 1776). Porters diamond model was extended in two directions. One was the incorporation of the multinational activities through the introduction of the double diamond model (Rugman 1991 Moon, Rugman and Verbeke 1998, Dunning 2003). The other was the addition of the role of human factors through the proposition of the nine-factor model (Cho 1994). This study applies the nine-factor model to countries and also incorporates multinational activities, as suggested by the generalized double diamond model. Several reports on national competitiveness already exists, but they are not satisfactory enough. Policy makers are often sensitive to the results of reports of this kind and can be misled to pursue undesirable policies. In particular, rankings are misleading if they are not based on a rigorous model and an appropriate methodology. For discussions about these issues, refer to Cho and Moon (2000). In this study, we have corrected theoretical and methodological problems in the existing reports. We hope that policy makers and businesses will find useful implications from this research. Critical Review of the Existing Reports The two most popular institutions publishing national competitiveness reports are the International Institute for Management Development (IMD) and the World Economic Forum

(WEF). The IMD published reports since 1989, but was separated into the IMD and the WEF in 1995. The two institutes have published separate reports since 1996. Their reports sometimes trigger responses and make big headlines in some countries. However, a careful examination of these two reports reveals some significant problems. Theory The two reports have different views on the definition of competitiveness and their models have been evolving over years. The IMD first defines competitiveness as the ability of a country to create added value and thus increase national wealth (IMD, 1996, p. 42). This definition implies that GDP and productivity are proxies for competitiveness, but the IMD argues that competitiveness cannot be reduced to the mere notions of GDP and productivity (IMD, 1996, p. 42). In contrast, the WEF accepts GDP and/or productivity as proxies for competitiveness by defining competitiveness as the ability of a national economy to achieve sustained high rates of economic growth, as measured by the annual change in gross domestic product per person (WEF, 1996, p. 19). While their definitions of competitiveness are different, both institutes have chosen almost identical factors of competitiveness. First of all, the IMD has chosen two factors, domestic economy and internationalization and then added six others government, management, finance, infrastructure, science and technology and people. However, there are conceptual redundancies between the first two factors and the other six because the latter six factors can be classified as either domestic or international variables. In the WEF report, the first two factors are altered slightly: Domestic economy becomes civil institutions Internationalization becomes openness, while other six remain the same. by defining competitiveness as the ability of a national economy to achieve sustained high rates of economic growth, as measured by the annual change in gross domestic product per person (WEF, 1996, p. 19). While their definitions of competitiveness are different, both institutes have chosen almost identical factors of competitiveness. First of all, the IMD has chosen two factors, domestic economy and internationalizationand then added six others government, management, finance, infrastructure, science and technologyand people. However, there are conceptual redundancies between the first two factors and the other six because the latter six factors can be classified as either domestic or international variables. In the WEF report, the first two factors are altered slightly: domestic economy becomes civil institutions and internationalization becomes openness, while the other six factors remain the same. The factors of competitiveness in these two reports are compared in Table 1. Table-1 Original Model of the Two Reports IMD Report (1989-2000) WEF Report (1996-1999) Domestic Economy Civil institutions Internationalization Openness Government Government Management Management Finance Finance Science and Technology Technology People Labor Openness, while the other six factors remain the same. The factors of competitiveness in these two reports are compared.

Methodology Although they are now using different models, both the IMD and WEF reports used to have eight variables that were almost identical, but they produced quite different results. This was mainly due to the fact that they applied different weights to the same variables. Any weight age scheme can be arbitrary to some extent, but if a model is weighted in an arbitrary manner, it might produce entirely misleading results. The IMD report contained both hard data, that is, statistical indicators published by organizationsand soft data, that is, survey results compiled from executives. Because soft data could be volatile, the hard data accounted for two-thirds of the entire data employed by the IMD. In other words, the survey results accounted for one-third of the overall competitiveness scoreboard (IMD, 2000, p. 55). On the other hand, the WEF applied different weights to different factor indices (WEF, 1999, p. 98). This means that the factor indices are given the following weights, thus creating the overall competitiveness index (note the weights sum to 1.0): openness, 1/6; government, 1/6; finance, 1/6; infrastructure, 1/9; technology, 1/9; management, 1/18; labor, 1/6; and institutions, 1/18. After recognizing some problems of their weighting schemes in 2000, both the IMD and the WEF frequently change the weights of variables as well as their models. In 2003 the IMD classified countries into two groups in terms of population size, that is, more or less than 20 million people, while keeping the weights the same as before, which is, two-thirds for hard data and one-third for soft data. On the other hand, in 2002 (2001-2002 Report) the WEF classified countries in terms of the number of patents Without a rigorous theoretica explanation, it is not clear why some factors are important and others are not. These reports do not have any strong theoretical background. Without a rigorous theoretical explanation, it is not clear why some factors are important and others are not. Due to their lack of a rigorous theory, these reports frequently change their models. The IMD newly added location attractiveness to its original model in 1999 and introduced a completely new model in 2001. Instead of its original eight variables, this new model consists of four variables economic performance, government efficiency, businessefficiencyand infrastructure. However, a careful researcherwill immediately find this model not as rigorous as Porters Diamond. A similar problem is found in the WEFs new model, as shown in Table 2. Table 2 Revised Model of The Two Reports IMD Report Economic Performance Govt Efficiency Business efficiency Infrastructure WEF Report Aggregate indicators performance Macroeconomic environment Public corporation

Public institutions, law

Company operations and Domestic competition strategy General infrastructure Cluster development

innovation Information Technology and communication technology granted in the U.S. The core group country has patents of 15 or more per one million people and the non-core group country has patents of less than 15. Weights are different. The core group weights are: technology 1/2, public institution 1/4and macroeconomic environment 1/4, while the non-core group weights are: technology 1/3, public institution 1/3 and macroeconomic environment 1/3. meaningful among the nations endowed with similar comparative advantages competing in similar industries. For example, it may be less meaningful to say that Korea is in general less competitive than the U.S. because these two countries have different comparative advantages. Incontrast, it is more meaningful to say that Korea is more(or less) 3 There may also be a problem with the subjectivity of opinions. For example, the IMD (1996, p. 44) sent questionnaires to approximately 21,000 executives, but only 15 per cent were returned. Although the sample size was large, there is a significant non-response bias. Moreover, the consistency and reliability of the data used can also be called into question. Both the IMD and the WEF have a global network of partner institutes that greatly vary in nature, ranging from universities to private or public organizations. Such diversity makes it quite difficult to maintain consistency in data collection. In order to make the survey results consistent and reliable, the survey should be conducted either by one single organization or by a group of organizations similar to one another in nature. Policy Implications Both the IMD and the WEF reports rank each nation according to its overall national competitiveness. However, this method is not very useful to give implications for countries with different characteristics. For example, in the WEF Report 2003, Finland is on the top of the list and the Philippines is listed at 66th. What can be learned from this? How would this help the Philippines improve its policy? Does this mean that the country has to invest large amounts of money and effort in developing technology, hoping that someday it might catch up to Finland? The Philippines should be compared and contrasted with other similar countries such as Thailand and Indonesia, rather than Finland. The existing reports are mainly designed for developed countries. For example, the IMD argues that knowledge is perhaps the most critical competitiveness factor (IMD, 2000, p. 47). However, the sources of competitiveness vary among nations as they have different factor endowments and characteristics. These may be natural resources, cheap labor, strong government support, technology or other factors, depending on the situation. We need different criteria for different countries if they are in different stages of economic development. A nations competitiveness is sometimes more competitive than Taiwan, because these two countries are very similar in terms of comparative advantages and areas of competition in the international market. Therefore, in order to derive meaningful policy implications, we need to consider rankings in groups of similar nations (Group Ranking), as well as overall rankings for all countries in the world (World Ranking). Based on the principles of theory, methodology and policy implications mentioned above, this report introduces a new national competitiveness study, containing rankings among similar nations as well as overall rankings. Redefining Competitiveness

Technological and diffusion

Competitiveness and relevant strategies should be understood and designed at various levels ranging fromproduct, firm, industry, to nation. The most popular definition of competitiveness at the national level can be found in the Report of the Presidents Commission on Competitiveness, written for the Reagan administration in 1984: A nations competitiveness is the degree to which it can, under free and fair market conditions, produce goods and services that meet the test of international markets while simultaneously expanding the real incomes of its citizens. Competitiveness at the national level is based on superior productivity performance. Some scholars have similar views to this. For example, Porter (1990, p. 6) said that the only meaningful concept of competitiveness at the national level is national productivity. Krugman (1994, p. 32) stated that competitiveness would turn out to be a funny way of saying productivity and would have nothing to do with international competition. However, competitiveness and productivity are conceptually different. A nation can sometimes enhance its competitiveness by changing strategies (for example, protectionism or currency devaluation), without any increase in productivity. Productivity refers to the internal capability of an organization, while competitiveness refers to the relative position of an organization against its competitors. These two important concepts are often confused and used interchangeably. The relative competitive position in the international market, not just the absolute amount of productivity, is a critical element for a nations competitiveness. Another important point in defining a nations competitiveness is that it is more meaningful to compare nations with similar comparative advantages competing in similar industries (Cho and Moon, 1998). Therefore, a report contains rankings among similar nations, as well as overall rankings. Major differences between this report and other reports are illustrated in tables given below. Comparison of Two Competitiveness Report Name of the report IMD the world Year Book WEF the global year book Sponsoring Institute International institute for WEF management development Location Laurance Switzerland Geneva, Switzerland Year Started 1989 1996 Year compared 2003 2003 Theoretical Base No particular theory No Main factors A collection of four factors A collection of 12 factors - Economic - Aggregated Performance - Performance - Macroeconomic Environment - Govt. Efficiency - Technology innovation and - Business Efficiency diffusion Information and communication technology - General infrastructure - Public Institutions and law Public Institution and corruption - Domestic Competition - Cluster Development -Company operation strategy - Environment policy

Criteria Data base Partner institutes No. of Countries

321 Hard data 2/3 Soft data 1/3 Universities and institutions 59

- international institution 188 Hard data 1/4 Soft data 3/4 other Universities and institutions 102

other

Conclusion When comparing national competitiveness, nations should be grouped with regard to similarities in terms of economic scale and structure. It is not very useful, for instance, to compare the competitiveness of the US and that of Bangladesh because these two countries are so different. For this purpose, this study proposed two criteria for economic scale and structure. One is a composite index of population and land size and the other is another composite index of incorporating the eight competitiveness variables. The classification of countries based on these two criteria is more comprehensive and accurate than the traditional method of only GNP, the IMD method of only population and the WEF method of only patents. Based on this new model, this study showed more accurate analysis and policy implications. Another contribution of this study is the application of the generic strategy at the corporate level to the study of national competitiveness. Regarding this, very important conclusions can be drawn as follows. For large-size countries, either the cost strategy or the differentiation strategy should be carefully selected based on their competitive situations. For most of medium and small-size countries, the differentiation strategy would be more viable. Finally, for some countries neither the cost strategy nor the differentiation strategy will work. These competitiveness-failed countries need a radical change to escape poverty. The most important contribution of this study is to emphasize the role of human factors and internationalization. Although they may not have abundant natural resources, the competitiveness-failed countries can gain competitive momentum by remobilizing human factors and opening up their economies. Needless to say, these two policy variables, human factors and internationalization, are also critical for further enhancing competitiveness of the already competitive countries Q.7 In spite of the dismal performance in Human development Index, Indian manufacturing sector has performed well. How do you explain this paradox? Can India hope to have a sustained competitive advantage? Discuss. The Human Development Index (HDI) is an index combining normalized measures of life expectancy, literacy, educational attainment, and GDP per capita for countries worldwide. It is claimed as a standard means of measuring human development, a concept that, according to the United Nations Development Program (UNDP) refers to the process of widening the options of persons, giving them greater opportunities for education, health care, income, employment, etc. The basic use of HDI is however to rank countries by level of "human development" which usually also implies to determine whether a country is a developed, developing, or underdeveloped country. The HDI combines three basic dimensions:

Life expectancy at birth, as an index of population health and longevity. Knowledge and education, as measured by the adult literacy rate (with two-thirds weighting) and the combined primary, secondary, and tertiary gross enrollment ratio (with one-third weighting). The standard of living, as measured by the natural logarithm of gross domestic product (GDP) per capita at purchasing power parity (PPP) in USD.

THE HUMAN Development Report 2007-08 released recently by the United Nations Development Programme (UNDP) once again refers to India's disappointing performance in improving its Human Development Index (HDI). India ranked 128th out of 175. Iceland has overtaken Norway to become the country with the Highest Human Development. This is what the Human Development Index for 2007-08 released by United Nations indicates. The Human Development Index (HDI) is published every year. Last year i.e. in 2006, Norway was slated at the number 1 position. The report ranks 175 countries on several parameters like... Life Expectancy at birth (in years) Adult literacy rate Combined gross enrolment ratio for primary, secondary and tertiary education GDP per capita India has been ranked at 128 out of the 175 countries tabulated in the report with the HDI Value at 0.619 behind Morocco and Equatorial Guinea. India is ranked... 125 in Life expectancy at birth, 122 in Combined primary, secondary and 117 in the GDP per capita charts. 114 in Adult literacy rate, tertiary gross enrolment ratio and

India may be among the fastest-growing economies, but the HDR report says the country's record in human development continues to remain less than impressive. After growing at around 6 per cent for 25 years, India has entered into what one might call a high-growth phase, with the growth rate averaging 8.6 per cent per annum in the last four years since 2003-04. During this period, the average inflation rate has been contained at about 5 per cent, which has been significantly lower than that of around 8 per cent in the previous three-and-a-half decades. In the last two years, the growth rate has averaged 9.1 per cent with GDP estimated to have grown at 9.2 per cent in 2006-07. For the year 2007-08, the Reserve Bank projects the growth rate in GDP is to be around 8.5 per cent. A welcome development in regard to inflation and growth prospects is that the fiscal position of the Government, both central and States, is undergoing consolidation in terms of targeted reduction in fiscal deficit indicators. The improvement in the fiscal position of several States is particularly impressive. A notable recent development is that India is also becoming a major hub for manufacturing and export of manufactured products and some examples of global competitiveness of Indian industry may be in order. Steel production in India is now amongst the lowest-cost production in

the world. Pharmaceutical and biotech firms are likewise very competitive internationally. In recent years, we have witnessed the coming of age of the Indian IT multinationals, indigenous players beginning to build noticeable presence in other locations through cross-border acquisitions, off-shore winning of contracts and organic growth in other low-cost locations. Indian manufacturing firms are acquiring firms abroad to leverage comparative advantage of foreign locations, using synergies between the parent company and the company under acquisition to gain scale economies as well as domain knowledge. It is a matter of satisfaction to the Reserve Bank of India that the financial sector has acquired greater strength, efficiency and stability. This is the combined effect of increased competition, regulatory measures aligned with international standards, conducive policy environment and motivation amongst the market players, including the banks. The money market has been progressively developed. The Government securities market is deep, liquid, vibrant and well developed in terms of instruments, processes and participants. The exchange rate of the rupee has been flexible, particularly, in the last few years and the turnover in the foreign exchange market has increased considerably. The stock market has been opened to foreign institutional investors and is comparable with major international equity markets in terms of market capitalization, turnover and systems and processes. True, the corporate debt market in India is somewhat less developed relative to major financial centres, but has a large potential in the medium term to raise resources particularly for infrastructure projects, housing and for corporate and municipal needs. Supply of institutional funds is likely to be enhanced with ongoing transformation in insurance and pension sectors. The well-developed government securities market, the strong micro-structures and financial infrastructure, the skills of market participants should enable a very rapid and healthy growth of the debt markets in India. As far as Indias external sector is concerned, it has become resilient with the current account deficit being maintained at very modest levels after a couple of years marginal surplus. Exports have been growing at an average rate of around 24 per cent during the last four years. Sustained growth in export of services and remittances continued to provide buoyancy to the surplus in the invisible account. There was a significant strengthening in the capital account. With the foreign exchange reserves above US$ 200 billion, the reserves currently exceed the countrys external debt of about US$ 142.7 billion as at end December 2006, thereby reflecting improved external sector sustainability of the economy. There are sound reasons for the optimism and the overarching policy challenge at this stage is to manage the transition to a higher-growth path in a sustainable manner by containing inflationary pressures. In this context, some issues have been explored: (I) Savings-Investment: Favourable Trends The strengthening of economic activity in the recent years has been supported by persistent increase in domestic investment rate from 22.9 per cent of GDP in 2001-02 to 33.8 per cent in 2005-06 coupled with an efficient use of capital. Domestic saving rate has also improved from 23.5 per cent to 32.4 per cent during the same period. This was made possible due to improvements in both public sector and private corporate savings. Given the fact that Indian per capita income is increasing rapidly and policy efforts towards financial deepening for achieving

a more inclusive growth are underway, savings rate in India could even rise further in the medium to long run. The level of saving rates should help finance the investment needs of the economy especially for development of social and physical infrastructure. As already mentioned in regard to financial sector developments, especially the corporate debt market, we should expect efficient financial intermediation to match the growth in savings, especially long-term contractual savings, through insurance companies and pension funds and meet the growing demands for long-term funds for infrastructure in India. (Ii) Evidence of Increasing Productivity Yet another positive factor for India is the trend in productivity. Some of the recent studies relating to India have indicated an increase in total factor productivity (TFP) growth in recent years. For instance, Rodrick and Subramanian, in an IMF working paper of 2004, point out that India seems to have large amount of productivity growth from a relatively modest reforms. A more recent paper by Barry Bosworth, Susan Collins, and Arvind Virmani (2006) confirms this trend. They find that output per worker grew only 1.3 per cent annually during 1960-1980, when GDP growth was also at a low of 3.4 per cent. TFP growth was barely above zero, according to their calculations, indicating that growth in output was almost entirely driven by growth in inputs. In contrast, growth in output per worker nearly tripled to 3.8 per cent during 1980-2004, while TFP increased ten-fold to 2 per cent. The evidence of an increase in the growth of labour productivity is also available from other studies (Economic Intelligence Unit, 2007). A Study by Tata Services (2003) found that for the all-India manufacturing sector, labour productivity (output per unit of labour) has increased significantly during the post-reform period, compared to the pre-reform period. (Iii) Physical Infrastructure : Grounds For Optimism Admittedly, a critical constraint to economic growth in India in recent years has been the infrastructure deficit. The Approach Paper to the 11th Five Year Plan has estimated that for accelerating the GDP growth from 7 to 9 per cent, there is a need for accelerating the current level of investment in infrastructure from 4.6 per cent of GDP to 8 per cent during the Plan period. The issue of providing adequate and quality infrastructure has already attracted attention of policy makers at all levels. The Committee on Infrastructure, headed by the honourable Prime Minister, has estimated the investment requirements of the Indian economy during the 11 th FiveYear Plan at around US$ 345 billion, i.e., roughly 8 per cent of GDP, every year. There are several grounds for optimism in regard to overcoming the problems relating to physical infrastructure, provided the framework of public policy, especially regulatory environment, is conducive. First, there is adequate generation of domestic savings while India has also become an attractive destination for foreign capital.. As in the past, over 90 to 95 per cent of investment could be funded by domestic savings. As already mentioned, recent developments in insurance, pension, debt market, fiscal side, etc., add to the prospects of efficient and adequate domestic financing options for infrastructure development. Second, the infrastructure investments in India are basically demand driven and hence, are likely to have a short gestation. Third, there are significant domestic entrepreneurial-, construction-, technological-skill capabilities to execute the projects efficiently and promptly. Fourth, the growth and quality of services sector in India adds to the potential for enhanced productivity in

investments in physical infrastructure. Finally, a dynamic mix of public-private and domesticforeign partnership is already evident in many sectors such as airports. (Iv) Improvements In Fiscal Balance It is true that the aggregate stock of public debt of the Centre and States as a percentage of GDP is high, currently at around seventy five per cent. However, there are signs of improvement even after adjusting for recent favourable cyclical factors. The fiscal-management of Central Government is broadly in the direction of achieving the targeted ratio of gross fiscal deficit (GFD) to gross domestic product (GDP) to three per cent and eliminate revenue deficit (RD) by 2008-09. It may be noted that the GFD / GDP and RD / GDP ratios are already budgeted to reduce to 3.3 per cent and 1.5 per cent in 2007-08. In the recent years, there has been a significant improvement in State level finances also. The GFD of all States declined from 4.7 per cent of GDP in 1999-2000 to 2.7 per cent of GDP in 2006-07, while the RD came down from 2.7 per cent of GDP to 0.1 per cent of GDP. Most States have also enacted fiscal responsibility legislations. It is also useful to note that there are several unique features of management of public debt in India, which imparts overall stability to macro-economy. First, States have no direct exposure to external debt. Second, almost the whole of public debt is local currency denominated and held almost wholly by residents. Third, public debt, of both Centre and States is actively and prudently managed by the Reserve Bank of India ensuring comfort to financial markets without any undue volatility.. Fourth, the government securities market has developed significantly in recent years in terms of turnover, depth and participants, and significant further improvements are underway. Fifth, stable contractual savings supplement marketable debt in financing deficits. Finally, direct monetary financing of primary issues of debt has been discontinued since April 2006. Hence, the high stock of public debt relative to GDP has not so far been a matter of concern as far as stability is concerned, while it is recognised that long term sustainability would call for a gradual reduction to prudential levels. (V) Demographic Dividend And Challenge India has the worlds youngest and fastest growing working-age population. At present, about 36 per cent of Indian population is below 15 years age. It is expected that the average age of the population in India will decline, before it begins to rise after 25 years. In contrast to the rise in the median age of population in the industrialised countries from early 30s to early 40s over the last two decades, the median age in India has increased from 20 in 1980 to 24 in 2005. According to the projections made by the United Nations, the median age in India would cross 30, only by 2025 and would remain around 35 till 2040. In 2020, the average Indian will be only 29 years old, compared with the average age of 37 years in China and the US, 45 in west Europe and 48 in Japan. While there are some inter-regional differences in demographic features, given the free labour mobility, for the country as a whole, the relatively prolonged favourable demographic transition would have an important bearing on the overall economic growth process. Given our emphasis on human resource development in terms of producing large number of engineers, technologists, doctors, etc., it is expected that a large and young population of India

would have high labour productivity along with lower need for social security and health related expenditures. This is expected to power the growth process of not only India, but would increasingly meet the growing need of other industrialised countries. The demographic process would, no doubt, create a large and growing labour force. However, the window of opportunity provided by a relatively large and young workforce in India needs a conducive social policy environment for getting realised. In this context, it is recognised that further efforts are needed at accelerated pace to create a quality social infrastructure in terms of education and health which can help the easy and productive absorption of the prospective ''youth bulge''. Public policy is increasingly aware of the need to give high priority to education and health and also generating employment that is consistent with global competitiveness. In other words, to reap the rewards of demographic dividend, public-policy has a critical role to play. (Vi). Poverty And Employment : The Litmus Tests The growth story in any developing country is incomplete without assessing its impact on the poverty and employment situation. The number of people living below the poverty line in India has decreased from around 36 per cent in 1993-94 to 22.0 per cent in 2004-05. The average decline in the percentage of people below the poverty line over the period 1993-94 to 2004-05 is 0.74 percentage points per year. India has ranked 126th, in terms of human development index (HDI) according to the UNDP Human Development Report, 2006. The most daunting task for public policy is to ensure that adequate work is found for millions of poor people and in particular to the growing number of young persons. As per broad results of a recent job survey published in one of the popular magazines, the current high growth phase is not a jobless growth, but now the jobs are created in almost all sectors as compared to the 1990s. According to the report and other anecdotal evidence, the benefits of recent surge in growth rate of GDP are not just restricted to large cities, but people in other urban and semi urban areas are also gaining. While there is some evidence of reduction in under employment and disguised unemployment in the informal sector and larger work opportunities, the provision of productive employment is of highest priority in India. Q.8 Discuss the major changes brought in the Indian patent regime after 2005. How pharmaceutical industry benefit from it? Ans. India moving to a Strong Patent Regime Challenges & Concerns After lot of debates and discussions, Indian Parliament on 23.03.05 passed the Patents (Amendments) Bill 2005 with the support of Left Parties who had been opposing any of its provisions until then. This in turn paved the way for a vertical shift from a weak process patent system to a strong TRIPS compliant Product Patent System. Even though the President had promulgated an ordinance on 26.12.04 to amend the Patent Act, 1970 to put in place a TRIPS compliant Patent System on 01.01.2005, only the present legislation could incorporate some protective provisions to safeguard the interests of India Pharmaceutical sector. Left parties claimed that they won a battle with Government forcing it to concede their earlier stand.

However the fact is that many of the changes brought out in the act could only take away the transparency of many technical provisions. But the major achievement of the Left parties, as they claim, is to reduce the impact of damages that otherwise could have caused to the India pharmaceutical industry due to the grant of Product Patents in respect of applications in Mail Box. A first look of the amendment only reveals that section 5 of the Patents Act, 1970 (as amended in 2002) is removed and some protective provisions are added here and there. Even though it sounds like only deletion of a provision, its impact is huge since it takes away a protective measure, which stood all the way from 1970 to safe guard the interests of Indian pharmaceutical industry. Removal of this section throws open a challenge to Indian pharmaceutical companies forcing them to fight with MNCs for their survival. Earlier Process Patent Regime always provided them an option to develop an alternate process different from the patented process and there were no threat of infringement since it was not possible to take Patent for pharmaceutical products. A strong patent system makes the scenario more competitive. But the question is, how many of our pharmaceutical companies are capable of developing new drug molecules and how many of them hold a share in the global market. There are only a few Indian companies who can develop drug molecules, say Ranbaxy, Dr. Reddys or Nicholas Piramal. The prime concern is whether the Indian pharma sector, which presently meets 80% of the domestic drug demand indigenously, will continue to do so after 10 years from now. Lets hope that our pharma companies will stand up to the expectations of the Indian public. Thanks to the parliamentarians to pressurize the inclusion of a provision in Section 11A(7) to prevent the patent holders from instituting the infringement proceedings against those Indian companies who are manufacturing and marketing the products covered by inventions in Mail Box. This protection was in addition to the one previously introduced in the ordinance, which provided that the rights of a patentee in respect of Mail Box applications shall accrue only from the date of grant of the patent and not from the date of filing the patent application. However some of the amendments brought in the act are meaningless and quite confusing in respect of its technical implications. For example the definition of inventive step describing it, as a feature of the invention involving technical advance as compared to the existing knowledge or having economic significance or both that makes the invention not obvious to a person skilled in the art, leaves lot of scope for its interpretation differently by different people. In this context, it is worth mentioning here that the Patent Examiner who evaluates the invention would not be in a position to judge its economic significance. Also the words technical advance, economic significance, efficacy , entity etc. used in the present legislation causes lot of confusion since these words are not found else where in any other patent statute in the world. Similarly the impact of new definitions such as new invention and pharmaceutical substance will be felt only later when patent attorneys and patent examiners start extracting meanings out of them. While the definition of new invention is redundant with respect to the definition of invention in Section 2(1)(j) and Section 13, the definition of pharmaceutical substance makes no sense as it is not referred else where in the Act. Also it is to be blamed that the present legislation reverted back the amendments made to section 3(k) by the ordinance, which clarified that, only the technical application of the software or its combination with hardware is patentable. Now the statute in its present form leaves lot of scope for the interpretation of what is computer program Per Se. It is to be noted further that the provision added in section 3(d) to prevent Ever greening of patents related to pharmaceutical substances, has created more confusion as to its implication though the amendment made therein was widely

appreciated by the Indian Pharmaceutical companies and public at large. Recently the same pharmaceutical companies have expressed their concern as to whether this provision would prevent them from inventing around a patented molecule. The explanation provided in this sub section indicates that the mentioned forms, combinations and other derivatives of known substance will be considered as a new substance if it differs significantly in properties with regard to efficacy. Here efficacy may be interpreted conveniently by the Patent Examiners and Patent attorneys. However it is to be greatly welcomed that the Government decided to refer the issue on ever greening and the patentability of microorganism to a committee chaired by Dr. R. A. Mashelkar, Director General, CSIR in order to assess the TRIPS compliance of the respective provisions in the present statute. This implies that that the doors are not closed and there is still some hope for remedying the mistakes that have crept in. It is also great that India showed due diligence to include the commitments of Doha Declaration in the amendment without fail. Whatever may be the pros and cons of the amendments, the initiatives taken by the Government to reduce the time limits for the process of granting patents is to be appreciated. But the decision of the Government to retain the provision in Section 159(3) introduced by the ordinance and which empowers the Government to dispense with the compliance of Pre-notification of the rules, is dubious since most of the time limits for the processing of the patent applications have been moved from the Act to the Rules. This authorizes the Government to change the time limits even without public opinion. Reduced time limits and huge workload on the Examiners may affect the quality of Patent examination. It also interesting to mention about a comic consequence of the effort to reduce the time lag in grant of Patents. Post-grant opposition to the grant of patents was proposed instead of Pre-grant opposition in order to reduce time in granting patens, but the legislation in its present form contains both pre-grant opposition and post grant opposition The latest news from Indian Patent Office is that the Government has taken necessary steps to convert all those temporary Patent Examiners to a Permanent status. This supplements to the modernization of the patent office in respect of its infrastructure and work culture. So it is a new beginning to tackle the advantages of a system imposed upon this country as part of Globalizations. To conclude, I would like to mention that India had a history of surviving under the most difficult conditions. Therefore it is hoped that the Product Patent regime would become beneficial to India as it brings enhanced competition in Indian manufacturing sector. (The author is former Examiner of Patents & Designs in Indian Patent Office. He may be contacted at praveenrajrs@yahoo.com) SOME BROAD IMPLICATIONS OF THE 2005 ACT 1. Access to Medicines Although the 2005 Act has made wide-ranging changes to Indias patent regime, the most controversial provision is the one introducing product patents for pharmaceutical inventions. Civil society proponents are concerned that this would cause a steep rise in drug prices and adversely impact access to important drugs. They argue that the available TRIPS flexibilities have not been exploited appropriately and that adequate safeguards have not been built in to ensure an affordable supply of medicines (Basheer 2005). The 2005 Act has a number of important safeguards built in to ensure that the production of existing generic versions of drugs is not jeopardized. It also has provisions to ensure affordable access to new drugs. Whether such provisions would in fact be interpreted in a manner conducive to public health needs remains to be seen. One of the key provisions in the 2005 Act Compulsory Licensing is discussed below.

2. Compulsory Licensing As mentioned earlier, the provision of two new grounds for compulsory licensing (one in respect of exports to countries that lack manufacturing capabilities and the other in respect of the manufacture of drugs that are the subject matter of mailbox applications) would go a long way towards ensuring that local industry can continue to manufacture at a cost lower than the innovative drug company. However, despite these new grounds, the new regime has done little to ease the administrative and procedural bottlenecks that constrained the invocation of compulsory licensing provisions under the old regime. Indeed, a rather stark example of the procedural delays inherent in compulsory applications is provided by a case under the old regime, where the compulsory licensing application was dragged on all the way to the Calcutta High Court, by which time the patent had almost expired. The 2005 Act has streamlined one such procedural hurdle by providing that voluntary negotiations with a patentee should be concluded within six months. It could therefore well be the case that extensive provisions on paper may not translate easily into practice. Further, contentious terms such as reasonable royalty rates (used in the context of the newly added compulsory licensing ground to permit generic companies to continue manufacturing drugs that are the subject matter of mailbox applications) could significantly slow down the compulsory licensing process. It is nevertheless important to appreciate that possibly another reason for the non-optimal use of the compulsory licensing regime under the old regime was the absence of a well-developed local 16 industry. Needless to say, in the context of pharmaceutical inventions, this is not an issue, as India has a well-developed local industry with extensive expertise and a readiness to exploit compulsory licensing provisions. In the years to come, India is likely to provide a fertile ground for the emergence of sophisticated compulsory licensing jurisprudence, at least with respect to pharmaceutical inventions. FOLLOWING ARE SOME OF THE MAJOR HIGHLIGHTS OF THE INDIAN PHARMACEUTICAL INDUSTRY 1. Since the mid 1990s the Indian private sector has started investing in R&D for new drugs. But none of the Indian companies is engaged in the entire process of drug development. The Indian companies develop new molecules and license them out at the early stages of clinical development. TRIPS may have prompted these Indian companies to go for new drug R&D but such gains would be very small compared to the costs that the developing countries would incur for the high prices resulting from the products patent rights granted to the MNCs. 2. The pharmaceutical MNCs have never been keen to undertake basic drug manufacturing. The production facilities set up to confirm to the industrial policies pursued by the government in the 1970s and 1980s are now being divested with abolition of these policies. 3. In the previous patent regime the Indian generic companies were against product patent protection in the pharma sector. After the revision of the patent law they developed through reverse engineering and by innovating new processes for the new patent products introduced abroad. The growth of the Indian generic companies was due to their own indigenous efforts and not because of the MNCs. 4. Currently the nature of activities and the relationships of the Indian companies with the MNCs is changing. Collaborative arrangements between the Indian generic companies and the MNCs encompass the entire range of activities: i. manufacturing

ii. marketing iii. R&D. It is mainly the large Indian companies which are partnering with the MNCs in the marketing of the imported products and R&D for the development of new drugs. But both large and small companies are getting involved in manufacturing subcontracting. The MNCs are increasingly outsourcing from Indian companies not only their requirements for off patent drugs but also for intermediates required for development and production of new chemical entities. 5. There has been a change in the attitude of the generic companies towards IPRs. Those Indian companies which propose to grow in partnership with the MNCs favour strong patent protection as opposed to others. Thus the generic industry in India is divided. 6. Some of the MNCs did not introduce their products in absence of the patent protection in the earlier regime. However this was beneficial as the Indian companies could produce and sell them at lower prices. Considering other arrangements as R&D sub contracting and manufacturing subcontracting the patent regime is unlikely to be of much significance in influencing the decisions of MNCs. 7. Opportunities of R&D subcontracting would have been available even in the absence of TRIPS and some generic companies believe that prospects for manufacturing outsourcing depends on product patent protection. 8. In the past the domestic consumers and the producers gained at the cost of the MNCs. With shrinking domestic opportunities, as Indian companies enter and try to grow in the generics market in the developed countries they will be increasingly competing with the MNCs and hence will be contributing to the affordability of drugs in those countries. But in India the generic companies will no longer be able to produce the new patented drugs and compete against the MNCs to make the prices more affordable. This will adversely affect not only the consumers in India but also those in other developing countries which depend on low cost supplies from India. 9. It is agreed that with many drugs going off patent in coming years there are tremendous export prospects which can compensate for the shrinkage of the domestic opportunities after 2005 Since India is an established exporter some companies can take advantage of the good export opportunities. But the generic exports to the regulated Markets which provide the greatest opportunities have nothing to do with TRIPS. Generic companies can enter and grow only after the product patents expire in these markets. PATENTS IN THE PHARMACEUTICAL INDUSTRY: A FEW END NOTES The net benefits of the patent system to the society have remained controversial over the years. Most studies on the economic implications of the patents have been produced in the developed countries and their direct relevance to the developing countries have been questioned. TRIPS was introduced not because the developing countries wanted it but because the MNCs and the developed countries insisted on it. It was claimed that not only would the developed countries be able to take care of the costs of the TRIPS, they would also derive various benefits out of it. However these benefits have not materialized. The pricing pattern of the drugs in the new regime depends on whether or not the MNCs adopt differential pricing schemes. If product patent protection leads to higher prices then the developing countries are empowered to intervene and regulate the market prices. One way to do so is by using Compulsory Licensing. If the product patent protection is abolished or flexibilities such as Compulsory Licensing are introduced then the competition would drive down the prices and accessibility can be improved. However the R&D funds available with the MNCs may go down thereby adversely affecting the development of the new medicines. In quantitative terms lower prices in the developing countries may not have any significant negative impact on the resources of the MNCs. The developing countries have been experiencing difficulties in implementing the flexibilities provided under TRIPS.

While lack of awareness of the different options and possibilities and the absence of a proper administrative and legal infrastructure has been an issue in some cases, the more important factor has been the opposition from MNCs and some developed country governments. While amending her patent laws, India has not been able to introduce a simple and easy to use Compulsory Licensing system the way Canada has done. Though Canada did not have the support of a home grown chemical industry, she has efficiently adopted the Compulsory Licensing system which has helped the domestic pharmaceutical industry and also the domestic consumers. In India though the domestic industry is well established and has developed the skills to reverse engineer and invent a new product it could not attract large amount of FDI because of the lack of patent protection. However as a signatory of the WTO, with stronger patent laws the government now allows 100% equity in pharmaceuticals, a measure which should lead to an increase in FDI. Further in a developing country like India, Compulsory Licensing can be effectively implemented to ensure proper affordability and accessibility of the drugs.