Making manufacturing more competitive

The National Manufacturing Comp-etitiveness Council (NMCC), set up by the Prime Minister, has just come up with a draft national strategy for manufacturing and has placed it on its website, seeking feedback from all stakeholders.

A focus on manufacturing competitiveness is timely and critical for sustaining a higher GDP growth rate at 8% or more. Manufa-cturing that is not competitive in the global market place has no future. Revival of manufacturing is also key to employment generation for India?s growing work force. The NMCC feels the sector?s annual growth rate should increase from the 7% seen over the past decade to 12%. This would generate 2.5 million jobs in place of the one million seen in the past. It would also bring the contribution of manufacturing to GDP to 23% from the 17% in 2003. Which, of course, would still be low, compared to the East Asian countries.

NMCC has identified factors that impi-nge on the broader issue of competitiveness, like tariffs and indirect taxes, cost of capital, innovation and technology, infrastructure, regulatory environment, etc., and has come up with a set of recommendations. While the factors identified are important, they only partly explain competitiveness. An important set of determinants of competitiveness lie in the domain of enterprise-level decision-making. NMCC has apparently not been able to pay due attention to the enterprise-level factors, although it recommends that firms are encouraged ?to build abilities to acquire, assimilate, develop new technologies and reduce production costs? and seeks a national programme of lean manufacturing.

In terms of the most objectively measured criterion of manufacturing competitiveness of an enterprise, i.e., its export performance, one finds a very wide variation across firms. All firms in an industry broadly face a similar macroeconomic environment, cost of capital, tax treatment, infrastructure availability, and external market conditions. Yet, the outcomes vary widely. Some firms try to establish themselves in international markets and build a niche, while others are not motivated to export at all. Obviously, enterprise dynamism has a role to play in producing export successes, besides other factors. A detailed analysis of the export performance of 4,500 firms across industries, conducted at RIS, revealed a number of important factors affecting their export performance and may be considered by the NMCC in its work.

For instance, firm size has an important influence on export performance, with the relationship between the two variables taking an inverted U-shape. Implying that smaller firms are clearly at a disadvantage in export markets until a threshold size is reached. Policies assisting smaller firms with information on opportunities, technological support, credit and export distribution channels through development of clusters may help. It also suggests a role for policies for nurturing world-class enterprises or national champions or flag-bearers in select sectors, who could be assisted to grow to world-scale and compete with their own brands, overseas investments and acquisitions.

The RIS study also finds an enterprise?s own innovative activities play a key role, especially in knowledge-intensive industries. Developed country governments spend billions of dollars in R&D subsidies to national enterprises. Such subsidies have been made non-actionable under WTO rules. In India, R&D activity has been encouraged mainly through weighted tax deductions in certain industries. It is arguable that a more direct support in the form of R&D subsidies for specific projects for development of products or processes may be desirable. Another policy to promote local innovation could be protection accorded to minor innovations through utility models and industrial designs protection, as done by a number of East Asian countries.

Finally, the quality of FDI varies a great deal and not all FDI flows may bring to their host countries the best practice technologies. In this context, it may be important to focus on export-oriented FDI, as these investments have to be competitive right from the beginning. And, hence, tend to bring in the best-practice technologies. They also have other favourable externalities and crowd-in domestic investments by creating demand for intermediate goods.

Here, we can learn from China?s experience. FDI has been pushed to export-oriented production and today, foreign affiliated firms account for nearly 55% of China?s manufactured exports and 80% of its high technology exports. Export-oriented FDI could help the Indian manufacturing sector tie up with the global production networks of MNCs. Our large and expanding domestic market and our low-cost, but high-quality, human resources need to be leveraged effectively for India to be viewed as a base for export-oriented production. China, among other countries, has effectively bargained with MNCs on the access to its domestic market, in return for accepting certain export-obligations.

Pro-active targeting and promotion of export-oriented FDI could also be useful for exploiting India?s potential in attracting export-platform FDI. Incidentally, contrary to general perception, export-obligations are fully consistent with WTO?s Trims agreement and can still be employed without any problem.

NMCC has started to address the important, but complex, and challenging task concerning India?s manufacturing revival. These are a couple of issues that may be of interest to it!

The writer is director-general, Research and Information System for Developing Countries (RIS). These are his personal views