State Support for Industrial R and D

in Developing Economies
Telecom Equipment Industry in India and China
The importance of state support for industrial R and D in literature fails to take cognisance of
the contextual specificity of late industrialising economies. The problem of inadequate
investment in technology by domestic firms, engaged primarily in ‘technology catch-up’, is
rooted in their dependence on technologically advanced foreign firms and their inability to
break down non-technological barriers to entry in the product market. Through a comparative
narrative of technology development under state support in India and China, this paper seeks
to provide some evidence on the need to be sensitive to the stage of technological development,
and the nature of industry in designing policies of state support for industrial R and D for
effective intervention.
BISWATOSH SAHA

I to entry’ in the product market which are created due to the extant
Introduction market structure and the strategies of entrenched firms in the
industry. Developing economy firms then might continue in

T
here has been a renewed debate on the role of government
support for industrial R and D, much of it in the context
of advanced industrial economies. The US in particular
has been arguing about the necessity of state intervention
[CEA 1995; Hill 1995;1 Mani 1999]. As Stiglitz (1998) argues,
“technology has numerous positive externalities. Indeed in some
respect, knowledge is like a classical public good” (p 27). Hence,
without government intervention, there will be under-investment
in industrial R and D because of the inability of the investor to
fully appropriate the returns to investment. The public policy
implication following from such an argument is that state
subsidisation of R and D, through tax breaks or direct research
grants, which makes up for the gap between private and social
return (deductively derived within the neo-liberal equilibrium
model) to R and D investment, suffices to ameliorate the problem
of market failure. This argument, rooted in neo-liberal tra-
ditions (with the additional assumption of externalities) is
ahistorical, in a sense, for it fails to take account of contextual
differences between economies in different stages of industrial
and technological development. This is crucial, I argue in this
paper, particularly for the implications for the design of instru-
ments of state support and consequently, the success of state
intervention.
Developing economies are “late industrialisers”, as Amsden
(1989), Wade (1990) and others have argued. Domestic enter-
prises in these economies are engaged in a process of ‘techno-
logical catch up’ with rival firms from more advanced industrial
economies. The nature of industrial R and D in domestic enter-
prises indigenous to developing economies is, therefore,
qualitatively different from R and D in ‘cutting edge’ technolo-
gies that are primarily the target of state subsidisation in indus-
trially advanced economies. For firms in developing economies,
engaged in the technology catch-up process, low investment in
R and D might be rooted in their inability to surmount ‘barriers
‘relations of dependence’ with technologically advanced foreign
firms, preferring not to take up the risk of investing in R and D.
Domestic firms in developing economies, therefore, might under-
invest in R and D, even if they do not face traditional problems
relating to appropriation, which has occupied much of the new
debate.
This paper analyses the experience of Centre for Development
of Telematics (henceforth to be referred to as C-DoT), a public
sector research institution in India set up in 1984 to develop
indigenous telecommunication switching technology. Though
state intervention in supporting industrial R and D in India
is not regarded as highly successful, especially compared to
east Asian economies, [GoI 1986; Mani 2001] C-DoT has
been successful in developing cost-effective indigenous
telecom switching technology, making India one of the few
developing economies to have indigenous design capability in
the industry.
The Indian experience, however, appears modest when com-
pared to the remarkable success of Chinese telecommunication
equipment manufacturers over the last decade, particularly their
rapid pace of technology learning and development, and expan-
sion into global markets in the short span of about a decade. The
industrial policy environment and instruments of state interven-
tion in China, as will be shown, have been quite different from
that in India and this paper analyses the significance of such
differences. Through a comparative account of technology
evolutions and development in industry in the two countries, the
paper seeks to provide evidence on the need to link the design
of instruments of state support to the stage of technological
development of domestic industry so that state intervention is
effective.
The paper is organised as follows. Section II deals briefly with
the global telecommunication equipment industry, analysing the
nature of the industry, its market structure, nature of competition

Economic and Political Weekly August 28, 2004 3915

as well as the nature and extent of barriers to entry. Section III
analyses the experience of C-DoT and evaluates its performance.
Section IV provides a brief narrative on Chinese telecom equip-
ment firms over the last decade, contrasting it with the Indian
experience. Section V analyses the significance of the somewhat
differential experience of indigenous technology development
in the two economies.
II
Global Telecom Equipment Industry:
An Overview
Before moving on to the particular narratives of the two cases,
a brief digression on the global telecom equipment industry will
set the context for the discussion that follows. The telecom
equipment industry broadly refers to a range of products that are
usually segmented into switching, transmission and access (cus-
tomer premise) products, depending on the part of the network
it is used in. Among these different segments, switching and some
transmission products are generally more ‘technology intensive’
and are characterised by concentrated industry structures domi-
nated by a few multinational firms. Being an intermediate in-
dustrial product, demand in the industry is driven by the growth
in telecom service markets (it is primarily network expansion
and upgradation that creates demand for telecommunication
equipment). Over the last decade, the rapid expansion of telecom
networks (and telecom service markets) in large industrialising
economies (China, India, Brazil, in particular) has made these
markets the new growth poles of the equipment industry –
particularly for traditional fixed line networks.2 In developed
markets, growth in the telecom service industry has been more
concentrated in the new technology segments that include mobile
telephony and data networks. However, developing economies
constitute a significant part of global markets in these new
segments as well. China, for instance, already had the largest
installed base of mobile telephones in the world by the turn of
the century [Nolan 2001].
Globally, the industry is highly concentrated. The top ten
manufacturers, all with their roots in advanced industrial
economies, accounted for 75 per cent of the global switching
equipment market in early 1990s [Carpentier et al 1992].
Moreover, markets in major industrialised economies that
had a major telecom equipment manufacturer – US, Japan,
France, UK, West Germany – were dominated by the local firm.3
In fact, the largest telecom service markets in the world, till
very recent times, were all closed markets (the sector was
considered strategic in terms of national interest) with private
or public sector monopolies operating the network. The operator
often had close relations with the local equipment supplier,
including preferential purchase policies, which played an impor-
tant role in technology development as well as evolution of the
industry structure.4
Telecom network operators in developing economies (mostly
under state ownership), where indigenous technological capa-
bility for equipment manufacturing did not exist, depended on
foreign equipment suppliers – such dependent relations ranging
from imports to local assembly based on foreign technology
licensing. It is only in the 1990s that firms from developing
economies – South Korea, Brazil, India and China, entered the
industry with indigenously developed technology, often pro-
duced at a fraction of the cost.
3916
Nature of Industry and Sources of Entry Barriers
The telecom equipment industry, particularly the switching
segment, is technology intensive: expenses on research and
development in designing new products are about 15 to 20 per
cent of sales of leading MNCs [various Annual Reports of Lucent,
Alcatel 2000-2001]. The manufacturing process, post design, is
a simple assembly operation. Technology barriers lie, therefore,
at the design stage. There has been an important change in the
product development process from the 1980s, after digital
switching technology came in. The focus of product development
has shifted from hardware to software components (around 80
per cent of R and D expenses, currently, are on software devel-
opment) over the 1990s – giving firms from developing econo-
mies a cost advantage in the R and D process itself, due to
availability of low-wage skilled labour. Cost advantage in prod-
uct development can lead to cost advantages in the final product
market, due to the substantial contribution of R and D costs to
total cost. However, technology and product development is by
no means the only entry barrier, particularly after the recent
regulatory and technological changes that profoundly affect the
structure and contours of evolution of the industry.
The telecommunication industry, over the 1990s, experienced
major restructuring after the introduction of competition in almost
all segments of the industry. The restructuring was led by the
US, where competition in fixed-line telephony was introduced
in phases from 1984, by breaking up the monopoly operator
(AT&T) into a long-distance carrier (competition was allowed
in the long-distance market) and the Regional Bell Operating
Companies, which retained monopoly status in operating the
local loop. Finally in 1996, with the passage of the Telecom-
munication Act, competition was introduced in all segments of
fixed-line networks in the US. Technological changes over this
period – the rapid development of mobile telephony, other radio
based communication and the growth of data networks – created
competing modes of telecommunication. This played a role in
the restructuring of fixed-line networks as well – more so because
the newer segments developed under competitive market struc-
tures in USA.
What essentially began as a US phenomenon gradually spread
to other countries – aided in no small measure by US diplomacy
and protracted negotiations at the WTO over the World Tele-
communications Agreement (under GATS; signed in 1997),
which shaped and influenced the policy dialogue in the industry
across the globe.5 The European Union, for instance, enacted
the EU Telecommunications Act in 1998, introducing compe-
tition in the industry. Simultaneous to the introduction of com-
petition during this period, was another profound change – the
opening of hitherto closed national telecom service markets to
foreign operators, which set the stage for the multinationalisation
of the telecom service industry.
Cross border mergers and acquisitions as well as massive
investment flows have characterised this industry over the last
few years, as the leading telecom operators (primarily from
developed economies) consolidated their market positions across
major markets in North America, Europe and Japan. The merger
between Vodafone, Mannesman (both EU based) and Airtouch
(US based) to create VAM – the largest mobile phone operator
(12 per cent of global mobile phone subscribers in 2000) with
a trans-Atlantic market position is probably reflective of this
trend. The leading global telecom operators are also consolidating
Economic and Political Weekly August 28, 2004
market positions in large parts of the developing world – par-
ticularly in Latin America, where extensive privatisation and
liberalisation of foreign investment rules have led to the com-
prehensive takeover of national operators. By the late 1990s, 18
out of 20 largest operators in Latin America, for instance, were
controlled by strategic foreign investors [Nolan 2001:778-79].
This fundamental reordering in the organisation of the telecom
service industry had a profound impact on the relation of the
network operator with equipment suppliers. Firstly, the erstwhile
monopoly telecom operators (many of whom are today corporatised
or privatised) faced with competition in their service markets,
are becoming more demanding in looking for attractive commer-
cial terms for equipment procurement. Provision of vendor credit,
supplier finance and strategic equity investments in operators
have become important competitive tools in opening up and
developing telecommunication equipment markets. The financial
strength of entrenched MNCs and their institutional links with
international banks/financiers (developed historically) is enabling
them to provide cheap and extended credit to finance equipment
sales to clients.
As the Annual Report of Lucent Technologies (1999) notes –
The purchasing behavior of Lucent’s largest customers has increas-
ingly been characterised by the use of fewer and larger contracts.
These contracts typically involve longer negotiation cycles, require
the dedication of substantial amounts of working capital and other
resources; and in general require costs that may substantially
precede the recognition of associated revenues. Lucent has increas-
ingly provided or arranged long-term financing for customers as
a condition to obtain or bid on infrastructure projects”
(‘Management’s Discussion and Analysis of Results of Operations
and Financial Condition’, 1999).
At year-end September 2000, Lucent had around US$ 8.1
billion of customer financing assets (loans or guarantees) on
annual revenues of about US$ 28.9 billion. Some of these assets
turned bad as the telecom industry entered a downturn at the end
of the century, forcing Lucent to incur US$ 765 million and
US$ 1.8 billion as financing charges in 2001 and 2002 respec-
tively, [Annual Report, Lucent Technologies 2002]. This clearly
brings out the significance of such competitive tools in opening
up markets for equipment vendors. Similar perceptions about
industry dynamics were referred to in annual reports of other large
MNCs as well.
The other major change affecting the industry involves a shift
in the role of the ‘system integrator’, from network operators
to equipment suppliers. To understand this shift, we need to
remember that switching equipment constitutes only one com-
ponent of a telecom system and that the integration of different
components constitutes an important aspect of network design
and installation. Under the old industry structure, the network
operator played the system integration role, often in close relation
with the equipment supplier – particularly in developed markets
where domestic equipment suppliers existed. This role is slowly
shifting to equipment suppliers, as network operators concentrate
on their core function of marketing telecom services. On the other
hand, for new entrants into the telecom service industry, who
lack in-house technical expertise, this shift is obvious. To be
competitive in this new environment, equipment manufacturers
need to have a complete product portfolio to cover all segments
of the network (switching, transmission and access) or bid in
consortium. Because of the system nature of the downstream
network, the upstream industry also needs to organise along
Economic and Political Weekly August 28, 2004
similar lines, through strategic alliances and consortium. Incum-
bent multinational equipment manufacturers have already re-
sponded to these expected shifts by taking recourse to strategic
alliances and acquisitions to gain access to complementary
technologies and products and develop capabilities for imple-
menting turnkey installations of complete networks.6
Thirdly, the multinationalisation of the service industry (the
client for equipment manufacturers) will imply that the national
operation of an equipment manufacturer will become increas-
ingly unviable. To the extent that developing economies have
to open up the telecom service industry to foreign competition,
the ability of the state to provide an assured domestic market
to indigenous equipment manufacturers will get eroded. Even
at the turn of the century, most telecom markets in east Asia,
India and China remain protected and segmented from global
markets to a large extent due to various restrictions. But, how
long such restrictions will remain is an open question.7 For
indigenous firms from developing economies in the equipment
industry, the path to salvation might well lie in establishing a
toehold in global markets. And surmounting the technology
barrier alone is unlikely to be a sufficient condition for successful
entry into global markets.
III
C-DoT and Telecom Equipment Industry
in India
C-DoT was set up in August 1984, as an autonomous registered
scientific society under Department of Telecommunications
(DoT), government of India, with a specific mission to indig-
enously design high capacity digital telecom switches. Creation
of C-DoT transferred the technology-intensive R and D function
to an autonomous institution, separating it from the manufac-
turing activity, which was then being carried out at public sector
Indian Telephone Industries (ITI) through technology licensing
arrangements with Alcatel. The switching equipment envisaged
for development in C-DoT was to cater to capacities from 128
to 40,000 ports,8 for a variety of applications like PBX, local,
trunk and tandem9 in rural, urban and metropolitan areas in India.
To appreciate the context under which C-DoT was formed,
a short digression about the existing switching technology in the
Indian network is essential. ITI, the sole licensed manufacturer
of switching equipment in India, was dependent on various
foreign technology suppliers since its inception in 1949. Mani
(1989), after a review of ITI’s technology imports, concluded
that the direct cost of technology import by ITI was quite high.
More importantly, absorption and assimilation of imported
Table I: Major Milestones in C-DoT’s Technology Development
in Digital Switching
Date Technological Breakthrough
July 1986 128 port RAX installed at Kittur, Karnataka.
May 1987 Installation of 512 port MAX at Delhi Cantonment.
August 1987 Installation of 16,000 port MAX-L at Ulsoor in Bangalore.
March 1988 Mass production of RAX at ITI, Bangalore started.
December 1995 Installed the first MAX-XL switch (maximum capacity 40,000
ports)
1996-97 CCS No 7 introduced successfully in an existing RAX.
April 1998 ISDN compatibility achieved, IN features launched
1999-2000 C-DoT switches can be used as fixed line exchange and
mobile switching unit.
Source: C-DoT Annual Reports.
3917
technology was extremely tardy. Switching technology used in
the Indian network kept pace, broadly, with shifting technological
frontiers in the international industry. But, in every case of
transition to a higher generation technology, ITI had to depend
on technology transfer from foreign sources. In many cases, the
choice of technology was not appropriate and was governed by
factors other than commercial considerations.10 ITI spent close
to 8 per cent of its revenues on R and D throughout the 1980s,
but most of it was spent on costly exercises to adapt inappropriate
foreign technologies to local conditions.11 Meanwhile, the Rajiv
Gandhi government, which came to power in 1984, began
implementing fresh projects for technological modernisation and
indigenous capability development. C-DoT was formed, at this
stage, as part of the Technology Mission on Telecommunication
(identified as one of the five thrust areas), ‘cherry-picking’ some
of the best engineers in the country to form the core team.
Technology Development at C-DoT
The first product designed by C-DoT was the EPABX (Private
Automatic Branch Exchange) system. The basic design was
formulated within a year after C-DoT’s formation. By 1989,
nearly 70 per cent of local EPABX manufacturers entered into
technology collaboration arrangements with C-DoT, instead of
looking towards foreign sources of technology [C-DoT 1989].
The achievement was all the more laudable because ITI, which
was manufacturing EPABX systems of smaller capacity since
1976-77 under foreign technical collaboration, had till then,
3918
failed to design a reliable EPABX system of its own in spite
of significant investment in R and D.
RAX: Entry into Digital Public Switching Market
The first digital public switching system designed by C-DoT
was the 126 port Rural Automatic Exchange (RAX), installed
in 1986 to replace the existing Strowger type electro-mechanical
exchanges in the DoT (monopoly telecom operator till the mid-
1990s) network in rural areas. By 1999, over 90 per cent of the
rural switching capacity in India was made up of RAX products.
After the success of RAX, DoT reserved its requirement of rural
exchanges for preferential purchase of RAX products. RAX has
been particularly successful because it was tailored to local Indian
conditions, with ability to withstand extreme temperature con-
ditions (–20 to 500C), dust and humidity. It consumes very little
power and does not even require air conditioning, and has upto
512 port applications. It may also be noted that MNCs did not
have a competing product suited to rural applications in India and
C-DoT products found ready acceptance in a ‘niche’ not served
by incumbents. The product development trajectories of estab-
lished MNCs in the industry, influenced as they are by demand
patterns in industrially advanced developed markets (characterised
by high quality, advanced features and premium pricing), pre-
cluded product development suited to specific local conditions
in India.12 This gave C-DoT opportunities for ‘technological
learning’, as RAX was used as a basic building block to scale
up to higher capacity switches in C-DoT’s product portfolio.13
Economic and Political Weekly August 28, 2004
 C-DoT’s design philosophy, since it evolved out of unique local cost), but it could not influence DoT procurement policy. It was
demand conditions, was different from established industry norms. also argued that the demand for value added services would be
Instead of standardising one switch to suit all needs, usually a low and concentrated in only a few metropolitan cities – so DoT
cost-effective solution for MNCs, C-DoT had a four-pronged could, for a large part of its purchases, utilise MAX-XL switch
product strategy (PABX, RAX, MAX-L, MAX-XL) to suit even without those features. It is pertinent, perhaps, to point out
different applications. Its product strategy emphasised ‘common- that the lobbying and promotional effort of MNCs, who have
ality of hardware and software’ between different product lines better capability to deliver on advanced features, also plays a
to reduce manufacturing complexity and costs. It also used role in shaping the network operator’s procurement decision as
capital-sensitive, labour-intensive equipment process technolo- it reinforces or even shapes the dominant discourse on technology
gies, for instance, PC-based testing was used instead of costly choices. While the DoT can be blamed for being susceptible to
electronic (advanced) testing jigs. It also did not have a fully- such lobbying efforts (and the dominant discourse), analytically,
automated plant (manual assembly of cards was used) so that it is also useful to look into these dynamics as an outcome of
the investment requirement was minimised [Ray 2001]. firm rivalry – which influences the parameters on which com-
C-DoT gradually migrated to the development of higher ca- petition operates in the industry. Over the years, C-DoT itself has
pacity switches, and they were inducted into the DoT network. begun investing in developing advanced features, styling, and
By 1999, the MAX, MAX-L series (capacity upto 10,000 ports) aesthetics – moving away from its ‘no frills’ design philosophy.
of C-DoT switches made up 40 per cent of the DoT urban network The late 1990s also witnessed another major change in the
as well. All DoT purchases of digital switches, with capacity less product development strategies of leading MNCs in the industry.
than 10,000 terminations, were reserved for C-DoT manufactur- As developing economy markets started growing, as mentioned
ers, since the successful design and installation of the MAX- earlier, MNCs realised the importance of tailoring their products
L switch in the early 1990s. Multiple manufacturers with tech- to unique operating conditions in these markets and started
nology licences from C-DoT, actually compete for DoT14 pur- developing country specific competencies. They have started
chases in this segment through a tendering process. offering products suited to rural applications in the Indian market,
which they claim can compete with RAX.
Entry into Large Capacity Wwitch Market By the end of the decade, however, C-DoT had succeeded in
developing state-of-the-art large capacity digital switches, with
As C-DoT upgraded its product portfolio – entering the large technical features that almost matched those of leading multi-
capacity switch segment – it faced direct competition from national firms in the industry (products offered in Indian market),
foreign firms in the Indian market and, as is argued below, the while the cost of equipment was generally lower (Appendix 1).
protection it received also began to be contested. The balance Price comparisons should, however, be made very carefully
of payment problem in India in 1991 and the economic restruc- because pricing of complex technology capital equipment is
turing initiatives that followed the adoption of the IMF bailout extremely complicated and sensitive to specifications as well as
package, led to fundamental re-ordering in several sectors. The terms of service support. Analytically, this shows that price, on
New Industrial Policy (announced July 1991) allowed foreign its own, is a weak signalling device in these industries and
equity participation (up to 51 per cent) in the telecom equipment competitive rivalry will occur on many non-price fronts as well.
industry. During that period of foreign exchange crisis in the As C-DoT licensees competed in the tenders, new strategies came
country, several MNCs arranged for foreign exchange loans, to the fore – it has been claimed that MNCs have under-quoted
including soft credit. Siemens, for instance, offered DM 500 in the bids (lower than landed costs) in order to gain market shares
million to finance the import requirement (equipment) of DoT. [VANS Information Limited, various dates, Ray 2001:545]. C-DoT
Alcatel similarly offered a 0.1 million lines exchange to DoT claims that the prices of its products (over the life of the equip-
on a ‘lease basis’ – to reduce the immediate outgo of foreign ment) are lower because it offers after-sales service, software
exchange [Ray 2001].
All these facilitated the entry of MNCs, who established joint Table 2: C-DoT Switching Equipment in DoT Network
ventures (eventually the Indian partner’s stake was bought over Product No of Exchanges No of Lines (Million),
by all the MNCs) to carry out assembly operations in India. DoT, including Expansion
December 1996 March 2003 December 1996 March 2003
which till then, depended solely on Alcatel (through its licensee)
for its large capacity switch requirement, started apportioning RAX 16998 32990 1.83 4.56
its orders to MNCs (through their licensees or joint ventures SBM-RAX 2025 9971 1.80 9.4
MAX-L 250 874 0.82 3.53
(JVs)) – the largest share of the order going to the lowest bidder. MAX-XL 1 1237 0.03 7.33
To add to the problems of C-DoT, it became the subject of Total 19274 45072 4.49 25.01
prolonged political inquests, beginning with the appointment of
Source: C-DoT internet site at http://www.cdot.com
the Nambiar Committee in 1989; political interference and attempts
to break up the organisation debilitated it considerably, as it lost Table 3: Sources of Revenue of C-DoT
many people during that period of turmoil (refer to note 13). (in Rs million)
Although the large capacity C-DoT switch (MAX-XL) was Year 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999-
installed in the DoT network in 1995, C-DoT licensees were not 92 93 94 95 96 97 98 9 9 2000
allowed to bid for DoT tenders of large switches till 2000 – as Grant 192 290 600 280 400 585 550 747.5 709.7
MAX-XL did not incorporate value added features (like IN, Tech transfer,
ISDN, etc) till then. C-DoT argued that development work on royalty, etc 52.4 77.5 111 117.9 118.1 49.7 74.1 328.6 190.4
Total 244.3 367.5 711 398 518 637.7 700 1086 900.1
the advanced features were nearing completion and that they
would be retrofitted to all MAX-XL switches (without any extra Source: Annual Reports, C-DoT, various issues.

Economic and Political Weekly August 28, 2004 3919

upgrades, etc, without any extra cost. Its repair and equipment
maintenance strategy, which depends on replacement of parts
rather than sub-assemblies (the general industry norm), ensures
a far lower maintenance cost, unlike MNCs – whose pricing of
repairs and after-sales service is high, although the initial equip-
ment sale price might be lower. Such pricing strategies with back-
loading of the revenue stream due to high maintenance charges
on a locked-in consumer, however, is quite common in the sales
of technologically complicated capital equipment in other indus-
tries and it is no surprise that such strategies will be employed
by MNCs in the telecom equipment industry as well.
Apart from its success in the domestic market, C-DoT products,
particularly RAX solutions, have also been exported to several
countries including Russia, Vietnam, Nepal, Bangladesh, Indo-
nesia, Thailand, Nigeria, Ethiopia, Uganda, Gambia, Zambia and
Ghana [Annual Report, C-DoT, various issues]. The total value
of exports of C-DoT products, however, could not be obtained.
Estimates suggest that the value of exports is small compared
to domestic sales (just around 3 per cent), in spite of the con-
siderable excess manufacturing capacity in the domestic industry.
Exports of C-DoT products, however, have mostly been in the
low-end (low value added) segments – primarily for rural net-
works.
Before moving to the next section, it is perhaps important to
look into the technology development cost of C-DoT. Table 3
shows the sources of income for C-DoT between 1991-92 and
1999-2000. Grant-in-aid from the government of India, around
Rs 5,500 million till March 2000, has been the major source of
financing for C-DoT.
Estimated sales of switching equipment, till 2000, would be
more than Rs 50,000 million (C-DoT website), which implies
that C-DoT’s technology development budget has been just over
10 per cent of sales generated, which is far lower compared to
the R and D expense (15-20 per cent of sales) incurred by leading
MNCs in the industry. Moreover, the price of C-DoT switches
being lower, the R and D expense in absolute terms is far lower
compared to global benchmarks.
Manufacturing and Marketing of C-DoT Products
C-DoT, being a technology development centre, has not been
undertaking any manufacturing activity. Once a technology reached
the commercialisation stage, it was licensed to domestic manu-
facturers. The technology transfer process, therefore, has been
an important aspect of C-DoT strategy. At every stage, when any
product was designed, likely manufacturers were involved in trial
productions. Detailed documentation was developed as part of
the designing process itself and elaborate training and support
was provided to manufacturers to set up their production lines.
C-DoT also played a pro-active role in developing the vendor
base (around 680 registered C-DoT vendors) for manufacturing
components through technology transfer to component produc-
ers, which went a long way in indigenising production and
increasing the local content.
C-DoT has not been undertaking marketing of its product as
well, except promoting the generic technology solutions that it
has developed in international telecom technology fairs. The
marketing, pricing and bidding for equipment supplies depend
on the multiple licensees of C-DoT technology, in the domestic
as well as export markets. Given the technological complexity
of the product, however, C-DoT has to provide technology
3920
support, especially on software development, to the licensees for
tailoring applications to local conditions in foreign markets. The
domestic switching equipment industry in India has, therefore,
developed on the basis of vertical separation of the technology
development function from other value chain activities and the
success of C-DoT products in the market depends on the com-
petitiveness of manufacturers as well.
C-DoT technology has been transferred to more than 50
manufacturers, thus creating a fragmented manufacturing base.
This was done by design, as it was felt that a fragmented industry
structure would keep prices of C-DoT products low for DoT,
the main purchaser. The MAX-XL technology, for instance, has
been transferred to about 11 manufacturers. The average annual
demand for large capacity exchanges for DoT between 1997-
2000 has been around 3.5 million lines, which implies that even
if half of DoT purchases of large capacity switches of C-DoT
technology, the average annual demand for each of the 11
manufacturers of MAX-XL would only be about 0.15 million
lines, which is very low compared to internationally competitive
scales of operation (see Section IV). It is estimated that the total
installed annual capacity for C-DoT switches in India is around
seven million, which leads to very low capacity utilisation rates
– sometimes as low as 20 per cent [www.cdot.com, Ray 2001].
The fragmented industry structure has kept prices of C-DoT
equipment low, but it has also created problems of excess capacity
leading to low capacity utilisation in the industry.15
Earlier, it was argued that deregulation in the telecommuni-
cation industry worldwide has led to many changes, some of
which are taking roots in the Indian market as well, particularly
after the introduction of competition by the entry of private sector
telecom operators from the mid-1990s. Private telecom operators
in India, who lacked technical expertise in designing networks
in-house, had entrusted their equipment suppliers with the
responsibility of network planning and full installation on a
turnkey basis.16 Provision of vendor credit has been an important
element in all the equipment supply deals to private telecom
operators in India, which can be understood as the private
operators were often financially constrained [Appendix 2,
Saha 2001 provides more details]. C-Dot licensees have been
unable to break into the equipment market of private operators
in India.
Analytically, it is important to realise the importance of non-
price competitive tools in gaining market shares in industries with
oligopolistic market structures like telecom equipment. Such
dynamics can be expected to drive competition as C-DoT pro-
ducts compete directly with offerings from MNCs in Indian as
well as foreign markets. The C-DoT technology based indigenous
equipment industry – given the vertical separation of technology
development from other functions and the fragmented structure
of the manufacturing segment – appears ill-suited to respond
adequately to the new competitive dynamics. The C-DoT product
portfolio is also narrow, as it has not been as successful in
developing transmission products – although the mission of the
organisation was expanded in 1989 to include transmission
equipment development as well. This obviously limits the ability
of C-DoT licensees to bid for turnkey installations unless a
consortium arrangement is made with manufacturers (essentially
foreign firms or technology licensees of foreign firms) who can
offer complementary products. Given the convergence in the
strategies, and the structure of organisation of different value
chain activities by multinational equipment manufacturers, it is
Economic and Political Weekly August 28, 2004
unlikely that a different ‘strategic position’ (like that of C-DoT)
would be sustainable unless the environment is radically different
in India. This is quite unlikely given the trend towards deregu-
lation and greater liberalisation in the telecom service industry.
With this brief narrative about the C-DoT experience, I shift to
a discussion of the Chinese industry.
III
Telecom Equipment Industry in China
China’s telecom service sector has grown rapidly over the
1990s, becoming one of the largest markets in fixed line and
mobile telephony by the turn of the century. The pro-growth
macroeconomic environment as well as the ambitious five-year
plans to expand and modernise the telecom network played a
crucial role in this rapid growth. The Chinese government has
been making proactive efforts to strengthen China’s technologi-
cal and manufacturing capabilities in the sector, but has not
invested directly in the technology development effort. The entry
of foreign firms has been regulated, creating a domestic market
for Chinese firms as they develop products. It is reported that
the licence to enter the Chinese market (according to rules
effective from January 1999, a licence to a foreign telecom
equipment supplier was valid for only three years) was accom-
panied by stringent conditions to transfer technology to Chinese
partners in joint ventures (JV). Foreign firms, however, in many
cases, succeeded in getting across the barriers through interna-
tional joint ventures and promises of technology transfer. But
given the rapid growth in the market, even limited attempts to
protect the domestic market did lead to the assurance of a large
market for domestic producers. Foreign suppliers dominated the
fixed line switching market in China in the early 1990s, with
Alcatel being the largest supplier through its JV, Shanghai Bell.
By 1998, however, domestic Chinese firms had captured a
dominant share of the fixed line switching market, supplying 98
per cent of the switches added to the network.
Due to historical reasons, the telecom equipment sector in
China developed into a fragmented industry (like several other
industries as well), but over the 1990s, government policy
Huawei Technologies
Huawei Technologies was formed in 1988, with a seed capital
of US $ 1,000 in Shenzen, and has been one of the most successful
indigenous firms to develop the design and manufacturing
capability for a number of hi-tech telecom products in China.
Table 4 shows the annual sales revenues of the firm and Table
5 indicates sales volume and market share of some of its important
products. Its product portfolio includes products for optical,
fixed, mobile and data communication networks. Huawei Tech-
nologies currently spends 10 per cent of its net annual revenues
on R and D and employs 40 per cent of its employees in the
R and D unit. It had 4,000 employees in R and D in 1999, and
11,000 in 2003, compared to around 1,000 employees in R and
D in C-DoT. Apart from its conventional circuit switching based
digital switches, Huawei also developed other state-of-the-art
transmission products like SDH equipment, ATM switches and
GSM/CDMA based products for mobile infrastructure and rout-
ers and LAN switches for data networks. By 1999, within a decade
of its inception, it had graduated into a major manufacturer having
a wide product line to implement end-to-end turnkey solutions
for network operators.
Apart from its dominance in the domestic Chinese market,
Huawei’s products have also been exported and used in telecom-
munication networks in more than 40 countries, including Brazil,
Bulgaria, Estonia, Iraq, Kazakhstan, Kenya, Latvia, Lithuania,
Russia, Singapore, South Korea, Tazhakistan, US and Uzbekistan
with exports making up around 13 per cent of its revenues in 2001.
The company’s target is to achieve 33 per cent of its revenues
from overseas sales by 2006; in 2002 exports increased by 66
per cent to US $ 552 million from 2001 (www.huawei.com.cn).
It has also attained turnkey capability in network planning and
has set up the network of Hong Kong Hutchison Telecom, the
second-largest telecom operator in Hong Kong [Gasper 2000].
Huawei has also been able to challenge the dominance of the
market leader, Cisco Systems, in the router market in US. In 2003,
Table 4: Net Sales Figures of Huawei Technologies Company
(US $ million)

encouraged consolidation in the industry, often by providing 1996 1997 1999 2000 2001
cheap credit to finance merger and acquisition deals. Great Net Sales 350 500 969 1933 2407
Dragon Telecom, for instance, was formed in 1995 by merging Net Income - - 128 345 574
four different telecom equipment manufacturers. To make Chinese
Source: www.huawei.com.cn
manufacturers competitive in the market, the government also
encouraged commercial banks to provide loans to both the telecom Table 5: Sales and Market Share of Huawei Technologies
operators and producers to purchase equipment from domestic in China, 2000
producers [Wang and Kullman 1999]. Sales Volume Market Share
Chinese fixed line switch manufacturers have developed (Per Cent)
their own brands and designed their switch architecture inde-
Switches 7.5 million 32
pendently. They include HJD04 by Great Dragon Telecom, SP30 Access Network 4.5 million 64
by Datang, ZXJ10 by Zhongxing, C&C08 by Huawei, ETM601 SDH Transmission 15,000 sets 24
by Jinpeng, JSN-1 by Huaguang, LEX-500 by Legend, HJD-1000 WLL 8,000 channels 72
GSM 4500,000 subscriber 18
by Sang Da and JSU2000-05 by Beijing Telecom Equipment Access Server 120,000 ports 32
Factory. Unlike in India, there have been multiple technologies Signal Transfer Points (STP) 1,2000 lines 70
developed by different local firms in China under conditions of BITS 120 sets 31
intense rivalry. Decentralised equipment procurement by the Notes: The C&C08 family of fixed line digital switching equipment of Huawei
provincial telecom authorities also created an environment Technologies can be configured to yield a maximum of 800,000 lines
which could support competition among domestic equipment or 180,000 trunk connections. The BHCA of the switch is 6000 K for a
producers. Huawei Technologies is one of the successful telecom fully configured system, which is better than the specifications of C-DoT
MAX-XL switch. By 2002, there were over 100 million ports of C&C08
equipment firms and below I briefly discuss some aspects of its switches installed globally
strategies. Source: www.huawei.com.cn

Economic and Political Weekly August 28, 2004 3921

it entered into a joint-venture with 3Com (3Com had a 49 per
cent stake for US $160 million) for its data networking products,
which includes co-branding, joint global marketing and cross
licensing of technologies and products between the two com-
panies (www.huawei.com.cn).
Huawei is seeking to increase its international business, from
the simple provision of telecommunication equipment to the
engineering and development of large turnkey projects, through
a strategy of alliances and partnerships worldwide. In recent
years, the company has expanded its global marketing and service
network by establishing branch offices in 32 countries, eight
regional headquarters and several customer support centres around
the world. It has developed distributorship as well as OEM
manufacturing arrangements in several countries in order to
service those markets. It has also launched a joint venture in
Russia for manufacture and marketing of its products. Over the
last few years it has also globalised its R and D set up, investing
in setting up overseas R and D facilities in US, India, Russia
and Sweden to supplement its R and D activities in China
(www.huawei.com). Till 2002, it had filed 1,762 patents, includ-
ing 455 in advanced mobile (3G) technologies. In 2003 it entered
into a co-development and marketing joint venture with Siemens
for 3G products (TD-SCDMA). Through its own R and D efforts,
co-development and other strategic alliances, Huawei has begun
playing a role in the global battle for setting standards in the
telecommunication industry.
Recently it hired over 70 senior managers from IBM in a major
global recruitment drive in order to manage its international
expansion, and link its technology development with the mar-
keting and promotion of its products [Forbes 2002]. It has also
been actively engaging management consultancy firms like IBM,
Towers Perrin and PWC to develop and enhance management
capabilities within the organisation. Financial commitment to
foreign markets through outward foreign direct investment (FDI)
and aggressive marketing has been a feature of Huawei’s foreign
expansion, similar to that of many other Chinese enterprises in
industries like consumer electronics and household appliances
[Saha 2001]. Huawei is one of the Chinese name-brand firms
identified by MoFTEC for leading China’s process of globalisation
and is supported by liberal access to cheap credit from Chinese
banks and financial institutions. Within a short span of just over
a decade, Chinese firms like Huawei have grown remarkably.
Though Huawei still remains much smaller (in terms of revenues)
than the global leaders in the industry (in 2002 Lucent revenues
were US $ 12 billion which was a 42 per cent year-on-year decline
from 2001), it is closing the gap with them fast. It has continued
its growth, including sales in international markets, even during
a global downturn in the industry.
IV
Implications of Comparative Narratives
The development of indigenous technological capability in the
telecom equipment industry in both India and China, aided by
support from the state, is quite remarkable given the fact that
the industry has been dominated, for decades, by firms from
advanced industrial economies. In either case, access to a pro-
tected domestic market or creating an assured demand, through
preferential purchase policies of the local network operator or
restrictions on entry of foreign firms, facilitated entry as well
as the initial technology learning in domestic firms. As was
3922
argued earlier, access to a large domestic market and close
relations with the domestic telecom operator were also important,
historically, in the technology development process of incumbent
multinational telecom equipment manufacturers.
But as the Indian experience illustrates, a protected domestic
market does not necessarily spur technology learning and invest-
ment in domestic firms. The formation of C-DoT was crucial,
in India, in breaking the organisational inertia that had developed
in R and D activities of ITI (which also operated in a protected
domestic market) through prolonged dependence on foreign
technology suppliers, deterring development of indigenous tech-
nology.17 The agency of the technology leader is clearly crucial
in moving beyond the paradigm of dependence and breaking out
of the mould. The leadership role played by senior C-DoT
managers and the Technology Mission on Telecommunications
in conceiving and charting an independent trajectory of technol-
ogy development was extremely crucial. C-DoT, it may be recalled,
was set up with a clearly articulated target and a mission, which
was important in the absence of market pressures of competition
in creating incentives for managers/technocrats in the organisation
to perform and reach the targets envisioned. Moreover, from the
very beginning, C-DoT targeted commercialisation and mass
production of the products that it designed – thus forging concrete
links with the market and industry and averting the problems
of ‘ivory tower’ research, which many argue [GoI 1986] is a major
problem with several state financed R and D institutions in India.
The financial investment of the state, in terms of its budgetary
outlay, has also been comparatively quite low.
Notwithstanding C-DoT’s success, the comparison with the
technology development of Chinese manufacturers, particularly
the rapid rate of innovation and technological catch up and the
expansion into global markets raises issues about the design and
instruments of state intervention. The Chinese Ministry of In-
formation Industries encouraged multiple technology developers,
unlike in the case of India, creating immense pressures for
innovation through rivalry between local firms – a factor that
may not be insignificant in explaining the rapid pace of tech-
nology development in the Chinese telecom equipment industry.
The decentralised procurement practices of Chinese telecom
operators (by the Provincial Telecom Authorities) also created
institutional spaces for competing equipment manufacturers to
operate.
However, the industry in China was not allowed to become
fragmented and industrial policy of the state encouraged the
growth of a concentrated oligopolistic industry structure. The
successful firms, therefore, had the advantage of scale economies
and the financial strength to face foreign competition – particu-
larly in export markets. Vertical integration of R and D, manu-
facturing and marketing in the same firm also allowed for greater
coordination within organisational hierarchies, which became
important in responding to a rapidly changing market characterised
by technological flux in the industry over the last decade. Support
from Chinese banks and financial institutions, by providing
access to low cost credit lines, also played a role in enabling
firms like Huawei Technologies to pursue aggressive expansion
strategies and make the strategic investments required to gain
and preserve market share in oligopolistic industries. Chinese
telecom equipment firms, therefore, were much better placed than
the Indian telecom switching equipment industry, to breach the
multiple barriers to entry in foreign markets and emerge as
significant global competitors.
Economic and Political Weekly August 28, 2004
 While state intervention in India in directly financing and
promoting C-DoT as a research institution in the public sector
did succeed in lifting the industry out of technological depen-
dence on foreign suppliers, it has been inadequate in enabling
domestic firms to overcome the non-technological barriers to
entry in the final product market, especially in global markets.
Vertical separation of R and D from manufacturing and marketing
and the fragmented manufacturing base of C-DoT products is
bound to become a serious problem in deregulated telecom
markets. The Chinese strategy, on the other hand, did not seek
to directly finance R and D activity in the industry, but through
its industrial policy instruments succeeded in creating favourable
conditions for the growth of a globally competitive domestic
industry. The argument here is not against state ownership or
its financial and management involvement per se in R and D
organisations. The essential difference between the Indian and
Chinese experience has been that of industry structure, both with
respect to horisontal levels of industry concentration in each part
of the value chain, as well as the vertical scope of operation of
the firm. That, as has been argued, plays a crucial role in defining
the firms’ incentives as well as their capability to make invest-
ments required to break entry barriers in the industry.
Another key element of difference between the Indian and
Chinese experience is the ability of the state bureaucracy to
respond to markets and its evolution in the design of policy
interventions. The formation of C-DoT and the creation of the
associated industry structure was reflective of the structure of
the domestic telecom service industry (with a protected national
monopoly operator) prevalent at the time of C-DoT’s formation.
As the global telecom service industry underwent a deep restruc-
turing over the next decade and a half, the Indian industry
followed, at least in part, a similar trajectory. State intervention
in the equipment industry failed to reorient itself. The Indian
industry has, as yet, failed to relocate itself into the same ‘strategic
group’ (in terms of strategies adopted and organisation of value
chain activities) as the MNCs in the industry. Chinese government
officials, on the other hand, seem to have developed a more
nuanced idea about the process of globalisation and the structure
and dynamics of evolution of industries like telecom equipment
and have been able to respond to them in designing appropriate
policy supports for indigenous firms in China. Chinese firms,
therefore, have been better placed to attain the same differential
sources of competitive advantage as multinational equipment
manufacturers of the country. The Chinese state also seems to
have an uncanny ability to direct selective industrial policy
supports to the right set of well-performing indigenous firms.
And the failure of the bureaucracy in India to deal with the poor
performance of enterprises, which benefit from state support (ITI,
prior to formation of C-DoT), only provides a sharp contrast. What
determines this differential ability of the state and its bureaucracy
to play an essentially ‘entrepreneurial’ role, to my mind, is an
important question but beyond the purview of this paper.
State support for industrial R and D, especially in developing
economies, has been under attack in economic restructuring
initiatives undertaken with neo-liberal inspiration over the last
decade. The new debate on industrial R and D, however, has
brought back the concern over inadequate investment in indus-
trial R and D if it were left to the market – primarily by appealing
to its ‘public good’ nature. But, this debate has been inspired,
principally, by concerns about the loss of future competitiveness
of industrially advanced economies and the analytical framework
Economic and Political Weekly August 28, 2004
does capture, to a large extent, the problem of investment in
‘cutting-edge’ technologies in advanced industrial economies.
The problem of investment in R and D and development of
indigenous technology in developing economies is, however,
quite different, owing to the legacy of the technological back-
wardness of domestic industry. For developing economy firms,
the problem is of breaking down barriers to entry in markets
dominated by entrenched firms, mainly from developed econo-
mies. That is shaped as much by the ability to invest in technology
(industrial R and D), as by the ability to make strategic invest-
ments in developing and defending market shares. The locus of
such entry barriers and the nature of investments required to break
them, moreover, would vary between industries and between the
different stages of development of an industry.
Analytically, the neo-liberal framework fails to take cognisance
of the contextual specificity of ‘late industrialising’ developing
economies. It also fails to accommodate the complex dynamics
of oligopolistic competition and the multiple dimensions of entry
barriers that incumbent firms can create in such industries. In
such an environment, state support for R and D in developing
economies has to tackle problems of domestic industry that are
quite distinct from their developed counterparts and such support
is most likely to succeed as part of a well-rounded industrial policy
package, possibly using multiple instruments, that aid domestic
firms to breach the multiple barriers to entry.
This analytical failure is not just an epistemological issue –
it has connotations for the design of policies that can affect
significantly the trajectory of technological development. Regu-
lations in the WTO, for instance, are quite permissive of sub-
stantial state subsidisation and financial participation in R and
D projects at the ‘pre-competitive stage’ [Mani 1999].18 Within
a neo-liberal framework, such forms of state support should
suffice to tackle the problem of ‘externality’. But, as was argued
in this paper, state support for technology development in domestic
firms in developing economies is much more likely to succeed
as a complement in a package of well-rounded industrial policy
intervention. WTO rules, however, are far more critical of such
policy interventions. This analytical slip, therefore, has the potential
to have a differential effect on economies in different stages of
technological development – and lock in technologically laggard
economies in states of dependence. The new debate on state
support for industrial R and D, which is likely to play a role in
shaping the instruments of public policy intervention in the years
to come, does not adequately reflect this unique concern of
developing economies. EPW
Appendix 1
Comparison of C-DoT MAX-XL with Large
Capacity MNC Switch
Below is a brief comparison between C-DoT MAX-XL and
MNC switches installed in the Indian network, which includes
Alcatel’s OCB-283, AT&T’s 5ESS 2000, Siemens’s EWSD and
Ericsson’s AXE-10. The comparison is done on the basis of
information obtained in mid-2000 from C-DoT officials.
Capacity: Most MNC switches have termination capacities higher
than 1,00,000. Some have a termination capacity of 240,000 lines.
The C-DoT MAX-XL currently has a maximum capacity of 40,000
terminations (32,000 local and 8,000 trunk). But, both the Base
Module (BM) and the Central Module (CM) of the MAX-XL
are undergoing enhancements. A Value-Engineered BM would
3923
allow a doubling of the MAX-XL capacity and a Value-Engineered
CM (in which the core switch architecture would be modified)
would further double the capacity upto 1,60,000 in the near
future. But, even a 40,000 line exchange is believed to be
sufficient under Indian conditions (except in TAX applications).
A very large capacity exchange necessitates the laying of cables
to subscribers spread over a large geographical area, which may
not be cost-effective. A better solution is to have a separate access
network linked to the main exchange through high-speed digital
links. C-DoT is presently working on this solution as well.
Traffic Handling Capacity: All MNC switches have a BHCA
of 1.2 million. MAX-XL supports a BHCA of 0.8 million, the
specification set by DoT. If required, it is possible to support
BHCA of 1.2 million through software fine-tuning. In terms of
per line BHCA, C-DoT switches are better placed with figures
of around 20 as against 5-7 for other switches. In terms of Erlang
capacity, MAX-XL supports 6400 Erlangs, while MNC switches
support 24,000 Erlang. The Erlang capacity in the enhanced
MAX-XL would be 12,800.
Concentration: All MNC switches have flexibility in concen-
tration, from 4:1 to 10:1. MAX-XL has a concentration of 4:1
at the Base Module level. In enhanced versions, it can go up to 8:1.
Compactness: A 40,000 line MNC switch currently occupies
about 60 per cent of the floor space required for the MAX-XL.
However, work is on to introduce miniaturisation in large switches.
# 7 Handling: All MNC switches allow all digital trunk to be
configured as # 7 trunk. In MAX-XL, since centralised resources
are used for # 7 handling, it can handle upto 64 # 7 trunks, which
is sufficient in the current network.
Network Synchronisation: MAX-XL is comparable to all other
switches.
Access Network: MAX-XL is the only exchange in India capable
of supporting both V5.1 and V5.2 protocols.
ISDN: MAX-XL has ISDN capability, but it does not have an
integrated packet handler. Data packets are routed towards data
network.
Appendix 2
Foreign Currency Loans and Vendor Credit for Cellular Operators, December 1998
Cellular Operator Cellular Network Foreign Loans and Vendor Finance
Equipment Vendor
Manufacturability: MAX-XL, like all other C-DoT products, was
designed to attain high levels of indigenisation. The level of
indigenisation is about 80 per cent for C-DoT switches. Integrated
circuit chips are the main imported components. Local content
is significantly higher than the MNC switches, which are im-
ported in CKD/SKD form, with only 4-5 simple components (out
of around 500) sourced locally.
Cost: The costs of telecommunication switches are difficult to
compare, as they are sensitive to the features in the switch. The
‘per line cost’ of a MAX-XL exchange, of typical configuration,
is around Rs 4,500, while it is higher than Rs 6,000 for all MNC
exchanges. In addition to that, C-DoT provides all subsequent
software upgrades for the exchange to DoT, free of cost. In case
of retrofitable upgrades to add new features, C-DoT charges only
for the extra hardware fittings.
Address for correspondence:
biswatosh@xlri.ac.in
Notes
1 Hill (1995) argues that empirical evidence shows a significant co-relation
between federal R and D spending and private sector investment in R
and D in the US.
2 For instance, between 1997-2002, India had a target of adding more than
32 million lines of switching capacity in fixed-line networks, which is
almost equal to the installed network size of the world’s fifth largest
telecom network in France (at 34 million lines in 1998). (DoT, Annual
Reports and World Telecommunication Development Report, ITU,
Geneva, 1999].
3 Siemens held a 90 per cent share of the domestic installed switching
capacity in Germany, while Alcatel supplied equipment for about 80
per cent of the French network till the early 1990s. NEC and Fujitsu,
together, supplied about 80 per cent of the switching equipment in the
Japanese network [Carpentier et al 1992]. Even post-deregulation, 70
per cent of Lucent’s sales come from the US market.
4 The complex nature of technology made close cooperation between
equipment supplier and network operator important for successful network
operation and new innovations. Moreover, telecom network operation

Birla AT&T Ericsson, Sweden Syndicated Non-recourse loan (US$ 283 million) from consortium led by Bank of America and
Toronto Dominion (SE Asia) . Political risk of coverage of US$ 65 million by Swedish Export Credit Agency.
Spice Telecom Motorola, Siemens Motorola, Siemens provided supplier’s credit of US$ 140 million, rupee loan from Bank of America and
Standard Chartered, US$ 60 million loan from GE Capital.
BPL-US West Nokia and Motorola Equipment purchase on vendor finance of US$ 80 million. Finnish ECA financed purchase of Nokia
equipment, Motorola gave bridge loans till US ECA loan was finalised.
J T Mobile Ericsson – turnkey Vendor credit of $ 60.8 million
Koshika Alcatel turnkey Vendor credit from Alcatel, which also took a 3 per cent stake
Reliance Ericsson, Motorola US$ 40 million vendor finance from Ericsson, with the backing of Swedish ECA. US$ 80 million vendor finance
from Motorola backed by US EXIM Bank. Non-recourse loan of US$ 176 million from Bank of America and
Deutsche Bank
Aircell Digilink Siemens switch and US$ 110 million vendor credit for equipment in three circles. Plans to raise US$ 250 million from Union Bank
Motorola BTS of Switzerland

Foreign Currency Loans and Vendor Credit for Basic Service (fixed line) Operators, December 1998
Operator Vendor contract

Bharti Telenet Vendor credit of US$ 50 million each from Motorola, Siemens and Alcatel; Alcatel loan is for 6 years with moratorium on payment in first
two years.
Hughes Ispat Supplier Hughes Networks has equity position; Marubeni to be approached for long term vendor finance, switching equipment from NEC,
Japan.
Telelinks Qualcomm for WLL equipment on vendor credit for 85 per cent of the equipment cost, to be repaid over seven years, with moratorium
on payment in first three years. To use domestic corDECT technology for WLL also.

Note: Includes only the deals for which information was available.
Source: Compiled from operators details provided in ‘Telecoms and Wireless Markets and Strategies: India’, Pyramid Research, Economist intelligence unit, 1998.

3924 Economic and Political Weekly August 28, 2004

 and equipment manufacturing were often integrated within the same firm.
For instance, AT&T’s manufacturing activities were divested into a
separate firm, Lucent Technologies, only in 1996.
5 “[The World Telecoms Agreement] .. is a triumph for the American way…
US companies are the most competitive telecommunications providers
in the world; they are in the position to compete and win under this
agreement”; (Charlene Barshefsky, US Trade Representative designate,
Financial Times, February 18, 1997).
6 Alcatel, for instance, recently acquired DSC Communication Corporation
of US, which has design expertise in transmission products (Annual
Report, Alcatel, 1998). Motorola and Alcatel also entered into an agreement
to jointly promote, develop and sell each other’s complementary product
lines in the digital cellular phone infrastructure market – radio equipment
and base stations of Motorola and switching equipment of Alcatel.
7 Telmex, the former state-owned monopoly service provider of Mexico
(which also happens to be the largest listed telecom service provider
from a developing country), has been dragged into a WTO dispute by
the US in 2001 for violating the terms of the World Telecoms Agreement,
1997. Telmex was provided protection through its right to charge high
interconnect charges – a move that effectively blocked the growth of
AT&T and WorldCom in Mexico. The dispute is yet to be resolved, with
a panel ruling not being expected before December 2003. (www.wto.org)
8 Each port is a termination in an exchange – number of ports signifying
the termination capacity of a switch.
9 PBX is a private exchange limited within the subscriber premise; local
exchanges are used in the public network for local communication alone,
trunk exchanges are used only for inter-exchange long-distance
communication and tandem exchanges are a combination of local and
trunk functions in the same exchange.
10 It is widely believed that the choice of Alcatel-CIT for the E-10B digital
switching technology transfer in the early 1980s was motivated by the
French government’s tacit support for the Indian nuclear programme.
Alcatel was chosen though it did not respond to the global tender floated
for the purpose [Brundenius and Goransson 1985].
11 The most sensational among them was the case of cross-bar technology
for electro-mechanical switches, imported in 1964 from Bell Telephone
Manufacturing Company of Belgium. The exchange was designed keeping
in mind usage (call) patterns in developed countries. It led to the formation
of the Indian Crossbar Project (ICP) in June 1974, to adapt the technology
to Indian conditions. When the new design was ready by 1979-80, a
new technical collaboration agreement had to be signed with the same
foreign firm for the process technology [Mani 1989].
12 “The core strategy [in the subsidiary] cannot be any different because
the core strategy is driven largely, in industries of this nature, by
technology. And since, technology emanates from the centre, automatically
everyone has to follow. It is not that globally Alcatel is developing product
A and I find the market for product B. We cannot make product B because
the volume of product B for the local market will not justify spending
on R and D for product B in the Indian market” [senior executive of
Alcatel in Ray 2001:540-41].
13 This was possible, in part, because of the modular design of all C-DoT
switches, where the basic unit continued to be the 128 port RAX.
C-DoT could scale up and design switches of upto 10,000 ports (the
MAX and MAX-L series) by the early 1990s. However, the design of
MAX-XL series, with capacity upto 40,000 ports was significantly
delayed. Considering that C-DoT was set up with the mission to design
large exchanges within three years, i e, by 1987, this was a large time
over-run and in 1989, a committee (Nambiar) set up to enquire into C-
DoT’s activities did express scepticism about the basic design philosophy
of C-DoT. See The C-DoT Story by G B Meemamsi, Kedar Publications,
New Delhi, 1993 for a detailed account of the political interference that
plagued C-DoT right through the 1990s. The telecommunications minister
K P Unnikrishnan, allegedly with the backing of MNCs, attempted
breaking up the organisation.
14 The network operations of DoT was transferred to Bharat Sanchar Nigam
Limited – a corporatised PSU, in 2000.
15 C-DoT licensed manufacturers of switching equipment had a capacity
of 4 million lines per annum, working only on a single shift (full capacity
utilisation implies working in three shifts) in 1999-2000. In 1999-2000,
the total order for C-DoT switches was about 4.6 million lines. (Interview
with C-DoT managers in August, 1999).
16 In this respect, the C-DoT product portfolio itself has problems since
it has not been as successful in the design of transmission products.
Economic and Political Weekly August 28, 2004
17 The problem of technological dependence has been analysed in the
literature of ‘dependant industrialisation’ as well as ‘technology
management’. The role of the ‘technology leader’ in breaking off from
the dependant mode to chart an independent course of technology
development and innovation is often very crucial. Senior managers in
C-DoT, including Sam Pitroda – a leading force behind the initiative,
played this role effectively. But, public policy also plays an important
role in nudging managers is taking up such roles, especially in developing
economies where the problem of technology dependence is acute, due
to the historically derived legacy of technological backwardness in the
industrial sector.
18 The WTO list of non-actionable subsidies allows up to 75 per cent of
state financing of industrial R and D with planned future commercial
use and 50 per cent state financing for pre-competitive development uptil
the first prototype. State support for R and D, in the US, which is
principally carried out through 50-50 participation of government and
industry is, thus, left undisturbed under the new WTO norms. US
negotiators, in fact, lobbied hard to retain this clause. [Gibbons 1994;
cited in Mani 1999].
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