Do national systems of innovation benefit from foreign investment? Lessons from the BRICS

Investissements étrangers et systèmes nationaux d'innovation : l'expérience des BRICS
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Which BRICS multinationals invest the most in R&D?
BRICS multinationals and R&D, a recent…
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The influence of large transnational corporations (TNCs) in technology and innovation is compelling.

This paper is an abridged version of Chapter 1 of Cassiolato et al. (2013)

According to information released by the European Commission, the top 2,000 companies (1,000 EU and 1,000 non-EU) invested €372 billion in research and development (R''&D) in 2006/2007, which corresponds to approximately 80% of global business expenditure onR&D (European Commission, 2011). It is estimated that TNCs in the US are responsible for approximately 74% of the totalR&D by the nation's private sector. Approximately 80% of the 700 TNCs that invest the most inR&D originate from five countries: the US, Japan, Germany, the UK and France.

In spite of this intensive productive and especially technological concentration, some researchers argue in favour of a tendency towards the technological internationalization of developing countries, which has benefited from the partnership between foreign enterprises and local institutions and, most of all, from an increase in theR&D activities of TNCs.

These authors advocate that by attracting TNCs, developing countries may gain access to the technologies of advanced countries, stimulating the generation of technological innovation in such countries through their subsidiaries.

In this article, the thesis of technological globalization is taken with more caution and we refute the idea thatR&D activities will be inexorably internationalized. In particular, it considers that the complexity involved in innovative activities, likeR&D, limits the automatic occurrence of technological globalization without significant costs, and argues that knowledge-intensive activities still tend to be concentrated in home countries.

Foreign direct investment in BRICS: evolution and related national policies

In the 2000s there has been a strong increase in foreign direct investment (FDI) in BRICS countries, boosted by national favourable policies. Over the last two decades, China has had the highest FDI inflow of the BRICS nations, with a peak of $108 billion recorded in 2008; while, for most of this period, Brazil was the second highest FDI recipient. Russia, on the other hand, showed robust growth until 2008, reaching $75 billion. The same movement can be seen in India, but in a less intense way - there was a strong growth in FDI inflows until 2008, reaching $42 billion. South Africa is at the bottom of the list of BRICS countries with less than $10 billion a year from 1990 to 2010. In 2009, FDI inflows were reduced in all BRICS countries, with only China and Brazil recovering in 2010 to reach the same levels as they obtained in 2008.

In the mid 1990s, deep structural change in the Brazilian economy propelled an FDI boom - the third in its history. The central government played a key role in attracting FDI, basically through the approval of constitutional amendments that ended public monopolies in sectors such as telecommunications, oil and gas, and the removal of distinctions between Brazilian firms of national and foreign capital. This FDI boom in Brazil mostly targeted the services sector, particularly the privatized infrastructure sector (telecommunications and electricity). It also concentrated on operations of mergers and acquisitions of local firms. The share of TNC subsidiaries on overall sales of the 18 most important production chains jumped from 36% in 1996 to 52% in 2000. In recent years, with the end of privatization, FDI flows have been strongly directed to the primary sector - oil and natural gas extraction and, especially, metallic minerals extraction.

In Russia, the expansion of TNCs has been encouraged by its government, which pursues a policy aimed at providing a favourable investment climate and the development of an investment infrastructure. The government implemented a set of specific measures, with the support of a Foreign Investment Advisory Council, where the main objective is to create an attractive investment climate in Russia, and of a federal law that provides guarantees of equal rights and the protection of interests and property to all investors regardless of their ownership. Consequently, TNCs have been rapidly increasing and FDI flows went from $2.7 billion in 2001 to $75 billion in 2008. However, the liberalization of economic activities was implemented without taking into account domestic economic realities, and TNCs are generally not ready for large-scale investments in the modernization of major Russian production facilities whose equipment is mostly obsolete.

In India, since the 1990s, policy makers have perceived FDI inflows to be a major source of scarce capital, which is capable of contributing to capital formation, output and employment, and providing access to technology, managerial skills and markets. FDI has become an important form of external financing for India. Until 1994, FDI inflows to this country were less than $1 billion, while in the second half of the 1990s they stayed around $2.6 billion per year, prior to reaching an average of $5.4 billion in the first half of the 2000s. Inflows reached $42 billion in 2008, falling to $24.6 billion in 2010. Policy makers in India have shifted away from merely focusing on higher quantities of FDI towards the targeting of a higher quality of FDI, with sectors designated as high technology receiving preferential treatment in terms of access to infrastructure, tax incentives and subsidies. As in Brazil, India's latest FDI promotion policy is the principle of no discrimination against foreign firms.

China is a dominant player amongst BRICS countries in terms of its FDI outflows. In China, during the early stages of reform and opening-up, due to policy restrictions, joint and cooperation ventures were the main forms of foreign investment. With the improvement of China's investment environment, an increasing number of foreign investment projects have taken the form of solely foreign-funded enterprises. After the mid 1990s, non-financial TNCs began to invest in capital-intensive or technology-intensive areas, and started to emphasize the strategic position of subsidiary companies in China in terms of global business integration. However, much of China's exports in high-technology fields continue to involve the assemblage of electronic products based on components that are produced in other countries.

The South African economy is nowadays highly favourable to foreign investors, though few national documents currently contain specific references to FDI. At the international level, the country has committed to the majority of international and/or multilateral agreements relevant to ensuring the protection of foreign direct investors and their intellectual property. Generally, no discrimination is applied against foreign investors except in the banking sector. Besides its favourable TNC context, the country also offers a wide range of incentives to both domestic and foreign direct investors. Nevertheless, South Africa is still a small FDI recipient, and FDI inflows appear volatile. Sectorally, FDI has been concentrated in the primary sector, notably mining.

The limited contribution of TNCs to the innovation capacity and development of BRICS

With minor exceptions, the contribution to the innovation capacity and development of BRICS has been very limited.

In Brazil, a comparative analysis of large (more than 500 employees) locally-owned and TNC subsidiaries, based on the Brazilian Survey on Technological Innovation revealed that, with few exceptions, theR&D/net sales ratio of large local firms tends to be higher than that of large TNC subsidiaries across different sectors of manufacturing activity. Also, the ratios ofR&D expenditure over total innovation expenditure of locally-owned large firms are greater than those of TNC subsidiaries. The innovative performance of large domestic enterprises is stronger than that of the subsidiaries. The average technological efforts (R''&D/sales) of Brazilian subsidiaries were much lower (around 0.7% in 2005) than the worldwide TNC expenditure as a whole (5.0% in 2005). Besides its limited performance, theR&D activities of TNCs in Brazil are highly concentrated: almost half (48.6%) of theR&D carried out by large subsidiaries is performed by firms in the auto industry.

In Russia at present, the creation ofR&D organizations with TNC participation, except in a very few cases, does not bring to the country any outstanding results in terms of the development and promotion of advanced technologies or products. Foreign-owned companies are considered even less innovative than Russian ones. However, a relevant level of innovation activity has been shown by companies jointly owned by Russian and foreign capital, which have been twice as innovative as other types of companies. The main aspect of local expenditure that affects the innovation activities of TNCs in Russia is the low salaries of highly skilled professionals.

Foreign firms also reveal a lowerR&D intensity compared to domestic firms in India. The post-liberalization period has been characterised by the establishment of centres working exclusively on the objective of globalR&D. This trend has spread to the fields of software engineering, chip design bioinformatics and agro-biotechnology. Recently, there has been a significant increase in the number of FDI projects carried out by US companies for design,R&D and technical support activities for the development of global products. TNC subsidiaries in India do not focus on technology absorption, but on the customization of the technologies that originated in their headquarters. The analysis of the patterns of collaborations and patent ownership indicates that TNCs are establishing a highly unequal division of labour within the national science and technology (S''&T) system in India. Besides using foreign affiliates for the products under development for global markets, TNCs are actively using the instrument of intellectual property rights (IPRs) ownership to prevent spillovers from being captured by domestic entrepreneurs. So far there have been very few spin-offs from the foreignR&D centres. In general, multinational corporations use collaboration for later-stage work to avoid possible infringements. Furthermore, major software firms such as Infosys, Wipro and TCS are under contractual obligation to transfer the ownership of intellectual property created in the host organization.

At present, China has become an importantR&D base for TNCs, especially due to the growing pool of skilled engineers and technicians, to facilitate the reduction in research expenditure and pressure from the Chinese government. In spite of the enhancement of this process, the share of subsidiaries located in China is small compared to global TNCR&D investment. Although supportiveR&D remains the mainstay of foreignR&D activities in China, many TNCs have now transferred their innovativeR&D facilities to China. Wholly-owned affiliates are the main ownership mode of foreignR&D centres. ForeignR&D organizations established by TNCs are highly concentrated in information and communications technology (ICT) industries (including software, telecommunication, semiconductors and other information technology (IT) products), but equipment and components, biotechnology and drugs as well as automotive industries also attract a significant amount of this investment. Beijing and Shanghai are the preferred locations, but more recently Guangdong, Jiangsu and Tianjin have appeared on the map of foreignR&D investors.

A comprehensive analysis of foreignR&D in China's manufacturing industries was made by Sun (2010) who showed that foreign firms commit lessR&D resources than China's domestic enterprises in terms of both human resources and as a percentage of their sales (the latter for example being 0.37% for foreign owned subsidiaries compared to 0.63% for Chinese domestic enterprises). ForeignR&D activities are concentrated into a few sectors, which include medical and pharmaceutical products; transport equipment; electronics and telecommunication; 'instruments, meters, culture and office machinery'; electric equipment and machinery; general machinery; metal products; and chemical fibres, while foreign firms are less likely to conductR&D in sectors where they possess strong advantages. Particularly in hi-tech sectors, Chinese domestic enterprises are contributing more resources toR&D than foreign enterprises. In sectors such as electronics and telecommunication, office machinery, and electric equipment and machinery, differences between local firms and TNC subsidiaries are particularly great. In the electronics and telecommunication industry, Chinese owned enterprises spend 3.49% of their sales inR&D compared to only 0.64% by foreign-owned subsidiaries.

Finally, in sectors where foreign firms target the local market with strong competition from Chinese-owned firms, foreign firms are forced to makeR&D investments in order to be successful and, as Sun (2010) pointed out, 'if they want to achieve success in China's domestic market, they need to customize their technologies, and they cannot simply rely on technologies generated elsewhere'.

Sun's conclusion is that 'Chinese governments and domestic firms focus on building up indigenous innovative capabilities: the majority of foreign firms will invest inR&D when they feel the competition from domestic firms'.

In South Africa, 48% of the subsidiaries of foreign firms performingR&D reported that they had collaborated with other local firms. On which topic, healthcare and aerospace deserve particular attention - aerospace has been developed through large defence budget acquisitions in South Africa and a long history of telemetry (Kahn, 2007).R&D is concentrated in two main South African provinces: Gauteng, which incorporates Johannesburg, and adjacent Pretoria

Spillover and crowding out effects of TNCs on domestic enterprises

Vertical productivity spillovers have been present in some countries and in sectoral contexts, but horizontal productivity spillovers or technological ones have been harder to detect. While crowding out effects have also been found in specific situations.

In Brazil, positive horizontal effects are found only when locally-owned firms have already acquired higher levels of innovative capabilities. Market seeking strategies by TNCs, particularly when combined with high levels of effective protection, have a negative impact on locally-owned firms including those with higher levels of relative efficiency (Laplane et al., 2004).

In Russia, foreign TNCs have established training centres to ensure that Russian personnel attain the required skill levels and that the necessary amount of knowledge transfer takes place to enable the use or implementation of specific technological solutions. Practically all IT companies support training programmes to promote corporate standards for business solutions. In India, the contribution of foreign firms to the activities connected with the processes of upgrading the national system of innovation was found to be insignificant. The main beneficiaries have been TNCs and their affiliates, which have better access to technology and other intangible assets. In the case of domestic firms, the only ones to have achieved some success are those that have adopted a strategy of pursuing the non-equity route for technology imports, rather than relying on royalty payments. Other domestic firms that lack networking or non-equity strategic alliances have not done well. Furthermore, only when domestic firms have had a small technology and productivity gap in relation to TNCs have they been able to prosper under liberalization.

The gains made by domestic firms in sectors such as pharmaceuticals and automobiles cannot be attributed to third generation policies for the promotion of FDI and innovation. On the contrary, domestic firms were able to obtain better results from the systems of innovation because the government chose to delay external liberalization in these sectors. However, the Indian case suggests that it is possible, with the use of appropriate obligations and restrictions, to favourably develop the connections between domestic science, technology and the innovation system and the emerging global institutions. Domestic firms and national level S''&T organizations need to follow the paths of proactive learning to harness the spillovers and linkages for the benefit of indigenous innovation. However, in reality, indigenousR&D undertaken to assimilate foreign technology and exploit technology spillovers has still not improved significantly.

The Chinese case reveals that foreign investment has failed to promote an effective improvement in the innovation abilities of local companies. Due to the lack of apparent technology spillover from TNCs to local businesses, the role of TNCs remains controversial in the country. Researchers have found that there are positive productivity spillovers from foreign firms to their local suppliers in upstream sectors, but when it comes to the effect on domestic innovative technological development, studies have not been as optimistic, highlighting insufficient spillover effects. This result was not exclusively caused by the strategies of TNCs - it can also be attributed to the poor absorption abilities of local firms and the industrial structure of the country.

In South Africa, there has been a very mixed experience with the role of TNCs in domestic companies. In many sectors, such as iron and steel, telecommunications, pharmaceuticals, transport equipment and consumer goods, TNCs have been said to abuse their positions of power to the detriment of competitors or consumers, crowding out local development. However, some positive impacts can be seen in the automotive sector, such as productivity gains by domestic firms through linkages with TNCs.

Domestic TNCs of BRICS countries: evolution of their patterns of investment

BRICS countries also benefit from the enhancement of FDI worldwide. Enterprises from these countries have demonstrated a significant degree of internationalization in recent years, improving their importance to the world economy.

The domestic TNCs of BRICS countries tend to multiply and increase their investments abroad

The outward FDI of Brazilian enterprises has grown considerably in recent times, achieving $180 billion in 2010 according to the United Nations Conference on Trade and Development (UNCTAD). Many companies have increased their investments abroad to diversify the risk associated with operations in the domestic market. Essentially, the main driver of such expansion has been market access (see, for example, the Brazilian companies Marcopolo and Embraer). Some firms (such as Petrobras and Vale) have also invested abroad, seeking access to natural resources, while others (e.g., Gerdau, CUTRALE) have sought to avoid trade barriers or to improve the logistics infrastructure for their exports. The internationalization of large Brazilian firms gained momentum after the Brazilian National Socio-economic Development Bank (BNDES) began to provide specific supporting mechanisms. In particular, BNDES assessed financing schemes abroad and redirected them to potential Brazilian TNCs under extremely favourable conditions with particularly long repayment periods and very low spreads. In the last two years, BNDES has substantially increased its role through the use of its investment arm, BNDES Participações, to become a shareholder of these firms.

Russia was the fifteenth largest foreign direct investor in 2005, according to UNCTAD. Its outward FDI increased strongly in the 2000s, from $20.1 billion in 2000 to $433 billion in 2010. To some extent, this phenomenon can be attributed to the emergence of Russian TNCs in the fuel and energy sector that took place over recent years. Significant FDI has also been made by Russian telecommunications companies. This internationalization movement was strongly promoted by the State - about 30% of Russian TNCs that have accumulated foreign assets are government-owned. Nevertheless, in recent years most outward FDI has been boosted by private companies.

In India, since the early nineties, firms have been induced to expand their multinational operations. The motives for investing abroad are not only market-seeking, but have expanded to include access to strategic assets and skills overseas, enhancing the non-price segment of global competitiveness through the establishment of trade-supporting infrastructure and the circumvention of the effects of emerging trading blocs on a regional basis by gaining insider status. Indian multinationals draw their ownership advantages from their accumulated production experience, the cost-effectiveness of their production processes and other adaptations to imported technologies made with their technological effort, and sometimes with their ability to differentiate products. Since the onset of the latest phase of external liberalization, the dynamics of the processes of learning, competence building and innovation are now becoming increasingly established in the multinational operations of Indian firms. However, analyses of the emerging patterns of alliances, acquisitions and collaborations being entered into by Indian multinationals clearly show that FDI-based relationships are not enabling many resources to be leveraged from acquisitions and strategic alliances for the upgrading of national processes of technological accumulation. Generally, the efforts of Indian multinationals have not yet increased new product development capabilities in a significant way. There exists little encouragement from FDI-based operations for the development of products and systems needed to face the challenges of the socio-technical transitions that India must undertake. The national system of innovation is thus experiencing a liability in the form of a distortion in the innovation goals at all levels, including public sector research organizations.

China's outward FDI reached $297.6 billion in 2010. The majority of this overseas expansion involves investment in other developing and transition economies, which are the main destinations of Chinese TNCs. The first generation of Chinese TNCs was mainly driven by large State-owned enterprises. The second generation, which emerged after the early 1990s, has diverse ownership structures, including private ownership and foreign participation, and has been present in competitive manufacturing industries, in particular those related to electronics and ICT. Since the first TNC generation, Hong Kong (China) has usually been the first stop along the path to internationalization, and it remains the major location for 'overseas' operations. The main activities attracting Chinese investments are business activities, trade and natural resources. In recent years, FDI in manufacturing and mining has grown particularly rapidly, accounting for 60% of total Chinese FDI outflows in 2005. Due to a lack of core technology, many Chinese firms compete mainly in the markets for low value-added products.

Outward FDI from South Africa reached more than $81 billion in 2010. FDI outflows started to accelerate between 1997 and 1998 - given South Africa's democratic dispensation that was installed in 1994, and the opening up of markets after the dismantling of apartheid, its companies were afforded the opportunity to invest in economies previously closed to them for political reasons. Most TNCs from South Africa can be classified into five key categories: mining and energy; transport (aviation and road transport); retail; telecommunications; and financial services. In the industrial sectors, minerals and energy TNCs dominate, including the former State enterprise, Sasol (petrochemicals and chemical products), and the many mining giants. Although spread globally, the core of South African TNC investments are concentrated in Africa.

Increase inR&D investment by TNCs from BRICS

TNCs from BRICS have not only grown in number but have also become much more active in innovation and technological development. It is interesting to note the significant increase within a very short period in the number of BRICS TNCs that are now among the top 1,000 non-EU firms: in 2005, only 19 TNCs from BRICS were in the top 1,000 (three from Brazil, ten from China (including those based in Hong Kong), four from India and one each from Russia and South Africa) and none of these firms made the top 100; by 2010, the number of BRICS TNCs in the top 1,000 non-EU firms had increased to 57 (nine from Brazil, 27 from China, 18 from India, two from Russia and one from South Africa), while six of these firms (four from China and two from Brazil) had entered into the top 100 non-EU TNCs that invest the most globally inR&D.

It is also worth noting that, with the exception of the Brazilian aircraft producer Embraer (which ranked 457th in 2005 and 714th in 2010), all other BRICS TNCs increased their relative position in the overall top 1,000 rankings. The implication is that the 2007-2008 crisis, which negatively affected most Western TNCs, did not have a similar impact on BRICS TNCs, with the exception of Embraer that has relied extensively on the dynamism of markets in Europe, North America and Japan.

A pattern of specialization among BRICS countries has emerged: at one extreme, the only two Russian TNCs and a single South African one belong to the oil and gas sector, which suggests a total dependence on specialization in these resource-intensive activities. At the other extreme is China with its 27 TNCs covering a wide spectrum of activities but with an important emphasis on ICT, particularly telecom equipment - in 2010, Huawei ranked 39th and ZTE ranked 74th in the top 1,000 non-EU TNCs. Other important activities where Chinese TNCs have become established in terms ofR&D investment are automobiles and parts (seven TNCs), industrial machinery (three TNCs), oil and gas (PetroChina ranked 51st and China Petroleum ranked 114th), mining, electrical equipment, etc. India has shown an expected specialization in pharmaceuticals, automobiles and parts, and computer services and software; while Brazil has Petrobras in oil and gas, Vale in mining, Embraer in aircraft, a large software firm and several individual companies that have shown positive performances in industrial metals, agricultural implements, electrical energy utilities and chemicals.

Implications for innovation policy

During the pre-globalization phase, government-imposed obligations and restrictions regarding market access, local content and exports played an important role in persuading foreign investors to contribute to innovation processes, technological transformation and structural change in late industrializing countries.

Scholars have investigated the contribution of FDI vis-à-vis the other channels of knowledge and technology transfer. In Asia, Akira Goto and Hiroyuki Odagiri (2003) have highlighted the fact that Japan acquired advanced foreign technology through all channels except from inward FDI, which is also typical of a number of other Asian catch-up countries that followed Japan's example, such as Korea and Taiwan.

The role of public policy in creating indigenous innovation

Although to a lesser extent the importance of this factor is also confirmed by the experience of BRICS countries, India's achievements in pharmaceuticals and China's in telecommunications and electronics shows that the governments of these countries still require a policy space to advance the processes of technological accumulation at home.

Innovation for the purposes of technological upgrading is still contingent on the active efforts of domestic firms in terms of technological accumulation and on the improvement of national innovation systems. This can be achieved through the enhancement of investment in human resource development and the strengthening of the linkages between national-level S''&T institutions and domestic firms. Also important is nurturing and protecting novel innovation processes appropriate to local conditions by maintaining the IPR regime for indigenous innovation and home market protection. However, today, policy regimes in developing countries are certainly characterized by a mix that offers more advantages to TNCs as compared to domestic firms. The balance of advantages being offered has varied and is not the same in all emerging economies. Achievements and limitations of the technological upgrading process are now much more dependent on the degree of discipline shown by domestic enterprises and the success of a country in the implementation and coordination of policies for the creation of national S''&T capacity, the development of an effective demand for indigenous innovation and home market protection (Cimoli et al., 2009).

The FDI channel was not a major international source of knowledge and technology transfer, at least for sectors that have ultimately proved to be somewhat dynamic in terms of innovation. The main burden of competence building had to be largely borne by national S''&T institutions.

The failed attempts of 'the third generation policy regime of FDI promotion'

Investigations into the experience of BRICS countries also highlight the fact that governments have had to make their domestic enterprises submit to a policy of conditional access to foreign sources of knowledge and technology and to bring the required discipline to recipient firms for the development of national absorptive capacity.

However, in the BRICS countries there is now a greater influence of what we call 'the third generation policy regime of FDI promotion'. This policy regime allows a very different set of policy mixes that give total freedom to foreign investors to establish their operations in the domestic space. Foreign investors are allowed to use the national economic and technological space without being subject to any kind of restrictions and obligations. While the balance of advantages being offered to the TNCs is certainly not the same in all countries, the new policy mixes definitely offer greater access to the national knowledge base and markets. Today, in many countries foreign subsidiaries receive almost the same treatment from the policy makers as domestic enterprises once did in earlier times.

Policy makers have chosen to encourage domestic firms and S''&T organizations to actively participate in the global production and innovation networks. The focus has been on encouraging domestic firms and S''&T organizations to establish close linkages with foreign firms that choose host locations with the aim of seeking a supply of cheap talent and advanced skills. Recently, as factor-seeking investments originating from the TNCs of the US and Europe have, to a great extent, moved into knowledge-intensive activities, this tendency has been consciously allowed to grow in the emerging economies through the new policy mixes of FDI promotion and the support for innovation. Even policies that promote the outward FDI from BRICS countries also aim to tap the possibilities that can arise from this type of FDI in respect of the reverse flows from host economies to foreign subsidiaries. However, even through these investments, it appears that BRICS TNCs have not been able to benefit from the impact of reverse flows.

The experience of BRICS countries does not confirm the emergence of a great number of spin-offs resulting from the investment of European and US TNCs. For instance, it appears that the finance required for the new start-ups and spin-offs is still not available in most BRICS countries. Private equity (PE) and venture capital (VC) companies are not interested in supporting the innovation processes of such firms. Even in the case of outward FDI, the reverse flows from European countries and the US towards the BRICS economies have not been possible because the TNCs of emerging economies apparently remain overstretched and short on resources. In very few cases have existing established strategies allowed emerging economy TNCs to tap into the national systems of host locations for the benefit of innovation and technological capability building at home. Most tie-ups and investments are directed towards the objectives of taking over production facilities and establishing marketing and distribution networks. The processes of competition that are faced by TNCs from BRICS are capable of overstretching them and draining their resources. Consequently, many of these new BRICS TNCs have been taken over by TNCs from developed countries.

Building national capabilities through policy mixes of FDI promotion and innovation

Although the implications of these experiences are slowly making an impact on the options of policy makers of BRICS countries, it is also apparent that they are not yet ready to move to a policy regime in which the innovation policy would be used in a non-neutral manner to positively discriminate in favour of indigenous innovation. It seems that the logic of achieving higher growth rates is still driving the national governments of these countries towards the adoption of more of the same pathways for greater integration with the emerging global economy. Competition in respect of both inward as well as outward FDI continues to rise in the case of BRICS countries. Most of them now measure the level of success in competition by the amount of FDI their respective governments are able to attract in respect of knowledge-intensive activities. In most of the BRICS countries, governments are now in competition to attract FDI for activities such asR&D, design, development and testing, technical support centres, and education and training. FDI in designated high technology sectors is receiving preferential treatment in terms of access to infrastructure, tax incentives and subsidies. Governments have become liberal in their encouragement of FDI in sectors connected with IT, software development, biotechnology, pharmaceuticals, etc.

The thrust of new policy mixes includes the introduction of measures to provide for the: a) stronger protection of intellectual property and the preferential access to infrastructure, both technological and physical, through the formation of special economic zones; b) supply of cheaperR&D services from publicly funded S''&T institutions; c) availability of cheaper expertise for scientific and engineering work; d) development of educational institutions that are capable of producing well trained professionals that are fully familiar with international management and accounting practices; e) easy access to domestic markets; f) elimination of export and technology transfer obligations; g) removal of controls over monopolies and restrictive business practices; h) dilution of environmental controls; and so on.

Given that TNCs can offer new production facilities, managerial practices and also technology transfer opportunities to host countries, it is necessary that in the new context, policy makers must formulate policy mixes of FDI promotion and innovation to successfully build national capabilities. After the experience of the global financial crisis, certainly there is again a renewal of interest in dealing with the implications of financial liberalization for the domestic economies in both developed and developing countries. In the emerging economies, policy makers are engaged in rethinking the policies that were responsible for transmitting the impacts of the global crisis into their economies. In this context, the role of PE and VC must also be reconstituted to take into account the specific experiences of impact transmission through the instruments of finance on innovation in the emerging economies.

Conclusion: new directions for the national innovation systems of BRICS countries?

Since the new measures that are currently being implemented also belong to the sphere of innovation policy, scholars of innovation have recently started actively studying the impact of these FDI promotion policy changes on the national systems of innovation (NSI). José Guimón and Sergey Filippov (2010) suggest that the challenge of present times requires a different approach to one where policies focus on the quantity of FDI inflows, they claim that what is needed is a shift away from a mindset that prioritizes greenfield investments towards one where the focus is on subsidiary development and on changes to the policy mix and to performance measurement.

The studies reported in this chapter have shown that domestic enterprises and the efforts of national-level S''&T institutions seem to matter more in the sectors that have proven to be dynamic in terms of innovation. By shaping the institutions and incentives in the same direction for market and non-market actors, the narrowly defined pathways of growth have been instrumental in preventing processes of competence-building and innovation from going beyond the outsourcing of activities and exports to regulated markets in select product segments. Demand-side signals for the innovative activities of both non-market and market actors did not support the efforts that were undertaken for the benefit of indigenous innovation. In such a situation, the relationship between the technological activities of TNCs and the NSI of BRICS countries have been more about the exploitation of the local S''&T infrastructure, while concentrating much less on supporting the generation of major innovations of the indigenous kind. China has been the only BRICS nation to counteract and mitigate the effects of such behaviour by setting up a comprehensive innovation policy based on strengthening local firms and controlling access of the local market.

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