5.2 Transfer of technology
5.2.1 Main channels
There is a large body of literature on channels through which technology is transferred internationally. The channels include FDI/MNCs; technical licensing agreements between foreign and local firms; imports of intermedi- ate and capital goods; education and training in technologically advanced countries; turnkey plants and project contracts; technical consultancies by foreign companies/consultancy firms; and simply through participation in world trade (exports).8 However, little is known about the relative impor- tance of each of those channels as mechanisms of technology transfer,
especially technology transfer to SMEs in developing countries. Indeed, the importance of these channels cannot be established precisely, since it varies according to different stages of development, as does developing countries’
ability to take advantage of them.
The literature as a whole reveals the three most important features of tech- nology transfer to developing countries. First, given that foreign firms opt to produce in a developing country, FDI seems to be the preferred route and is therefore a prominent channel of technology transfer. Moreover, for many developing countries FDI is a more attractive means of developing tech- nology in their industries than is using technical licenses or other sources because whereas with licenses technology is provided, with FDI technology is locally developed. FDI is also different from other channels (except the import of capital and intermediate goods and export) since technology transfer through FDI involves continuous interaction between the acquirer and the supplier of technology. The main reason for this is that tacit knowl- edge is a component of virtually all technologies, but at the same time it is the most difficult to transmit between different agents (UNCTAD, 2007).
Soesastro (1998, p. 312) presents a story of technology flows in the so- called newly industrializing countries (NICs), such as South Korea, Taiwan, Hong Kong, and Singapore, which has centered on the dramatic surge in FDI.
Soesastro supports the general view that FDI has an important role to play in cross-border transfers of technology, since FDI brings in more advanced tech- nologies than alternative channels such as imports of capital and intermediate goods, project contract, and so on. This is particularly the case with MNCs, because they play a dominant role in the generation of technology which is usually associated with new or technologically complex products in the host countries.
The second and perhaps most robust finding of the literature is that an absorptive capacity in the host country is essential for deriving significant benefits from FDI. Without adequate human capital or investment in research and development, spillover from FDI fails to materialize. Thus, FDI policies in developing countries may need to be complemented by appro- priate policy and institutional changes with respect to education, R&D, and human capital accumulation, if these countries are to take full advantage of increased FDI (Saggi, 2002). Third, although governments in many develop- ing countries have been trying in many ways to encourage the inflow of FDI, there is not so much evidence of governments in the recipient countries playing a role in supporting the capacity of domestic enterprises, especially SMEs, to absorb technology.
As global production is becoming more fragmented through trade and investment liberalization, more companies are choosing to spread their pro- duction around the world. The driver of this trend is FDI, and the opening up of domestic markets and a reduction of trade and investment barriers are a precondition (though not the only one) for attracting FDI inflows.9 In Asian
developing countries where policy changes toward trade and investment liberalization have been enacted since the 1980s, FDI penetration has grown substantially since the 1990s. However, the rate of penetration varies between developing countries and less developed countries (LDCs) in the region such as Afghanistan, Bangladesh, Bhutan, Cambodia, Lao PDR, Bangladesh, Myanmar, and Nepal (Figure 5.5). Southeast Asian countries and China have been espe- cially active in utilizing incoming FDI not only in export-oriented industries but also in some major import-substituting industries (Kimura, 2006).
Probably Indonesia is among a very few Asian developing countries where empirical studies have been undertaken on the importance of FDI for transfer of technology, though mostly at national level using aggregate data. For instance, by using cross-sectional data, both Sjöholm (1999a, b) and Blomström and Sjöholm (1999) found positive spillovers from FDI in Indonesian manufacturing industry. Their results show that both the level and growth of labor productivity is higher for locally owned plants in subsectors with a high foreign share of output. The transfer of technology from foreign companies to local enterprises can happen in two main forms, namely, through subcontracting arrangements between foreign and local enterprises and labor movement from the former to the latter.
Thee and Pangestu (1994) tried to find some evidence at micro level. They assessed the technological capability of the Indonesian textile, garment, and electronics industries. They found that, in efforts to increase technological capability, Indonesian textile and garment manufacturers established strate- gic alliances (SA) with their Japanese counterparts, and that this has been the most important channel of technology transfer. Similarly, business linkages with foreign companies have been a very important channel for the transfer of technology to electronics firms, especially in consumer electronics and electronic components. However, technology transfer in the textile industry was limited to improvements in production capability. Japanese counterparts conducted more sophisticated activities that helped local firms upgrade their technological capabilities, including activities related to pre-investment, project implementation, and technical changes in production or product.
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1980 1990 2000 2005
Developing countries LDCs
Figure 5.5 FDI stock/GDP in developing and LDCs in Asia (%)
However, in general there is still little evidence of a significant contribu- tion of FDI to technological capability accumulation through transfer of technology to domestic firms, especially SMEs, in Indonesia as well as in other Asian developing countries. Possible reasons include the following.
First is the lack of integration of MNC-induced FDI into host economies.
This is especially true for MNCs in mineral extraction, which are highly concentrated geographically and have high import content. Most of those operations are wholly owned by foreigners rather than joint ventures with local firms. They tend to operate as enclaves, such as the case of an American gold mining, PT. Free Port, in Papua, Indonesia, since they are weakly integrated into domestic economies as they have few forward and backward linkages in host economies. With this type of operation, impor- tant technology transfer channels from MNCs to domestic firms, namely, production linkages through, for example, subcontracting, joint ventures, and labor turnover, are largely absent. On the contrary, MNCs in the manu- facturing industry have potentially greater technology-transfer effects since the industry is not geographically concentrated and is relatively labor- intensive, and it is easier for foreign firms to establish subcontracting links with domestic firms in manufacturing than in the mineral extraction. Thus, sectoral composition of FDI is indeed crucial.
Second, the priorities of the policies enacted by host countries are impor- tant. Only in a few Asian developing countries, for example Indonesia and Thailand, have governments been very active in encouraging production links between MNCs and domestic firms. Third, the absorptive capacities of Asian developing countries is low. Many studies conclude that the presence of FDI is likely to have a positive impact on local firms through transfer of technology only when the local firms have enough absorptive capacity, that is, they must have human resources with adequate skills and basic techni- cal knowledge. Without these factors, spillover fails to materialize, and MNCs can crowd out domestic firms with a technological gap that is too wide to bridge. From his analysis of the amount of technology transferred through the development of Indonesia’s automotive manufacturing indus- try, Tarmidi (2001, p. 10) concludes that the main constraints on technology transfer in the automotive component industry were not lack of trade and investment liberalization, which is important for attracting FDI, but, among other things, a lack of basic technological know-how and an insufficient number of skilled workers.10
In other words, the intensification of FDI will not on its own guarantee that it will work effectively in channelling technology transfer, unless poli- cies encouraging FDI are accompanied by active policies at the national level as part of broader development strategies geared toward the development of productive capacities. The most important policy action required, as the necessary precondition, is the maximization of the technological learn- ing and adaptive innovation capabilities in recipient countries. Important
lessons can be learned from the East Asian successes (i.e. South Korea and Taiwan). These countries show that, in order to realize the benefit of technology transfer, policies to attract FDI as part of trade and investment liberalization should be accompanied with science and technology and human resource development policies. Those policies should be considered as part of structural adjustment programs in the process of trade and invest- ment liberalization. Reinforcing key institutions, development of science and technology infrastructure and an information network/center, and incentives for industrial and agricultural development should be part of a development or adjustment plan. Otherwise, the inflow of FDI will not only fail to generate technology transfer but Asian developing countries will be marginalized within the global economy.
In addition to science and technology and human development policies, the success stories of South Korea and Taiwan suggest that FDI policies in Asian developing countries must be accompanied by policy actions: to allo- cate incoming FDI to high-value-added manufacturing activities, instead of concentrating in natural-resource extraction and low-value-added or tradi- tional manufacturing industries such as textiles and apparel, and footwear (although these industries are labor-intensive and so have higher employ- ment effects, but involve few skills); to encourage close links between FDI and domestic firms through, for example, subcontracting arrangements or joint ventures; to encourage movement of workers to domestic firms/SMEs after they have acquired sufficient experience as workers in foreign companies;
and to promote collaboration in R&D between FDI and local firms, including SMEs, by many measures such as easier procedures, removal of restrictions on royalty or technical fee payments, and a good patent system.
The People’s Republic of China (PRC) is a good example of a country that has been very serious about acquiring technology from advanced countries by encouraging foreign R&D investment in China, particularly in information technology related industries. The government offers a range of preferential policies that include tax rebates, construction loans, access to modern facilities, and other incentives. As a result, most of the world’s leading computer and telecom companies have R&D investments in China (Walsh, 2003). Thailand is probably a good example of a developing country in the region that has exploited FDI to acquire technology from advanced countries in its quest to industrialize by encouraging partner- ships, especially in the form of subcontracting between domestic firms and TNCs since 1960s. The government has used fiscal and other incentives, training programs, and other support measures (such as incubators and science parks) to facilitate partnerships (UNCTAD, 2005).
The second most-preferred channel for technology transfer by develop- ing countries is the import of intermediate and capital goods embodying advanced technological know-how. By far the most important source of technological innovation in developing countries as perceived by firms,
according to a large survey of firms conducted for UNCTAD (2007), is new machinery or equipment. It is likely that most of the machinery and equip- ment operated in Asian developing countries is imported, since the coun- tries have very little capital and intermediate goods manufacturing capacity.
However, in Asia, the intensity of capital goods imports, measured by the ratio of total capital goods imports to total merchandize imports, varies between developing countries and LDCs (Figure 5.6). The former countries (including Indonesia, Thailand, Malaysia, India, and China) import more capital goods than the latter countries (such as Afghanistan, Bangladesh, Bhutan, Cambodia, Lao PDR, Bangladesh, Myanmar, Nepal, and Yemen).
This difference is associated with the fact that the former are more liberal in their trade and investment than are the latter, and their level of industrial- ization is higher.
As with the case of FDI discussed above, empirical studies of the impor- tance of this particular channel for technology transfer in Asian developing countries are very scarce. Also the importance of this channel for technol- ogy transfer cannot be established precisely, since it depends on the level of development in the importing countries and on their ability to learn, master, and adapt foreign technologies derived from imported capital goods.
It can only be assumed that since human resources, technology capability, institution, infrastructure, and so on are more developed in developing countries than in LDCs within the region, the former benefit more than the latter from international technology diffusion through imported intermedi- ate and capital goods.
The only evidence is from national data on imports by types of goods.
For Indonesia, national data show a sustained increasing share of imported intermediate and capital goods in the country’s total imports. Although no case studies at firm level have ever been undertaken that can give detailed evidence, at least it can be assumed that such continued rise in imports of the goods must have had some effects on technological development in Indonesian firms in the last, say, 30 years. This view is supported by Jacob
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1980-89 1990-99 2000-05
Developing countries LDCs
Figure 5.6 Capital goods import intensity of developing and least developed countries in the Asian region (as a percentage in total merchandize imports)
and Meister (2005). Their study is based on an assessment of the contribution of foreign technologies to manufacturing performance in Indonesia at the subsectoral level, in which they combined Indonesian data-sets on produc- tion and input–output transactions with the R&D, export-to-Indonesia and output data of ten major OECD countries that trade with Indonesia. They conclude that the transfer of foreign technologies to Indonesia through imports of intermediate and capital goods does indeed make a significant contribution to the performance of Indonesian manufacturing, especially after liberalization and reforms started in the mid-1980s. Thee (2003), who has been actively studying industrialization in Indonesia, also stresses the important role of imports of intermediate and capital goods, particularly given the weakness of domestic industries producing such goods.
Another important channel is participation in world trade through exports. This method has been used intensively by local firms, including SMEs, in some Asian developing countries. For example, local electronics firms in South Korea, Taiwan, and Hong Kong were able to build up produc- tion capabilities through simple assembly of mature products for export, often developed through technical assistance provided by foreign buyers.11 This process of coupling exports with technology development has been called “export-led technology development” (Hobday, 1994, p. 350).
In the Indonesian case, this can be best represented by the success of Bali’s garment industry. It shows the importance of foreign buyers (i.e. foreign firms, businessmen, and tourists) as an important source of innovation, as they are able to act as marketing intermediaries, connecting local produc- ers with retail outlets abroad. In the process, these intermediaries dispense important information on design and production techniques. Foreign buyers provide information and technical and managerial assistance on plant layout, the purchase of the most appropriate machines, and quality control methods, and also often act as technical consultants to SMEs in the industry, enabling them to achieve higher levels of efficiency and accuracy (Cole, 1998a, b).
Foreign buyers also provided vital information and technical, managerial, and marketing assistance during the development of the export-oriented furniture industry in Jepara, Central Java, which is another important success in Indonesia. As a result, the quality of Jepara furniture has been steadily upgraded. Foreign buyers have also played a crucial role in provid- ing guidance to SMEs on the furniture designs popular in export markets and the quality standards required to penetrate these markets.12