WHY IS THE TECHNOLOGY CONTRIBUTION OF MULTINATIONALS POTENTIALLY SO IMPORTANT FOR DEVELOPING COUNTRIES? WHAT FACTORS WILL DETERMINE WHETHER OR NOT THE TRANSFERED TECHNOLOGY ACTUALLY PROVIDES NET BENEFITS FOR THE HOST DEVELOPING COUNTRY?
“Today’s world is divided no longer by ideology but by technology… 15% of the earth’s population, provides nearly all of the world’s technology innovations…half of the world’s population, is able to adopt these technologies in production and consumption. The remaining part, covering around a third of the world’s population, is technologically disconnected, neither innovating at home nor adopting foreign technologies.” Sachs (2000)
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According to the new Growth theory of the 1990’s, “Innovation is the prime source of technological advancement…which in turn drives economic growth”. One of the prime motives of host developing countries for widely accepting and encouraging various channels of FDI is to absorb the technological spillover from the foreign country firms. The Hard Technologies (industrial processes, equipment and plant) or Soft Technologies (technical know-how, management ideas, marketing skills etc) (Dunning and Lundan 2008) contributed by Multi-national Enterprises (MNEs) are considered the main source of economic development and growth.
When a multinational firm vertically integrates with the developing country firms, host firms they are forced to abide by the MNE’s strict guidance and standards to ensure quality goods or services in the form of raw materials or upstream services. The foreign firms would guide and assist, both managerially and technically which would lead to improvement both in quality and quantity of service by the local affiliates. Also domestic rival firms enhance their offerings to keep in pace with the foreign affiliated firms in the market thus enhancing the host country firms’ productivity. The biggest US based retailer, Wal-Mart’s entry and rapid expansion in China has helped the logistics industry in Chinese market to climb higher level Zhu (2010).
For developing countries to carve their niche in the global economy, they need to be technologically advanced. There is a possibility of importing new technology from foreign developed market, but this will cause a setback as the procedure would be expensive. Also countries will find themselves alienated from the advancement of technologies if they can’t develop export markets Sachs (2008). This can be minimised to a considerable extent by MNEs ‘trickle down’ effect wherein transfer of technological skills from developed countries to developing countries occurs through FDI. The transfer of Panasonic’s microwave manufacturing base from United States to China has led to the presence of 2800 Chinese enterprises to provide components for it, which has not only contributed new technology, but also advanced operations management techniques to Chinese market (Sinani and Meyer 2004).
The risk factor due to uncertainty of new technology’s results and heavy investment thwarts the developing countries from introducing any new technology from scratch. The argument in support of MNEs is that technologyÂ is the quintessential component of economic development and demands a lot of investment in research and development (R&D). Developing countries, however, lack both in skills and funds essential for R&D, which has led to the deficient level of R&D inÂ developingÂ economies. The host countries’ innovation can be stimulated because of the presence of MNEs, which would command resources necessary for R&D. Hence host firms can save on cost by using the technologies which are already implemented and used by MNE’s using Demonstration (by MNE’s) and Imitation (by host firms) (Das 1987; Wang & Blomstrom 1992, cited in Crespo and Fontoura 2007). However the patent regulation and challenge of absorbing the technological skills in the short term collaborative contracts makes the process very challenging for the firms in the emerging markets.
The human resources’ mobility from MNEs to local firms also act as a channel of technology transfer and extension since the systematic training provided to these high-skilled employees is dissipated to domestic firms in the form of innovative managerial ability thus enhancing the domestic enterprises which would otherwise be impossible (Crespo and Fontoura 2007).
Table 1: Summary of Spillover Channels of FDI (Blomstorm and Kokko (1998); Gorg and Greenaway (2001); Gorg and Strobl (2002))
The technology transfer usually occurs in a market which is imperfectly competitive and possesses no particular market structure. Since different developing countries would have different market structure, it becomes very complicated to have a generalized theory and model to find the determinant factors of technological spillover benefits to local firms (Mondal and Pant 2010). The results of empirical study by various researchers act as an alternative to analyse the net benefits of technology spillover for the host developing countries. The firm’s Total Factor Productivity (Factors like the level of R&D, foreign presence, the firm size) can be used as a proxy to gauge technology transfer (Haddad and Harrison 1992, cited in Crespo and Fontoura 2007).According to Seck (2011) “A 10% increase in a developing country’s foreign R&D capital stock leads to more than a 2% percent increase in its total factor productivity”.
The economic development level (measured by per capita GDP) impacts strongly on R&D activity (Cheung and Lin 2003). The growth in host country’s R&D activities reduces the technological gap and increases the absorptive capacity of the host firm thereby benefitting the host developing country.
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According to Schmid (2010),” A one percent increase in the Research and development (R&D) expenditure is associated with a five percent increase in the likelihood of a technology transfer”. He also states that the technology transfer is positively correlated to the trade flows and R&D expenditure of a developing country. R&D resulting in new processes and products either amplifies firms’ revenues or saves firms’ costs and is considered as the vital proxy for endogenous growth and technological advancement, Zhu (2010). In 2004, 23.7 % of industrial R&D within China was performed by affiliates as compared to 21.7% in 2004 (UNCTAD 2005, cited in Dunning and Lundan 2008, p.359) which exemplifies increasing trend and possibly positive effect on host developing countries. Here the main challenge lies in finding the exact proportion of beneficial R&D activities.
If the relative costs of technology adoption are large to the economic value of the underlying technology (to the host country firms), there will be little adoption relatively and FDI spillover realized will also be relatively limited (Blomström. et.al 1999). Thus cost of technology adoption plays a major role for the technology transfer to be beneficial to the host country firms.
The factors contributing to the distribution of technological capacity (which includes Higher educational institutions, Scientists and Engineers, R&D laboratories and other physical and human assets) which are aided by foreign affiliates reflects the net beneficial effect on host countries due to export or FDI (Dunning and Lundan 2008). Alongside the direct effects of technological capacity of host countries, the indirect consequences can be measured through knowledge, technology and R&D spillovers to host economy’s local firms which can be measured in terms of the raise in productivity of local firms as a result of the MNE’s presence or entry into host economy. However realising the exact proportion of productivity increase solely due to MNE’s contribution is a big challenge for many other factors would have aided the process.
A study by Xu (2000), cited in Dunning and Lundan (2008), suggests that the spending on royalties and licence fees approximately indicates the impact of productivity enhancement caused due to technology transfer of FDI in the host countries. The absorptive capacity of the developing countries varies and accordingly the positive or negative effects based on it. The study by Feinberg and Majumdar (2001), cited in Dunning and Lundan (2008) reveals that the pharmaceutical affiliates in India experienced no spillover to local firms through locally conducted R&D whereas the foreign affiliates had benefited. On the contrary, a study conducted by (Mondal and Pant 2010) shows the presence of foreign affiliates and high absorptive capacity for developing countries to impact positively on technology spillover which is elevated by a highly competitive environment.
The policies of host governments towards FDI such as technology policy and Intellectual Property Protection are also plausible determinants which impacts the magnitude of the efficiency spillovers captured by host country firms. For example government policies which would encourage the R&D performance like effective IP protection would alleviate the chances of FDI and intensify the technological capability of local firms which in turn would aid to exploit appropriate foreign technology (Blomström et al. 1999). On the other hand patents filed by developed countries would result in limited transfer of technological capabilities due to the protection of technology from imitation for 20 years. China became the largest recipient of FDI among the developing countries during 1990’s due to the ‘market for technology’ policy and enforcement of patent law in line with TRIP’s (Trade-Related Intellectual Properties) (Cheung and Lin, 2003).
Due to contradicting research data and the dependence of technology transfer benefits on the kind of industry and the level of alliance between foreign and emerging market country firms, it becomes very complicated to generalise the factors contributing to the net benefits of the developing countries.
According to (Dunning and Lundan 2008) “The ability to create, acquire, learn, use and effectively deploy technological capacity is one of the key ingredients of economic success in virtually all societies”. The exact realisation of net benefit of technology transfer to developing countries is measured using TFP as a proxy and can be enhanced by strengthening their local economy and capabilities to attract FDI inflow with the aid of strict and stringent government regulations.