International technology transfere

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Why is the technology contribution of multinationals potentially so important for developing countries? What factors will determine whether or not the transferred technology actually provides net benefits for the host developing country?

The technology transfer issue has ablazed much controversy in the last few decades amongst management researchers. This essay attempts to discuss on the potential benefit and contribution of technology transfers and presents and a suggestive theoretical framework on LDC s receiving new technology from multinationals.

Economists over the years have focused on the value of investment as a way of economic development while technological changes have been conceived of as an integral causal factor of growth; it was looked at as an inactive exogenous quantity that can assume of any set of values instead of an internally originating one that could be altered through policy. In the recent past, however, the pace of technological innovation and development of technology has been considered a major endogenous factor in determining economic growth. This new concept has caused many nations to contemplate new technology as a method of developing their economies. In an attempt to intensify monetary growth less developed countries (LDCs) look to the multinational corporations/enterprises (MNCs/MNEs) to provide them with the necessary factors such as capital, state of the art technology and skills.

The prominence of international technology transfer (ITT) for economic development of the LDCs cannot be undermined. Firstly acquiring technology and then nurturing it fosters productivity growth. Almost all of the developing countries depend heavily on imported technologies as reservoir of new productive information and knowledge.

Developing countries have long sought to use both national policies and international agreements to stimulate ITT. National policies range from economy-wide programs (e.g., education) to funding for the creation and acquisition of technology, tax incentives for purchase of capital equipment and intellectual property rights (IPRs). A prominent episode of international efforts to encourage ITT came in the late 1970s, when many developing countries sought a Code of Conduct to regulate technology transfer under United Nations (UN) auspices.

In 2001, WTO members established a Working Group on Trade and Technology Transfer to examine the relationship between trade and the transfer of technology and explore what might be done under WTO auspices to increase ITT to developing countries. This can be seen as another reflection of a long history of efforts by developing countries to enhance the relevance of the WTO for development.

We review the evidence on the major channels of technology transfer.

1. Channels of Technology Transfer

Numerous channels exist through which ITT may occur. Trade in goods and services is one. All exports bear some potential for transmitting technological information. Imported capital goods and technological inputs can directly improve productivity by being used in production processes. A second channel is foreign direct investment (FDI). Multinational enterprises (MNEs) generally transfer technological information to their subsidiaries, some of which may 'leak' into the host economy. A third major channel of ITT is direct trade in knowledge via technology licensing. This may occur within firms, among joint ventures, or between unrelated firms. Licensing and FDI are often substitutes. Which form is preferable to technology owners depends on many factors, including the strength of IPR protection. Patents, trade secrets, copyrights, and trademarks can all serve as direct facilitators of knowledge transfers.

Foreign Direct Investment flows may serve to supplement capital scarcities in developing countries, influencing investment levels and the balance of payments positively or they may actually lead to a reduction of domestic capital. Firstly, according to the two-gap model, capital and savings are low in developing countries, thereby limiting investment and economic growth. The benefit of FDI is to fill these two gaps through providing capital as well as higher tax revenues. The tax revenues benefit the government through increasing the funds available to improve public infrastructure and induce investment. For example in China foreign affiliates tax contributions accounted for 18% of the country's total corporate tax revenues in 20007. Generally, raising investment levels through higher capital availability increases growth. However, Coleman and Nixon argue that although in the short-run a positive effect on growth may take place, in the long-run the effect is likely to be negative as the "repatriation of profits, negotiated tax concessions, transfer pricing and intra-firm trading as well as payments of royalties, technical, and managerial fees to the parent company" result in a negative outflow of capital. Further, MNCs might lower the domestic capital availability by borrowing on local capital markets. In Latin America for example, American MNCs financed over 80% of their investments from local borrowing, which means that MNCs did not supplement domestic scarcities but consumed them further. This is likely to discourage local investment rather than stimulate it. The impact of FDI therefore depends on whether it discourages domestic investment or stimulates it by providing additional incentives.

Foreign Direct Investment flows may serve to supplement capital scarcities in developing countries, influencing investment levels and the balance of payments positively or they may actually lead to a reduction of domestic capital. Firstly, according to the two-gap model, capital and savings are low in developing countries, thereby limiting investment and economic growth. The benefit of FDI is to fill these two gaps through providing capital as well as higher tax revenues. The tax revenues benefit the government through increasing the funds available to improve public infrastructure and induce investment. For example in China foreign affiliates tax contributions accounted for 18% of the country's total corporate tax revenues in 20007. Generally, raising investment levels through higher capital availability increases growth. However, Coleman and Nixon argue that although in the short-run a positive effect on growth may take place, in the long-run the effect is likely to be negative as the "repatriation of profits, negotiated tax concessions, transfer pricing and intra-firm trading as well as payments of royalties, technical, and managerial fees to the parent company" result in a negative outflow of capital. Further, MNCs might lower the domestic capital availability by borrowing on local capital markets. In Latin America for example, American MNCs financed over 80% of their investments from local borrowing, which means that MNCs did not supplement domestic scarcities but consumed them further. This is likely to discourage local investment rather than stimulate it. The impact of FDI therefore depends on whether it discourages domestic investment or stimulates it by providing additional incentives.

However, the negative capital outflow might be offset by other factors such as technology and knowledge transfer, backward linkages and increased export competitiveness. Firstly, FDI can lead to technology transfer and knowledge transfer of managerial and marketing expertise which otherwise is more difficult to obtain through trade. Secondly, with new more advanced technology in place, as well as managerial know-how, there is a possibility for spillovers (unofficial technology transfer) and linkages (increasing local economic activity) into the economy. Local firms can copy the new technology, or they are forced through increased competition to upgrade their technology and innovate in order to remain as suppliers to the market. Thirdly, the higher product quality brought about by new technology in addition to the fact that MNCs bring to the country certain knowledge of international market conditions and improved access to foreign markets should increase exports. As Gemmell points out these possible higher export earnings can increase the balance of payments to offset the negative impact of repatriation of profits. On the other hand others argue that that the transfer of capital intensive technology might be either of an inappropriate nature for developing countries facing excess labour supply, or take place as a one-off demonstration effect instead of being diffused throughout the economy. In general it is argued that MNCs creates enclaves in the economy, which have little connection with the rest of the economy. As a result the spillover and linkage effects may be insignificant. The impact of FDI thus depends on how far integrated the MNC is in the local economy in that potential spillovers can be captured.

Although MNCs employ only a small proportion of the total labor force in the developing countries, they have a powerful effect on these countries' economies. They also often exert considerable power and influence over political leaders and their policies and are frequently accused of meddling in politics in certain developing countries. It is easy to see the harmful social, environmental and economic effects of multinationals on developing countries and yet governments in these countries are so eager to attract overseas investment and to turn a blind eye on many of their excesses.

Whether investment by multinationals in developing countries is seen to be a net benefit or net costs to these countries depend on what are perceived to be their developmental objectives. In my opinion, if maximizing growth in national incomes is the goal, then MNC investment has probably a positive contribution. If however, the objectives of development are seen as more wide reaching and include goals such as greater quality, the relief of poverty, a growth in the provision of basic needs such as food, healthcare, housing and sanitation and a general growth in the freedom and sense of well-being of the mass of the population, then the net effect of multinational investment could be argued to be anti-developmental. What then do we do in order to benefit from this seemingly necessary evil situation? Perhaps in order to prevent virtually the most critical abuse practices including culture invasion by diluting our way of life, governments of developing countries must be firm, divide and tightly control selective sectors with highly lucrative profitable potential to make sure that the MNC investments could be restricted to at least 50-50 joint ventures with the governments or the private partnership in the domestic economy.

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