This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
Emerging economies are low-income, rapid-growth countries using economic liberalization as their primary engine of growth. Some of these emerging economies have a lot of natural resources, but yet they struggle, so their challenges are centred on large populations, skills shortages, ineffective processes and absorption of technology and thus an inability to compete in a global economy. Private and public enterprises have had to develop unique strategies to cope with the broad scope and rapidity of economic and political change in emerging economies. Absorption of technology can help emerging nations to “leap frog” others.
Modern technology, interpreted broadly, includes product, process and distribution technology as well as management and marketing skills (Blomstrom and Kokko 1998, p. 1). The primary force needed to stimulate growth in a host country is technological advance. According to Quinn (1969, p. 149), “Fortunately, it is the application of technology through diffusion - not necessarily original scientific research or invention - which creates growth.” This makes it all the more important for developing countries to recognize the potential of technology transfer as a growth stimulator.
Technology transfer across national boundaries is dominated by MNCs (Multinational Corporation). Barlett et al. (2006, p. 2) define an MNC as “an enterprise comprising entities in two or more countries, regardless of the legal form and fields of activities of those entities, which operates under a system of decision0making permitting coherent policies and a common strategy through one or more decision-making centers, in which the entities are so linked, by ownership or otherwise, that one or more of them may be able to exercise a significant influence over the activities of the others, and in particular, to share knowledge, resources, and responsibilities with others.”
Other institutions, such as cooperative R&D programs and cross-licensed enterprises, also transfer technology among nations. But the level of technology transferred through these channels is insignificant compared to what can be transferred through MNCs. A multinational company's success depends on its superior management techniques, better manufacturing technologies or operating economies of scale. Direct investment may be the best way for a country to obtain technology. “Such investments can allow the country to eliminate the decades of time required to educate people, develop processes and generate investment sources internally” (Quinn 1969, p. 152).
The importance of technology contribution by multinationals can be understood by examining the direct and the indirect benefits for the host country. Direct benefits for the host country are mainly through manufactured products and services, training provided to local workers, purchase of materials and components from local suppliers and research and development in multinational companies' local laboratories. Indirect benefits include productivity spillovers, market access spillovers and stimulation of economy through competition. Now, these benefits shall be examined in detail.
One of the most important direct benefits offered by MNCs is the upgrading of host country's facilities in a particular sector. This is mainly achieved through the distribution of products and services produced by the MNCs, in the local economy. To deal with the improved technologies, MNCs train local employees and increase their levels of productivity. The other main benefit will be for the local suppliers of the MNCs. To cope with modern technology of MNCs, the local suppliers will have to upgrade their facilities. This is the potential mode of direct technology transfer to the local economy.
Another channel of direct transfer will be from the multinational companies' local research laboratories. MNCs will provide contacts with competent scientists from renowned organisations throughout the world, thus exposing the host country nationals to rich technological environments available. The information transferred along with the new technology will also be responsible for stimulating the host country's economic growth.
The primary indirect benefit for the host country is from the productivity spillovers that take place through the backward linkages in a value chain of the MNC. “The simplest example of such a spillover is the case where a local firm improves its productivity by copying some technology used by MNC affiliates operating in the local market” (Blomstrom and Kokko 1998, p. 3).
MNCs in advanced technological industries may create primary markets for the host country. An example given by Quinn (1969, p. 153) is that of the integrated circuit companies. “U.S. integrated circuit companies ran special programs in Europe to teach electronics companies how to design products to use integrated circuits. By building markets in their own self-interest, they also created demands which could be met by alert European companies.” MNCs also give local firms access to foreign markets through information availability and their existing international network. Certain technology transfers can be powerful enough to have an impact on the lifestyle of the local people and a profound impact on the economy.
The effect of MNCs on local competitors should also not be ignored. One of the productivity spillovers, in this context, will be that MNCs can force local competitors to modernize their management and production technologies. Naturally, the local players, who are not willing to upgrade their technologies and practices, will go out of the competition and the overall productivity of the players in a particular market segment will be improved. MNCs can also break down monopolistic or oligopolistic markets, as they have sufficient resources to overcome the high barriers of entry and in turn can introduce competition. In turn, the local firms may embark on a search for more novel and efficient technologies, thus intensifying the competition.
There are two sides to every coin. While technology transfer has its share of benefits, governments of the host countries have valid fears regarding this transfer. Two main potential conflicts are at the heart of their fears. There may be conflicts between policies of the host and the parent countries. There may also be conflicts between company strategy and national macro-economic goals. These conflicts can interfere with the cooperative information and knowledge transfer, thus hindering the host country from realizing the benefits of the technology transfer of the MNCs. For example, the countries that are culturally different from the investing partners will find it very difficult to capitalize on technology being transferred.
To overcome these fears, host country governments must consider some factors that will help in assessing the benefits of technology transfer. The primary factor that can influence the efficiency of technology transfer is the level of economic development in the host country. The next factor would be the adequateness of infrastructure in the host country for receiving and harnessing the technology. In other words, this indicates the extent to which the host country economy is strong and stable enough to adjust to technological change. This would also involve assessing the local competence. “Stage or path theories suggest that the relative development of the host economy positively relates to the kind and complexity of the inward direct investment it attracts” (Lorentzen et al. 2003, p. 416).
Macroeconomic strategies of the host country will also play an important role in assessing the benefits of technology transfer. Only when the strategies are clearly lined out, can the compatibility of the goals of the MNCs and the benefits of technologies transferred, be critically assessed. This will also include analysing the impacts of MNCs on industry structure.
For analysing the impacts of MNCs, the concept of output growth, from economics comes in handy. The output growth mainly derives from growth of inputs and growth of total factor productivity (TFP). Of the two factors, TFP is the more important one. Total Factor Productivity (TFP) is defined as the ratio of aggregate output to aggregate input. TFP growth is the difference between growth of aggregate output and growth of aggregate input. The TFP growth index is often used as a proxy for technological change.
The growing globalisation activities and the increasing presence of multinational companies has heightened the significance of the development of National Innovation Systems (NIS) by the host country, for analysing the role of innovation in economic development at national and regional levels. The firms which operate within the NIS structure will have more efficient and innovative technologies to offer to the host country.
Multinational companies are becoming the dominant players in the international trade arena. While the multinational companies do have hordes of benefits for the host country due to technology transfer, the host country governments must accept investments only after analysing in detail the lasting impacts of that MNC on the country's industry structure and economic growth. The MNCs - in their own self-interest - must include the host country's goals as integral elements of their long-term strategies. Only by doing so, can the symbiotic relationship between the host country and the MNC be nurtured, and the fruits of the efficient technology transfer can be borne by both the parties.
With the trend toward globalisation, the divide between rich nations and emerging nations is getting wider. New markets are available beyond the national boundaries, and emerging nations need to embrace the potential for development that global economies present. The catalyst for change is often technology absorption and the best route is by the absorption of technologies brought in by the multinational companies. This low cost strategy will allow emerging nations to build their national skills and thus achieve long term national development.
Artisien-Maksimenko, P. 2000. Assessing the Costs and Benefits of Foreign Direct Investment: Some Theoretical Considerations. Multinationals in Eastern Europe. Great Britain: Macmillan. pp. 10-57
Barlett, C.A. et al. 2006. Expanding Abroad. Transnational Management: Text, Cases and Readings in Cross-Border Management. New York: McGrawHill. pp. 1-13.
Blomstrom, M. and Kokko, A. 1998. Multinational corporations and spillovers. Journal of Economic Surveys 12(3), pp. 247-277.
Javorcik, B. S. 2004. Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages. American Economic Review 94(3), pp. 605-627.
Hoskisson, R. E. 2000. Strategy in Emerging Economies. Academy of Management Journal 43(3), pp. 249-267.
Lorentzen, J. et al. 2003. Host-country Absorption of Technology: Evidence from Automotive Supply Networks in Eastern Europe. Industry and Innnovation 10(4), pp. 415-432.
Malairaja, C. And Zawdie, G. 2004. The ‘black box' syndrome in technology transfer and the challenge of innovation in developing countries. International Journal of Technology Management and Sustainable Development 3(3), pp. 233-251.
Quinn, J. B. 1969. Technology transfer by multinational companies. Harvard Business Review 47(6), pp. 147-161.