Radosevic, Slavo, International Technology Transfer and ‘Catch Up’ in Economic Development, Edward Elgar, Cheltenham, 1999. Chapter 7 Conclusions: From a ‘Contract Bargaining’ to a ‘Sourcing’ Policy Context

Radosevic, Slavo, International Technology Transfer and ‘Catch Up’ in Economic Development, Edward Elgar, Cheltenham, 1999. Chapter 7

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7. Conclusions: From a ‘Contract Bargaining’ to a ‘Sourcing’ Policy Context The main objective of this book was to analyse the emerging technology transfer issues for developing economies in a globalized economic environment. We compared the main technology transfer issues from the 1960s/70s with the current situation and outlined the changes that have taken place in this period. The analysis has shown that the requirements for catching up have changed over this period such that we can talk about a new policy agenda for technology transfer in a liberalized trading and investment environment. We framed these two agendas as ‘contract bargaining’ and ‘sourcing’ and we compare them below. Our first conclusion is that the characteristics of the host country and its domestic absorptive capacity are crucial determinants of technology transfer. The extent and quality of the transfer process depends heavily on the absorptive capacity and structural characteristics of the recipient economy. ‘Catching-up’ is essentially an endogenous process. Technology import is an important ingredient of this process. External circumstances, particularly foreign markets and accessible new technologies, do shape the depth and duration of ‘catching-up’. However, access to technology per se is far from sufficient to explain country differences. The absorptive capacity is an outcome of growth and technological accumulation which is primarily a domestic driven process. In the

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post-World War II period it was apparent that similar conditions of access and even similar technology transfer policies led to significantly different outcomes. In that respect our conclusion only confirms a historical truth observed by Rosenberg (1982, p. 271) that the most distinctive single factor determining the success of technology transfer is the early emergence of an indigenous technological capacity. In the absence of such a capacity, foreign technologies have not usually flourished. As a result of the globalization of the world economy the linkages within national economies have weakened on account of regional and global production, market and financial linkages. However, these processes have not undermined the local and firm-specific nature of technology as the main generator of growth. Policy attempts to attract FDI, subcontracting or alliances without local processes of active assimilation cannot generate long-term growth. The technology transfer process is part of the absorptive capacity and structural characteristics of a host economy and cannot be treated as a generic area. From this follows our second conclusion that the treatment of technology transfer as an isolated and generic area is fraught with difficulties. Its looseness stems from the fact that it is the consequence of a specific national and international context, and there is very little in the transfer process per se that can stand as an independent factor. This looseness dominated our analysis and is reflected in the very broad set of issues that we have had to deal with in order to understand the conditions under which technology transfer contributes to the growth process. The secondary nature of technology transfer mechanisms to endogenous growth factors and mechanisms has produced very little in terms of general conclusions. A specific sectoral or national context produces dynamic interactions in which very few independent variables exist. The processes of integration of technological knowledge into a domestic economy coevolve with the structural features of the domestic environment.

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Trying to capture the determinants of such a process through crosssectional studies is faced with serious limitations and requires knowledge of history and the specific nature of this co-evolution. Only with a detailed knowledge of the history and specific nature of the co-evolution in individual contexts can one hope to overcome the limitations of trying to capture the determinants of the process of the integration of technological knowledge through crosssectional studies. In a globalized economy whose basic feature is an increasing interdependence between economies the distinction between domestic technology development and technology transfer issues has become even more pronounced. A number of different equity and non-equity linkages encompassing marketing, finance, production and other business activities and sectors has significantly blurred the boundary between domestic and foreign determinants of technology transfer. Although the aggregate statistics cannot provide a neat picture of the processes of production, financial and market linkages that are developing, they seem to be a distinctive feature of the globalization of the world economy today. These are enabled by new IT technologies and by the liberalization of trade and investment rules which are opening up the world economy, especially at the level of trade, finance and production networks. As a consequence of these changes, the complexity and indeterminacy of policy options have increased. These are reflected in the main technology transfer policy issues. Policy concerns are now more focused on how to increase collaboration with foreign sources of technology and how to maximize the technological benefits of FDI and sourcing relationships than on the regulation of technology transfer as an area where elements of technology are traded. The diversity and number of technology transfer channels have increased, and the interaction between domestic and foreign technology has become

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increasingly blurred through the expansion of sourcing arrangements, privatization based FDI, market and finance links. Our third conclusion is that the liberalization of trade and investments is not leading us to an idealized world of a borderless, free-market world economy. Markets are social institutions and the deregulation of trade and investment is already causing concerns with regard to the new emerging areas of inequality and unfair advantage, such as intellectual property rights laws, domestic competition rules, environmental and labour standards, etc. This is likely to lead to new re-regulations of international rules of the game in which previously domestic policy areas will be increasingly subject to international regulations. The possibilities for influencing technology transfer on the ‘border’ have been reduced and the policy emphasis is shifting towards domestic regulations to make use of increasing production, market and other linkages. The only remaining instruments for influencing technology transfer on the ‘border’ are investment incentives and performance requirements. The expected process of regulation of previously domestic policies will shift further the line of what is considered to be a ‘border’ in terms of domestic policy. The driving force behind these highly politicized processes is the friction between the liberalization of trade and investments on one hand and the private nature of many technological assets. The spreading of production networks does not necessarily generate an equal spreading of technology networks. The liberalization of trade and investments has not been accompanied by the liberalization of technology flows. The friction between ‘shallow’ (trade/finance) and ‘deep’ integration (production/ technology) processes generates new issues in technology transfer. This leads us to our core issue: what are the main technology transfer issues in a globalized economy characterized by an

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increasing multiplicity of micro linkages or processes of ‘deep integration’ which we summarize in the next section.

7.1. A ‘CONTRACT BARGAINING’ VERSUS A ‘SOURCING’ POLICY AGENDA History is an evolutionary process and new situations are inextricably linked to past problems and solutions. Hence current technology transfer issues in a globalized economy share many features of those of the past. The main difficulty is in separating the qualitatively new features of the situation from problems which are old but appear as new. In this section we summarized the main features of technology transfer in the 1960s/early 1970s and in today’s globalized economy. We summarized them in a stylized manner by contrasting two technology transfer contexts: ‘hard bargaining’ and ‘sourcing’. Clearly, in emphasizing the differences between the two periods, the similarities may have been underplayed. However, we have tried to demonstrate that the changes which have occurred, which impact directly on technology transfer, are so far-reaching that we can now talk of two different policy contexts. However, by the end of this section the limitations of this generalization will also be emphasized. In Table 7.1 below the main distinctions between the two policy contexts have been summarized. The first policy context, analysed in Chapter 3, was developed during the import-substitution period. The main characteristic of that period was the emphasis on the legal aspects of technology transfer and issues of ‘contract bargaining’. ‘Contract bargaining’ should be here understood as the context in which the policy approach to technology transfer was institutionalized.

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The raison d’être of technology transfer policy was to attain a fair distribution of technology rents. Their distribution was not considered only as a cost saving matter but also as an issue of the distribution of long-term learning opportunities. The firm-specific nature of technology and its role as the main carrier of technology transfer were considered as secondary to a predominantly legal perspective on technology transfer. These concerns should be understood in the context of that time, where much learning was taking place in protected economies with national champions who served growing domestic markets. However, with the exhaustion of this type of growth this approach became increasingly irrelevant, as the emerging global economy began to change the context in which technology transfer occurred. The world economy is structured hierarchically through a set of production, market and financial linkages and supporting institutional arrangements. This hierarchical nature was much more obvious throughout the post-World War II period through not only economic, but also political blocs (North, South, East, West, subregional groupings) with their attendant markets and production linkages. With the end of the Cold War and the accession of the most countries to GATT/WTO rules, the old structure of the world economy has changed. Russian companies are emerging in US financial markets while Chinese exports are threatening the established positions of other developing countries in developed markets. Through processes of trade and investment liberalization a new dynamic is emerging whose structural characteristics are still unknown. This dynamic is driven by the production networks focused around large TNCs and dynamic markets. How to become integrated into these networks and through them ensure access to these markets has become the main concern in technology transfer. The more dynamic production networks and the more dynamic markets are likely to provide more knowledge inflows and ensure a

Conclusions

more stable competitive position. This context is significantly different from the past

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Table 7.1: International Technology Transfer Policy Issues Within ‘Contract Bargaining’ and ‘Sourcing’ Frameworks Policy context

‘CONTRACT BARGAINING’

‘SOURCING’

The main technology transfer concerns

TERMS OF TECHNOLOGY TRANSFER

POSITION IN PRODUCTION CHAIN

-Technology rents

-Firm specific

-Loss in dynamic technological capability

-Stagnation at lowvalue added FDI and sourcing positions

TECHNOLOGY ACCESS

MARKET AND TECHNOLOGY ACCESS

-Hierarchy of technology transfer channels

-Multiplicity of channels

-Disregard of foreign market as a learning inducement

-Market access as learning inducement

S&T INFRASTRUCTURE

LATECOMER FIRM

The main policy focus in technology transfer

The main carrier of technology

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transfer

Government role

-Infant protection learning

-Learning through networking

-Specific intra-firm learning paths

-Sourcing and linkage capabilities

INFANT INDUSTRY PROTECTION

MACROORGANIZATIONAL STRATEGY

-Technology transfer as a foreign trade policy

-Technology transfer as a domestic policy

-Outright discrimination of foreign ownership

-Networking capability

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situation where foreign production networks were considered to be secondary to domestic networks. However, in neither situation does the mere access to either technology or markets guarantee increasing returns to domestic growth. In the ‘hard bargaining’ context there is an imminent danger of loss in dynamic technological capability due to the limitations of learning behind protective barriers. In the ‘sourcing’ context countries could risk finding little room for manoeuvre and thus be stuck into initial comparative advantage and low value-added positions. Being integrated in terms of markets and even production networks does not ensure that countries and firms will be integrated technologically. Globalization is an uneven and multidimensional process whose final result may be impoverishment rather than prosperity, due to market integration but technological marginalization. Technological marginalization denotes a situation in which domestic enterprises are not to any significant degree involved in a process of technological accumulation at international level. This is not only a problem for developing countries. Even for developed countries there is a danger that global sourcing could be a good substitute for local or regional sourcing.1 In the sourcing context the main problem is how to move domestic firms from technologically simpler to technologically more demanding and complex sourcing positions. The higher the sourcing position the more likely it is that a country will receive more knowledge inputs. More spillovers will also be created through the upgrading of the sourcing position. In a globalized context, the entire ‘contract bargaining’ approach as a way to achieve these objectives is much more limited, though not impossible as we argue later on. The main policy focus in technology transfer has now shifted from price and ownership over technology towards the more autonomous 1

Morgan, 1994.

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and technologically higher positions in the international production networks. Which global companies will locate new plant or source components or assemble them in a host country is becoming more important than the terms of that relocation or the terms on which the sourcing is based. Attracting good companies in growing sectors is likely to ensure access to much larger production and technology networks. Policy no longer aims to discriminate against specific technology transfer channels, except in a few sectors still considered as ‘strategic’ in some countries.2 The hierarchy of channels is not seen as important as nurturing the multiplicity of those channels. As the technology becomes systemic, its adoption and assimilation occurs at numerous receiving points and the policy aim is to increase connectivity between the national system of innovation and the foreign S&T base. This is now facilitated through electronic networks. They represent new opportunities for technological integration through access to a world-wide web of knowledge as well as access to new mechanisms of exclusion for developing countries. The increasing possibility of accessing foreign markets is not necessarily accompanied by increasing access to technology. The issue of access to technology was the focus of international relations during the 1960s and 1970s but has since then disappeared, to be replaced by concerns about the softness of intellectual property rights systems in developing countries. This reflects the changing balance of power and is indicative of continued concerns over the control of rents coming from the generation of technology. However, the emphasis on access to technology per se either in the form of international agreements on technology transfer in the past or in WTO regulations on intellectual property rights today seems to miss the point that the access to technology is closely interlinked

2

UN, 1994, p. 309.

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with the access to markets. Technology is embodied in so many different forms that access to it can be realised only through continuous access to markets and close proximity to buyers or suppliers. New regional trade groupings may be considered as a more significant obstacle to technology transfer than the imperfect international or national regulations which aim to regulate elements of technology transfer. How to ensure that access to foreign markets as well as reciprocal openness of domestic markets will be coupled with technological upgrading is a new policy concern for developing countries, brought about by globalization. At a micro level, globalization has affected the organizational scope and structure of international production, and particularly the spread of regional production sourcing by TNCs. Production tasks have become more fragmented across national boundaries, leading to deeper production and technology specialization. This fragmentation and specialization is bringing into closer contact members of production networks in different countries. Closer interdependence at the production level, induced to a great extent by the requirements of new technologies, requires new forms of inter-enterprise organizations in which proximity but also flexibility can be combined. Learning becomes a collective process often undertaken on an international or even global basis. This stands in sharp contrast to the economic context where learning was basically of an infant protection type confined to domestic enterprises and domestic markets. This led to specific intra-firm learning paths where the scope for imitative technological development was much more in evidence than today. TNCs have also adjusted their strategies by establishing miniature replica factories to serve protected markets. In the poor conditions of developing countries public R&D infrastructure played an important role. National R&D institutes were important in imitative technological development and in attempts to ‘unpack’ imported technology. Disregard of the firm-specific character of technology was strengthened through the

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public ownership of large national enterprises whose role was to serve broader development objectives. The policy view underlying the emphasis on S&T infrastructure as a source of technology was that technology is similar to a commodity. This was not confined only to developing countries but reflects a knowledge frontier of the time where the complexity of technical change was not yet fully understood. An increasing inability to make public R&D institutes relevant to industry needs in most developing countries led to their restructuring. With increasing access to technological services from abroad they had to orient themselves more towards the current and future needs of enterprises. Unlike in the import-substitutive environments, firms in the liberalized trade and investment environment cannot grow if they rely only on intra-firm learning. Studies of technological capabilities in developing countries (Section 4.3) have shown the existence of an intensive process of intra-firm learning. However, links with foreign buyers and constant feedback from foreign markets are crucial if enterprise is to move from a simple to a complex technology sourcing position. When technological change is fast, learning behind a protective barrier based on domestic demand alone is markedly inferior to learning based on continuous linkages with foreign markets. This has lent importance to linkage capability or the ability to source and co-operate. While acquiring production capability could still be achieved ‘in-house’, acquiring design capabilities in many sectors is impossible without developed networks of partners and sourcing capabilities. The globalization of enterprises from developing countries suggests that these capabilities will be essential for their survival and growth in the ‘sourcing context’. Public policy control over technology transfer was much stronger in the past in developing countries. In the ‘hard bargaining’ context it was possible to pursue a coherent policy of technology transfer as most of the issues were determined at the ‘border’ (protection,

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price, ownership, legal conditions). However, with the privatization of large national enterprises and deregulation of their domestic and foreign activities, technology became much more an issue for private enterprises. The concern over this change is expressed by Enos et al. (1997) when they point out that the shift from the external and collective choice of technology to an internal and individual one may remove the transfer of technology from the public arena. Our response to this is that control over technology remains a public concern but the nature and forms of that public concern have changed significantly. In the globalized economy countries are increasingly unable to exercise fully independent macroeconomic and foreign trade policies. The spreading of ‘deep integration’ is also creating difficulties for governments in controlling trade in technology as these elements are not traded at a ‘border’, but through TNC structures or through a variety of sourcing arrangements (subcontracting, alliances) and through informal transfers from buyers. Also, in the sourcing context the possibilities for outright discrimination against foreign ownership are reduced through the acceptance of national treatment of FDI. The liberalization of trade and investment policies have reduced the control of technology transfer at the border or through trade policy. The only remaining instruments of indirect control over technology on the ‘border’ are performance requirements and investment incentives. However, the scope for these policies is severely restricted for developing countries, except for big, continental economies. In the sourcing context technology transfer objectives will be pursued more through domestic regulations rather than through instruments of trade or investment policy. The scope for some domestic regulations may be further reduced through harmonization of domestic policies which are considered as ‘unfair’. A new role for government is to be found much more in stimulating public – private co-operation and integration of what are considered as domestic enterprises and organizations into a global

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economy. From being a controller of technology transfer, governments will have to develop a role as supporters or organizers of technology networks. Access alone to production networks will not distinguish successes from failures. Mechanisms by themselves do not generate growth and technology acquisition. Much more than specific policies, the final result will depend on the implementation abilities and on the kind of social organization and governance mechanisms that will be appropriate to a world economy based on increased interdependencies. So far the two situations have been summarized in rather contrasting terms. However, situations in the real world are not amenable to such sharp dichotomies. Part of the problem has to do with the methodological need to contrast changes in order to emphasize their differences. The other part of the problem has to do with the complexity of technology transfer as an area of analysis where common tendencies cut across very many different national situations, some of which might contradict stylizations which are applicable only as general tendencies. Indeed, in many cases governments are concerned with contract bargaining issues. When Chinese and Korean officials negotiated with European partners for the transfer of the design and technology for new aircraft, they wanted to maximize the distribution of technological rents which came through that specific contract.3 When Daewoo bid for a car factory in Poland they negotiated with the government over income tax levels and import duties in 4 preparation for the final agreement. Usually such complex contracts, only part of which is fully formalized, cover several elements in the package including possible trade protection, tax 3

Financial Times, ‘Air rivals unite in Asia contest’, 8 September 1995; Financial Times, ‘West view for stake in Sino-Korean jet plan’, by Tony Walker, 15 August 1995.

4

Central European Business Weekly, ‘Mega Deal’, 8–14 September 1995.

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incentives, etc. Hence contract bargaining at the government level is still an instrument for control of technology transfer. Today it is reduced to specific ‘strategic’ sectors. However, the technology transfer policies are no longer institutionalized around ‘contract bargaining’ as the principle of policy but around ‘sourcing’. Control over technology remains important in the sourcing context as well, but the mechanisms of control over technology are different. In terms of policy they are not expressed through an institutionalized system over control of technology transfer contracts. Even when the control of technology transfer remains formalized in this way it no longer constitutes the main concern of technology transfer policy. We tried to show in previous chapters that the economic context has changed to such an extent that the method of technology upgrading has also been changed, which in turn has made previous policy assumptions obsolete. Whether the current policy assumptions reflect the changing nature of technology transfer is an issue which we tried to open up in this book but whose understanding would require far more empirical and conceptual research. In the last section we provide some ideas in this regard.

7.2. TECHNOLOGY TRANSFER RESEARCH IN A DYNAMIC, EVOLUTIONARY FRAMEWORK In this final section we outline the main directions for further research on technology transfer within the globalized economic context. The core problem of technology transfer policy in a globalized economy is how high-value inbound TNC activity and sourcing links are likely to be attracted into innovative and productive sectors and thus be caught up in a ‘virtuous circle’ of asset accumulation and clustering. This issue cannot be handled in a static framework of costs and benefits but only in a dynamic, evolutionary framework which is better able to handle dynamics and

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processes in general. However, these processes occur in different national institutional contexts where the strategic behaviour of countries, large companies and technological and economic opportunities co-evolve in a complex fashion. If anything the area of technology transfer shows the importance of strategies in converting opportunities for sourcing and the entry of foreign investors into highly specific national advantages. This suggests that, in the area of technology transfer, we are far from having a set of stylized facts as national contexts and new interfaces between national and global economies produce such a variety of outcomes, making it very difficult to generalize about transfer mechanisms and transfer as such.5 Technology transfer processes are contingent on so many other variables that any generalizations would hold true only if linked to stylized facts concerning technology, trade and growth. In order for it to have any theory and policy relevance, research on technology transfer must be closely linked to research on trade, technology and growth as its referential frame. One possible avenue is to distinguish between qualitatively different types of growth. Using Dosi, Pavitt and Soete (1989), distinctions between Ricardian, Keynesian and Schumpeterian based adjustment processes could be linked to different roles of TNCs and different factors in a global economy. How these growth paths are linked to technology transfer, or how they can be shifted towards more dynamic paths through technology transfer, should be an issue for research. Without closing the knowledge gap on linkages between technology, trade and growth and technology transfer there are

5

For an excellent summary of the past experience in technology policy, including technology transfer, see Bell (1997).

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strong limitations to an analysis of the technology transfer area per se. Transfer cannot be understood outside the national growth context and factors of national absorptive capacity, and in an increasingly globalized economy, without understanding how new ‘institutional interfaces’ like trade and financial liberalization (macro), and new forms of organising international production (micro) are changing technology, trade and growth links. Although faced with such methodological constraints, there is room for research on the actual processes of technology transfer, the role of TNCs, and sourcing, in the restructuring or retardation of countries and regions. TNCs may well increase local capacity, assist the dissemination of new knowledge to suppliers and customers, raise the quality of output, and act as a spur to local rivalry and thus reinforce the industry’s ‘virtuous cycle’. At the same time, inward FDI may not only drive out local competitors, but also restrict the creation of new technology by local suppliers, even if more technology disseminates to them from the TNCs. This reduces domestic dynamic technological capabilities and shows that, in a global economy, managing openness and protection still remains an issue. In short, TNCs and sourcing links may enforce ‘virtuous’ but also ‘vicious’ circles of increasing dependency on external sources of supply. However, as we pointed out in this study, our understanding of these mechanisms is sketchy. How countries get ‘caught-up’ in the dynamic learning process, or get marginalized through integration into a global economy, is an area of research whose results would be of high policy relevance. By looking at the interplay between domestic and technology transfer factors and their outcomes in terms of ‘vicious’/’virtuous’ circles, it would be possible to identify the levels and factors of linkages which arise from FDI and sourcing relationships or their

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absence.6 Methodologically this research should make sufficiently realistic assumptions to take into account the importance of historical context and strategic behaviour. Do FDI and sourcing arrangements have the potential to push a country onto a ‘virtuous path’, even when the initial absorption capability is low and structural weaknesses prevail, or are they ‘catalysts’ only when the process of domestic capability building is present? In which cases do foreign take-overs have destructive effects and in which do they contribute to technological accumulation? In which cases does the type of relationship between domestic and global economy actually damage the cohesion and interactiveness of national or local production and innovation systems, and in which cases does it encourage the ‘virtuous’ circle? How does a globalized economy change these processes? Is there a convergence in issues and perspectives in technology transfer analysis between developed and developing economies in a globalized economy? Do FDI and sourcing arrangements transform the ‘vicious circle’, or at least contribute to that transformation, or they are only the consequence of an entirely domestic process of technology accumulation? These are questions and issues that would enrich our understanding of how the technology transfer process is embedded in different growth patterns. The relevance to policy and theory of such stories and analyses would primarily come from understanding how these are linked to trade, technology and growth rather than from the stories themselves.

6

These might resemble Lall’s (1980) typology which is based on the distinctions between: Low technical linkages (quality control, communication of information about input specification); Medium technical linkages (joint development of component design, comprehensive technical assistance) and High technical linkages (entirely new designs).