Technology absorption: an overview Sanjaya Lall Professor of Development Economics Oxford University, UK

What is technology absorption? Most technology in ‘latecomers’ comes from abroad, in mixture of two forms: Embodied: in capital goods, patents, blueprints, designs, models and so on Tacit: knowledge that can be ‘transferred’ only by close interaction and learning by new user Using technology efficiently thus needs conscious effort by the enterprise & also the ‘system’ in which it works (suppliers, customers, technology support, training institutions and so on)

Technology flows take many forms Non-contractual: Public knowledge, fairs, conferences, migration, export activity and informal networks Contractual: FDI related: (internalized) transfers within multinationals or joint ventures with MNCs Arm’s length: equipment imports, turnkey projects, licensing, subcontracting, franchising and other contracts

Role of internalized technology flows is growing… Innovation is highly concentrated, by region, country and enterprise MNCs lead in innovation: most R&D is performed by large firms and most innovative firms are globalized MNCs dominate technology flows in all forms, but form depends on nature of technology: newest and most valuable technology is internalized, others licensed

Concentration of R&D by region US: 41% Japan: 24% EU big 3: 20%

Concentration of R&D in US by firm (2001) Only 68 manufacturing firms out of 16.8 thousand with R&D (0.4%) account for 49% of total enterprise R&D spending in the US. Only 329 manufacturing firms (2%) account for 71% of R&D. The level of concentration has been stable or rising over time – despite the rise of technology-based SMEs

Role of MNCs in global economy is growing steadily FDI is growing faster than other economic aggregates: national investment, GDP or exports MNCs control about 2/3 of world trade. About 30-40% of this trade is within MNCs, and their role is particularly large in high-tech manufacturing MNC export activity is taking new forms: ‘global production networks’, with very fine vertical specialization by function/component between countries Local companies are also involved in global production networks, but only if they have very high levels of technological capabilities – and form strong ties with MNCs to access and absorb their technological know-how and management skills

MNCs are globalizing innovation: Share of foreign affiliates in national R&D, 2001

‘Triad’ MNCs spend large sums in R&D in each others’ economies Flows of R&D in the Triad, 2000 (millions of PPP dollars) USA BERD: 199,539 EU BERD: 113,288 Japan BERD: 100,777 Source: OECD data 12,344 16,366 436 1,595 1,433 1,317

US MNC R&D in developing & transition economies (current $ million)

What this means for developing & transition economies… FDI is the most efficient way to access foreign technology if countries want ... New, fast-changing proprietary technologies not available at arm’s length Rapid access to new technology and subsequent upgrading, without local effort Non-core components of operation (i.e. management, marketing, finance etc) Access to MNC foreign markets, particularly to global production networks

For local firms… Licensing or joint ventures are desirable if: Local firms are strong in base technologies but need particular new components of technology They specialize in activities with stable technologies, where state-of-art technologies are available at arm’s length They can export through foreign buyers (low technology products), sell undifferentiated products directly or have established brands They subcontract to MNCs (OEM) or supply local components

Attracting FDI, particularly export-oriented production networks…

FDI location: ‘Traditional’ factors... Some remain relevant Stable, transparent and welcoming policies Good macroeconomic management Large and/or fast growing markets Primary resources Cheap and trainable labour But others are becoming less important Cheap unskilled labour Protected markets

‘New’ factors in FDI location... Human capital: new skills, flexible practices, training provisions, ease of expatriate entry Technology systems: MSTQ & R&D strongly linked to and supportive of enterprises Strong supplier and service network Modern ICT infrastructure and logistics Low ‘transaction costs’ (entry, exit, expansion, taxation, customs, employment) Strong legal systems and property rights Openness to cross-border mergers & acquisitions Effective FDI promotion, targeting and coordination with supply side policies

Rooting MNCs locally… Attracting FDI is not enough: globalized production is (by definition) mobile Retaining MNCs, esp. in export-oriented activities, needs Constantly rising skill levels Tighter links to more efficient suppliers Greater depth of technological activity, in-house and with local knowledge institutions

How to promote supplier linkages with MNCs? Local content rules often inefficient – and now forbidden by WTO rules Fiscal incentives are costly but can only play an initial stimulating role What works best: Improving supplier capabilities, directly and with MNC assistance ‘Matchmaking’, information dissemination Cluster development strategies

For example, in Malaysia… The Small and Medium Industries Corporation has a Global Supplier Programme to strengthen SMEs not only to become suppliers to MNCs, but also to become global suppliers. This programme provides training in critical skills and incentives to MNCs to ‘adopt’ local suppliers and to help them upgrade skills and technology. Eng Teknologi Holdings Berhad (ENGTEK) has benefited from both programmes. Starting as a supplier of components to the local hard disk drive and semiconductor MNCs, it is now a multinational, with nine companies in four other East Asian countries. ENGTEK has entered into partnerships with several electronics MNCs operating in Penang, which provide it with technical and financial assistance, helping it develop design as well as manufacturing expertise and providing it entry into their global value chains. MNCs also actively create linkages. Intel Malaysia uses its ‘SMART’ programme for local supplier development. SMART has five steps: select promising suppliers on the basis of systematic analysis; provide initial training; allocate business according to capabilities; raise capabilities by technical assistance and training; and help suppliers diversify and develop into global suppliers. Government tax incentives and financial support (worth about $50m a year) have helped this initiative.

Ireland is best practice in ‘using’ FDI to develop hi-tech industry Targeted inward investment strategy: The Industrial Development Authority (IDA) launched industry and company targeting strategy. Sector/industry specialists were used to develop industry-based strategy and meet potential investors. US electronics and pharmaceutical industries targeted in the 1970s, software and international services in the 1980s/1990s; IT, multi-media and e-business in the 2000s. Objective shifted from job creation to promotion of linkages with local firms and attraction of headquarters and R&D National Linkage Programme fosters links between investors and local firms. It covers market research, matchmaking, monitoring and troubleshooting, business development by arm of IDA set up specifically to promote indigenous firms. Aftercare and plant upgrading, concentrated on about 50 key companies in five target industries. IDA targets companies that have a high potential for new investment, or that can leverage investment from other companies. Links are forged with the management to improve plant competitiveness by making sure that the local management is fully informed of Ireland’s advantages. Skills development, which involved the expansion of education so that over 40%of school leavers go on to third-level education (set to rise to 50%). IT and science subjects have been prioritized as part of a proactive strategy anticipating future needs. Computer provision and training in schools have increased dramatically; IDA officers visited every school and written to every parent. Technology policy, including 2000 Technology Foresight Fund with a $1bn plan to boost R&D in information technology and biotechnology. Telecommunications deregulation and a $65bn National Development Plan, with a focus on e-business and infrastructure, also support technology activities. Low corporate tax has been a central to Ireland’s attractiveness for FDI . Corporate tax is currently set at 10% and many exemptions are available.

Creating a technology culture in industry (difficult but necessary) Raise awareness of need for in-house technological activity and R&D ‘Technology foresight’ exercises Benchmarking and technology audits R&D incentives: most countries make R&D tax-deductible expense, many offer extra incentives. Effects mixed, but tax credits linked to incremental R&D seem best

Strengthening the technology infrastructure Metrology, standards, testing, quality Quality standards vital (e.g. ISO 9000) Good standards institutions can help to diffuse technology and quality awareness Advanced standards institutions are withdrawing from testing into basic standard setting and research. They are helping create private service providers.

Metrology (measurement/calibration) is central to quality certification; international accreditation is vital to competitiveness Local metrology capability reduces cost and raises response speed Secondary metrology can be carried out by private laboratories, primary metrology has to be done in public institutions Role for government in providing the public goods and creating private markets

Research & development institutions Most public R&D/universities are delinked from enterprises: different ‘culture’, no incentives and wrong skills But they are an important resource for accessing, adapting, diffusing, creating technology – and for ‘rooting’ MNCs Valuable for hi-tech start-ups and SMEs Vital source of creating R&D skills for industry and breaking ground in generic new technologies

How can knowledge institutions be made more relevant? Privatization of public laboratories Hard budgets, management change Intensive training of staff and incentives to reach out to industry Funded schemes for joint R&D with industry, exchange of R&D personnel Matchmakers to create links with firms, raise their awareness of capabilities and potential

Conclusions Technology absorption needs stable and conducive policy framework Technology access is increasingly linked to FDI – but attracting, rooting and extracting benefits from FDI needs dynamic local firms & institutions Building local capabilities is basic to effective technology absorption: and this needs strong policy support