Technology absorption: an overview

1
Technology absorption an overview

• Sanjaya Lall
• Professor of Development Economics
• Oxford University, UK

2
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)

3
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
• Arms length equipment imports, turnkey
  projects, licensing, subcontracting, franchising
  and other contracts

4
Role of internalized technology flows is growing

• Innovation is highly concentrated, by region,
  country and enterprise
• MNCs lead in innovation most RD 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

5
Concentration of RD by region
US 41 Japan 24 EU big 3 20
6
Concentration of RD in US by firm (2001)

• Only 68 manufacturing firms out of 16.8 thousand
  with RD (0.4) account for 49 of total
  enterprise RD spending in the US.
• Only 329 manufacturing firms (2) account for 71
  of RD.
• The level of concentration has been stable or
  rising over time despite the rise of
  technology-based SMEs

7
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

8
MNCs are globalizing innovation Share of foreign
affiliates in national RD, 2001
9
Triad MNCs spend large sums in RD in each
others economies
10
US MNC RD in developing transition economies
(current million)
11
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 arms 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

12
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 arms 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

13
Attracting FDI, particularly export-oriented
production networks
14
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

15
New factors in FDI location...

• Human capital new skills, flexible practices,
  training provisions, ease of expatriate entry
• Technology systems MSTQ RD 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

16
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

17
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

18
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.

19
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 RD
• 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 Irelands
  advantages.
• Skills development, which involved the expansion
  of education so that over 40of 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 RD 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 Irelands
  attractiveness for FDI . Corporate tax is
  currently set at 10 and many exemptions are
  available.

20
Creating a technology culture in industry
(difficult but necessary)

• Raise awareness of need for in-house
  technological activity and RD
• Technology foresight exercises
• Benchmarking and technology audits
• RD incentives most countries make RD
  tax-deductible expense, many offer extra
  incentives. Effects mixed, but tax credits linked
  to incremental RD seem best

21
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.

22

• 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

23
Research development institutions

• Most public RD/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 RD skills for industry
  and breaking ground in generic new technologies

24
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 RD with industry,
  exchange of RD personnel
• Matchmakers to create links with firms, raise
  their awareness of capabilities and potential

25
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