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Technology absorption: an overview


New, fast-changing proprietary technologies not available at arm's length. Rapid access to new technology and subsequent upgrading, without local effort ... – PowerPoint PPT presentation

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Title: Technology absorption: an overview

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
  • Arms 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 RD is performed by
    large firms and most innovative firms are
  • MNCs dominate technology flows in all forms, but
    form depends on nature of technology newest and
    most valuable technology is internalized, others

Concentration of RD by region
US 41 Japan 24 EU big 3 20
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

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
  • MNC export activity is taking new forms global
    production networks, with very fine vertical
    specialization by function/component between
  • 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 RD, 2001
Triad MNCs spend large sums in RD in each
others economies
US MNC RD in developing transition economies
(current million)
What this means for developing transition
  • 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

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

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 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

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
  • 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

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
  • 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
  • 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

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

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

  • 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 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

How can knowledge institutions be made more
  • 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

  • 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
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