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INTERNATIONAL TECHNOLOGY TRANSFER*

by Nawaz Sharif Basically there are two ways for acquiring new technology: develop it or purchase it. The second way of acquiring new technology is commonly called technology transfer. The important reasons for purchasing technology are(i) little or no R&D investment needed; (ii) quick to get into use; and (iii) technical and financial risks are very low. There are also good reasons for selling technology, such as: (i) increasing return on R&D investments; (ii) technology has no immediate use; and (iii) technology has already been utilized up to its limit. Therefore, technology transfer occurs because of the existence of "buyers" and "sellers". The sellers are called "transferors" and the buyers are called transferees" of the technology transfer process. Technology transfer (TT) can take place within the national boundaries and also internationally. Inside a country TT can occur from one industry to another industry (or one sector of the economy to another) and from one organization to another. International TT can occur between two developed countries, two developing countries and from a developed (or developing) country to a developing (or developed) country. But in every case we must have a transferor, a transferee and some vehicle for transfer. In this chapter, we will discuss TT at the international level, mostly from the developed to developing countries. 1. Patterns and Criticisms of TT During the old colonial system, which came to an end by the close of the second quarter of this century, technology transfer occurred mainly in the primary sector of the economy such as mining and plantation agriculture. There were only a few isolated cases of TT in the secondary sector (such as jute and textile manufacture); they were few because of transportation costs, cheap native labour and nationalist aspirations. However, after their independence, the newly emancipated colonies embarked upon industrialization as a vehicle for economic development. Initially TT took place for the establishment of "import-substituting" industriesmostly in the area of consumer goods. The consumer goods, thus produced, had very little demand within ______________________ *REPRINTED FROM: Nawaz Sharif, Management of Technology Transfer and Development (UN ESCAP Regional Centre for Technology Transfer: Banglore, India, 1983), Chapter 7, pp. 53-61.

the developing country as these were needed only by a very small section of the population which adopted modern life-styles. Therefore, the developing countries moved into traditional industries and wanted to export more of their new import substitutes of finished goods and less of their new materials. They changed their industrialization strategy from import substitution to "export orientation". This was a clear conflict of interest between developed and developing countries. In order to suppress the conflict, some developed countries offered to help ex-colonies in their desire to achieve industrialization and the associated international division of labour. This offer materialized in a "donor-recipient" relationship through "aid". The essence of the aid was to grant some industrialization with the assurance of donor's increasing need of raw materials. Elements of TT to the industrial sector of developing countries were as follows: (a) Feasibility studies and market surveys prior to investment. (b) Determining the range of available technologies to manufacture a product, and selecting the best one. (c) Engineering design of new production facilities. (d) Plant construction and installation of equipment. (e) Production management and marketing. Now, a major portion of manufacturing in developing countries consists of conversion or penultimate manufacture and assembly operation. Core industries (i.e., industries producing capital goods like machine tools), heavy engineering, chemical and basic metal industries are very rare. Even for agro-based industries (such as, sugar, cotton, jute, rubber, tea, tobacco, etc.) machinery for product manufacture are imported. In the infrastructure sector, large dams, electric power stations, transport and communication networks have been built in the developing countries by privately owned transnational companies or public sector agencies of developed countries. These projects were normally financed by long-term loans. Whatever industrialization has taken place in the current set of developing countries, it is largely due to technology transfer. And yet, there is so much unhappiness about it! The following are some of the criticisms against transfer of technology: (1) (2) (3) Imported technologies are often outdated or, in some cases, even discarded in advanced countries. The import of technology has been on disadvantageous terms for developing countries. Most imported technologies are capital-intensive, high energy consuming and polluting.
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(4) (5) (6)

Imported technologies have increased national debt and dependence on foreign technology and capital. Industrialization through imported technology has resulted in the creation of urban elite and causing socio-cultural problems. Imported technologies have pushed many indigenous and traditional technologies into oblivion.

Many technologies have also been imported for rapid growth in the agricultural sector. Some of these are: farm machinery, irrigation technology, pesticides, fertilizer, etc. Here also, technology transfer is criticised for the creation of various societal imbalances, such as: (1) Introduction of tractors led to increased urbanization as the poor were driven from their fields and forced into cities to live in slums and buy expensive cereals grown in the field where they once harvested inexpensive legumes. By using imported technologies, rich farmers got richer while poor farmers had to sell their land. Use of mechanized fishing trawlers by rich people rendered the poor fishermen jobless. Imported storage and distribution technologies have led prime lands to be diverted to "cash crops" for export resulting in shortage of food grains.

(2) (3) (4)

One can list many other criticisms, but it is obvious that all of these criticisms point out to many major failures on the part of the transferee (some were probably inevitable, but some could have been avoided) and also some failures on the part of the transferor (many of which perhaps could have been avoided). There are two parties in the technology transfer processthe transferor and the transferee. Now, let us seek the reasons for some of the avoidable and unavoidable problems of both the parties. There are two fundamentally unavoidable situations: (i) the transferor has commercial advantage; and (ii) the transferee is under time pressure. The commercial advantage comes from the fact that: (a) a few of them own the technologies needed by all developing countries; and (b) in addition to a seller's market situation, they also know how to sell and what to sell. On the other hand, the disadvantage for developing countries is due to the fact that: (a) they have to achieve in decades what the developed countries have done in centuries; and (b) in addition to being in a hurry, they also lack the skill to choose, adopt and adapt imported technologies. Therefore, some of the problems faced in our short experience with technology transfer were inevitable. For example, let us take the case of polluting industries. There is a common belief among many developing countries that pollution is the inevitable price that they should be prepared to pay for
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industrial and economic development. Moreover, pollution is a future problem and hunger is immediate. Because of this, some pollution-generating and hazardous industries have been accepted by developing countries, which are attracted by potential exports and product-buy-back arrangements offered by the transferors. Neither the transferor nor the transferee can be blamed for the outcome! Technology transfer, as it is, has been beneficial for both the transferor and the transferee. However, as far as the negative effects are concerned, unfortunately, the transferee got more than his fair share. Many of these can be avoided in the future if we pay attention to what has been learned so far. It is quite clear now that the most unhappy transferee embarked upon a wrong technology acquisition strategy without properly understanding its consequences. Perhaps it is also true that some transferors took undue advantage of this ignorance on the part of the developing countries! Therefore, for the benefit of both parties, it is essential that developing countries fully understand the process and characteristics of technology transfer, which will hopefully lead to its successful management. 2. The Process of Technology Transfer Besides the transferor and the transferee, the third important element in the technology transfer process is the "linkages" between the two partners. The linkages are the ways and means of transferring technology. Many diversified linkages have been used to transfer technology from the developed to developing countries. Among them, the following are the most important: (a) Direct Linkages 1. Operation of transnational corporations. 2. Licensing arrangements. 3. Hiring experts and contractors. 4. Training of technical staff abroad. (b) Indirect Linkages 1. Purchase of machinery, equipment and components. 2. Exchange of information at international meetings 3. Flow of books, journals and other publications. 4. Exhibition and trade fairs. Developing countries use many or all of these linkages simultaneously. The actual choice of one or several of these ways is usually dictated by the nature of the technology desired and the existing technological capability of the developing
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country. In general, in most developing countries there is a paucity of local technical skills, particularly in the production sector. As a consequence, the process of industrialization has been less through indirect linkages and more through direct linkages. Moreover, it is mostly old and less productive technologies that are normally available through the indirect linkages. Traditionally, the most frequent direct linkage in the past has been the socalled "investment package" together with management, marketing services, and equity and debt capital provided by the transnational corporations (TNCs). But, as developing countries became aware of the difference between mere geographical or interfirm transfer and genuine indigenous assimilation of technology with mastery, control and improved ability to gain future autonomy, they have been striving to find ways and means to "unbundle" package deals. Several levels of "unpackaging" have evolved over the years. At one end of the spectrum, it takes the form of "jointventure" between a national and a foreign enterprise tied with contractual licensing arrangements. The licensing allows access to the total technological system of production to the buyer in the developing country. At the other end is the new comer on the stage, the public enterprise in developing countries attempting to purchase various components of a production process from several independent suppliers. Purchasing technology in the most unpackaged form requires indigenous skills to design and put together a production process from its individual components, to operate the overall production system profitably, and to handle technical maintenance, repair and improvement functions. This skill is frequently absent in developing countries, particularly for large-scale and complex production systems. Hence, developing countries have to purchase these skills from foreign contractors (or hired experts). A close link exists between licensing and training of local staff. Many licensees are more interested in the technology transfer clauses related to training than with those of products and processes. Especially in process technologies, training at developed country factories and laboratories is vital for TT. Besides enhancing a country's capacity for fruitful assimilation of imported technology, training is also a valuable step towards eventually acquiring the ability to produce one's own technology. Of all the linkages available for TT the most important ones are all peopleembodied. Looking back into history, we find that the earliest means of TT was by individuals who moved from place to place, bringing their technology with them. This was so in the case of crafts technology, and when industrialization occurred, transfer of knowledge through individuals still remained important. However, unfortunately for developing countries, technologically skilled prople are not moving from developed to developing countries but from developing to developed countries. Until developing countries can build up their technical manpower, TNCs provide the most powerful vehicle for TT through either direct investment or various licensing arrangements. This is because they are the real owners of modern
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technologies. We have discussed previously that technology embodies specialized knowledge, and as such is the subject of appropriation and control by those who own it. The international distribution of ownership of patented knowledge indicate that the overwhelming majority (over 80%) is held by six developed countriesthe United States, the Federal Republic of Germany, Japan, France, the United Kingdom and Switzerland. And in these countries, virtually all patents related to industrial activities are owned by large national and multinational corporations of the private sector. The patent right is used by TNCs as a means to achieve monopoly privilege. 3. TNCs and Developing Countries Transnational corporations from developed countries are increasingly moving into developing countries. Their main objective is increasing their profits. This search for profit, particularly using the resources of appropriated technical knowledge, guides their decisions. Basically, there are tow ways in which TNGs operate in developing countries (i) direct investment package and (ii) licensing. In many circumstances the direct investment package method is the most practical way for TT. It is specially well suited to either the first stage of industrial development or for fast moving technologies. Its main advantages for developing countries are the minimization of risks and direct access to all supportive resources of TNCs. The disadvantages primarily stem from the poor bargaining position of developing countries. It has been observed that advanced technologies are kept as closely guarded secrets in the early stages of the technology life cycle. Normally matured or obsolete technologies are transferred to developing countries. Critics also argue that this formula costs too much in the long-run and the technology transferred may be accompanied by restrictive conditions on its use. The direct investment package is almost certainly associated with little or no transfer of technical skills. This is the most serious drawback of this method of TT for future national technological self-reliance. Therefore, alternative arrangements have to be made for indigenous skill development. And once some technical skills have been acquired, it may be beneficial to purchase good second-hand machines for TT. In developed countries, because of rapid technological obsolescence, installed machinery becomes no longer profitable to operate even though it may be physically in good condition. Such machinery could be bought cheap, and because of the relatively low wages and the attractive tariff protection given, they could be profitably operated in developing countries. Many TNCs, which have favoured only direct investment with sole ownership for maximum control, are now entering into joint-ventures and licensing arrangements. There are various reasons for their decisions to license in developing countries. Some of these are: (i) To obtain additional earnings from technologies whose period of competitive advantage in primary home market is over.

(ii)

To lower production cost by capitalizing on the new inernational division of labour, and thereby maintain competitiveness in world markets.

(iii) To gain access to markets with protectionist barriers. (vi) To take advantage of existing surroundings for testing and improving certain technologies (v) To improve the corporate image.

A firm in the developing country (licensee) has various motives in entering such contracts. They buy because: (i) (ii) they lack capability to produce technology locally due to both skill and resource constraints. local market size does not justify minimum required investment.

(iii) they can capitalize on the new international division of labour. The basic terms of licensing agreement depend on the nature of technology and also the host country environment. The terms are negotiable. The classical formula provides for a down payment upon the signing of the contract and royalty payments computed as percentage of net sales and a yearly minimum payment. Straight licensing has excellent possibilities when the licensee has achieved a certain level of industrial experience and sophistication, when the local infrastructure is adequate, and when the available markets are large enough to enable the licensor to recoup his cost and make an honest profit within a reasonable period of time without being obliged to charge excessive rates. There are a number of ways by which developing countries defray the cost of technology transfer. Some of these are: (i) (ii) Direct payments for the purchase of technologies. Royalty payments under license and contractual agreement.

(iii) Payment for technology by supplying the raw materials needed by the owner of the technology. (iv) Payments by supplying the products manufactured by the licensee. (v) Payment of profits on capitalization of know-how and profit repatriation.

(vi) Over-pricing of imports of intermediate products and equipment. (vii) Inflated valuation (over-invoicing) of imported capital and other technical equipment.
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(viii) Transfer of technology tied-in with export sales of the licensor (indirect payment). Although TNCs have played a major role in technology transfer to the developing countries, there have been criticisms. Some of the common criticisms are: (1) Grossly unfair contractual arrangements (a) (b) (c) (d) (e) (2) Tied purchases of imports; Restrictions on exports; Guarantees for profits, royalties, tax rates and rates of exchange; Controls on competitive imports and on local resources; Excessive reliance on expatriate personnel.

Colonial approach to global division of labour (a) (b) Utilizing the cheap labour of developing countries to enhance their competitiveness; Confining developing countries to low-cost, labour-intensive technologies, while retaining the monopoly of high technology industries.

(3)

Leading to deceptive industrialization (a) (b) (c) Impart technologies to suit their needs and not the needs of the developing countries; Generate economic dependence at a new level instead of economic independence; Draining the country of its resources in exchange for few and temporary high employment opportunities and production of consumer goods.

(4)

Guarding superiority through complementation schemes (a) (b) (c) Setting up enterprises with incomplete production cycles in different countries to retain their (TNCs) technical superiority; Spreading out operations to safeguard themselves (TNCs) against political crises. Gain advantages by introducing competition among developing countries.

(5)

Perpetuating technological subordination (a) (b) Keeping developing countries as a market for their obsolete and secondhand machinery; Influencing life-styles and cultivating demand for non-essential imports.

(6)

Exerting undue influence


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(a) (b)

With sophisticated management skills and technological know-how, they are able to exert considerable influence on policy makers in developing countries; Financial resources are made available to influence public opinion through mass media.

On the other hand, the problems frequently encountered by TNCs in their involvement with developing countries are also many. Some of these are: (1) Basic commercial problems (a) (b) (c) (d) (2) Inadequate protection of property rights, both patented and unpatented, in many developing countries; Difficulties in securing an adequate return on foreign investment due to unstable economic condition in many developing countries; There is a structural problem in most developing countries due to the scale of production and market size; High commercial risks are common in developing countries.

Skill transfer problems (a) (b) (c) Lack of adequate R&D infrastructure in developing countries; In many developing countries R&D activities are concentrated in national institutions, which are engaged in non-relevant activities; Lack of qualified manpower for training;

(3)

Political pressures (a) In their home countries the TNCs are accused of "exporting jobs", "giving away valuable assets", and "opening up" the country to foreign competition; In the host countries the subsidiaries of the TNCs and their expatriate staff become hostages.

(b)

Many conflicts in technology transfer arise from a discrepancy between benefits anticipated by the two parties. Nevertheless, licensing contracts continue to be signed in large numbers because developing countries need technology and TNCs seek business opportunities. 4. Management of TT Technology transfer represents the expression of a choice of developing countries to import technology rather than to develop it within the country. It can be effective only through proper management. We have already mentioned a lot of issues and problems with TT. Let us now present a few strategies for developing countries.
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In developing countries industrialization is necessary even though it does not provide unlimited opportunities for absorbing surplus labour. To facilitate industrialization they will have to depend heavily on technology transfer. In earlier sections of this chapter, we have discussed that this strategy of industrialization through foreign technology import has, in the past, encountered many failures, such as (i) increased foreign control over the productive infrastructure of national economy; (ii) increases in energy, capital goods, spare parts, and raw materials import costs; (iii) increases in national external debt; and (iv) no progress towards technological self-reliance. There are two basic reasons for these failures: (i) developing countries, which purchase modern technology often do not have a detailed idea of what kind of technology is being bought and what will be the consequences of its application in primitive environment with, nonetheless, high aspirations, and (ii) developing countries have often failed to develop local technological infrastructure for the assimilation of imported technology. Therefore, what is necessary is a combined strategy of technology transfer and development of indigenous technical skill. Moreover, transfer of technology can never be a wholly adequate substitute for independent R&D activities. The two can most fruitfully complement each other. Development of appropriate technology and TT ought to be regarded as part and parcel of the innovative activities. Learning from the experience of the Japanese, a few principles for effective technology transfer are: (1) Selection of technologies to be imported from foreign countries should be determined by a correlation between national needs and usable resources available in the country. Imported technologies need to be applied after adapting them in such a way that they fit local surroundings. Repair, limitation and improvements in introduced technology should be done by local trained manpower. Hired foreigners (not foreign experts associated with aid or assistance programmes) can give effective training for manpower development.

(2) (3) (4)

Technology advancement is a continuing process, and change must be accomplished by constant improvement, diversification, and specialization. To facilitate this advancement process, it appears inevitable that, in certain areas, sophisticated technology has to be introduced, despite the prohibitive costs involved. For this purpose, TT through TNCs is very important. However, there are two essential prerequisites: (1) Incentives to the flow of technology depend upon the extent to which benefits can be appropriated.

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(2)

The host country policies are critical in inducing foreign collaboration.

An orderly transfer process can result in faster improvement in productivity and greater spill-over effect. When technology transfer occurs between two countries starting from the industry in which the technological gap is smallest and then moves to other industries where the gap is larger, the process is called the "orderly transfer of technology". In this way it becomes easier to absorb the transferred technology. If the technological gap is very wide, assimilation of transferred technology becomes difficult. Therefore, the time has come to ensure close cooperation among developing countries (which has come to be known as TCDC technical cooperation among developing countries). Developing countries should also exchange information on TT experience. United action by a group of developing countries can effectively counterbalance the power of TNCs. National technology transfer centres can provide valuable guidance to local enterprises in acquiring foreign technologies. The centre can also monitor the range of means of TT, build-up a data base, and help conduct technology evaluation before transfer. Many diversified means are available for transferring technology from developed to developing countries. As the indigenous technological capability increases, the technology transfer potential also increases. The importance of various linkages also changes with the change in local technological infrastructure. Contractors are important actors in the technology transfer process, irrespective of whether the transfer is by direct investment or by licensing to an independent enterprise. Although the role of the contractors will change from industry to industry and from one situation to another, they are generally responsible for the engineering of production system, plant construction, and sometimes they are also involved in the buying and selling of technology. There are various reasons why these engineering and construction contractors are engaged by the parties to the transfer. An obvious reason is specialization. A second reason is simply that few enterprises are large enough to support-in-house teams to engineer and construct their own plants. in many developing countries there is a general shortage of qualified contractors. Thus foreign contractors have to be employed at considerably high cost to the transferee. Developing countries need to develop their own engineering and construction services. Developing countries should also develop its technology transfer "gatekeepers". Gatekeepers are the technical qualified staff who "keep-up" with professional and scientific journals and maintain ongoing contact with the technological community outside the country. The most common way of maintaining contact is through attendance at international scientific and professional meetings and sustained correspondence. A very common problem encountered with TT is the "not invented here" syndrome. Every surrounding is somewhat unique, and hence technologies developed elsewhere can be judged as not applicable. Further, even if the need for
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transfer is accepted, procedural problems arise due to suspicions and pride. The transferee is prone to believe that, since it will have prime responsibility for utilizing the technology, its viewpoints should be given preminence with respect to the transfer procedure. The transferor, on the other hand, is likely to feel that since it developed the technology and probably also brought it to commercialization, it is in a far better position to guide the transfer process. This problem can be reduced if management works for an early consensus at all levels on the need for the transfer and the best method of conducting it. An interesting further dimension to the "who does what" aspect of technology transfer is the division of the transfer functions between transferor and transferee. Initially, the transferor performs a good deal of the transfer activities, and this seems consistent with general notion of TT. However, the transferee can never escape the learning activities required to understand the technology. Gradually the transferee should try to do everything. 5. Partnership with Understanding For a long time to come, the industrialization process in developing countries will be very much dependent upon TNCs for technology transfer. It is, therefore, essential that better understanding be reached between the transferor and the transferee. This is what is meant by partnership with understanding. We need to understand the basic facts and realities of technology transfer. In this section we list some of those important characteristics: (1) Technology transfer process is guided by a "need-resource" relation. When new national needs appear, there is a strong incentive for innovation. If the country does not have the capacity to innovate, the required technology has to be introduced from outside. In order to make such a transfer the country must provide transfer resources, such as skilled manpower, funds, and transfer linkages. For the transfer to be successful, the country must be able to supply or augment the necessary transfer resources when the need arises. The opportunity cost of the technology is to be paid for eventually in one way or another, even when the transfer is published as being a generous gift. To a great extent the transfer is a "people-oriented" phenomenon, and its success, in no small measure, depends upon the existence of close interrelationships between the transferor and the transferee. Technological knowledge is cumulative in growth, transnational in origin, transmissible across national boundaries and irreducible in supply upon transfer. But transferred technological knowledge can generate business competition. Technology in most industrialized countries of the Western world has been developed and is owned by the private sector, in all but very special cases.

(2) (3)

(4)

(5)

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(6)

Technology has a certain recognized value in the international marketplace. It is a commodity with life-cycle. It is very expensive to develop, and hence cannot be given away without cost recovery. Technology transfer is a multifaceted, amazingly diverse and constantly changing process with much variations. Buying technology can either be the most useless outlay or the best of possible bargains depending not only upon the ability of the transferor to relay it but, above all, upon the receptivity of the transferee and its ability to make good use of it. The existence of a sound infrastructure is generally an essential ingredient for accomplishment. TNCs can be very efficient transferors of technology, provided they can rely on a certain continuity and can earn a reasonable return on their most valuable assettechnology.

(7) (8)

(9)

(10) TNCs are likely to have little real interest in developing host country R&D capabilities. But they have to learn to be as sensitive and responsive as possible to the needs of the transferee. (11) TNCs must stop trying to export their own corporate dogma and demonstrate some flexibility. (12) Using less qualified people (under the "foreign expert" components) for activities in developing countries generally results in disasters. (13) No country, and certainly no corporation, can have a monopoly of all technologies. (14) Restrictive conditions on the transfer of technology imposed by the licensor can be as unhealthy as those imposed by the governments of transferee. Perhaps most important point to be remembered by both parties is that international technology transfer is the result of an agreement between a transferor (who has technologies for sale) and a transferee (who wants to buy technology), where the agreement is reached on the basis of prevailing market situation and mutual understanding. Expecting anything more than what has been agreed upon is wishful thinking! ***

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