CHAPTER 1: INTRODUCTION

1.1 Introduction:
It is widely acknowledged that transfer of technology has played a key role in the economic and
industrial development of any nation. It seems that less Developed Countries (LDCs) can increase
their productivity and efficiency levels through the acquisition of technical knowledge and skills
from the developed countries. The effective transfer of technology enables these countries to
utilize their natural and human resources efficiently through transformation of inputs into outputs.
It also enables than to build up their technological capabilities by importing and adopting foreign
technology. Technology transfer is also seen as an important strategic variable which must be
integrated into the national development planning of LDCs. As the experiences of some East Asian
countries during the past three decades show, these countries could increase their output, upgrade
the skills of their labor force, and accelerate the process of industrialization through the adoption,
adaptation, and absorption of imported technologies.
Technological change has also played key role in the overall economic and industrial growth of
developed countries in the past. The fact that the current developed countries could increase their
technological levels over the Last two centuries indicate that LDCs can also catch up with
technologically advanced countries. It can be said that LDCs in the current situation can take the
most advantage from the availability of existing technological resources and therefore do not need
to reinvent the wheel.
The transfer of technology has introduced high-productivity techniques and in many cases
encouraged technical change in LDCs. The acquisition of foreign technology can also contribute
to improving competitiveness in the local as well as the international markets for these countries.
However, while the development of indigenous technology should be encouraged, technology
transfer can be considered as a vital process of industrialization for LDCs. Despite the great
importance of technology transfer in the process of industrial and technology development of
LDCs, there have been some general problems in the process of effective and successful
technology transfer. These problems, which include mainly the lack of absorptive capacity in the
recipient country and unwillingness of the transferor in transferring real technology and technical
know-how, have led to unsuccessful technology transfer. Therefore, it is necessary for these
countries to promote their local technological capability in order to adapt and absorb foreign
technologies efficiently for their local needs. LDCs should also identify and improve those
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elements of technology in which they are weak. It seems that LDCs prefer to adopt and assimilate
new technologies rather than trying to generate and create them, since, it needs less traditional
R&D, but they still require a high level of technical skills. Unfortunately, there have been few
attempts to formulate and design the appropriate plan and strategies for effective and successful
technology transfer and development. The specific strategy and polity for technology transfer in a
country cannot be separated and isolated (ruin the overall national plan (or its economic, industrial.
and social development. Therefore, the major aims of technology transfer policy should be
concentrated on finding the most appropriate methods to use technology in order to achieve rapid
economic and industrial progress. In this way the LDCs will reduce the technological dependency
on developed conflict in designing appropriate strategies for their technology transfer and
development, LDCs can also draw valuable lessons from the successful experiences of some
Newly Industrialized Countries (NICs) in East Asian and Latin America.

1.2 General Background to the Study of Technology Tansfer:

For many less developed countries, a significant factor contributing to the persistence of low living
standards, rising unemployment and growing income inequality is the highly unequal distribution
of economic and political power between rich and poor nations. These unequal strengths are
manifested not only in the dominant power of rich nations to control the pattern of international
trade but also in their ability often to dictate the terms in which technology, foreign aid, and private
capital are transferred to developing countries.
Other equally important aspects of the international transfer process serve to inhibit the
development of poor nations. One subtle but nonetheless very significant factor contributing to the
persistence of underdevelopment has been the transfer of first and second world values, attitudes,
institutions, and standards of behavior to third world nations. Examples include the colonial
transfer of often inappropriate educational structures, curricula, and school systems; the formation
of Western-style trade unions; the organization and orientation of health services; and the
importation of inappropriate structures and procedures for public bureaucratic and administrative
systems. Of even greater potential significance may be the influence of rich-country social and
economic standards on developing country salary scales, life styles and general attitudes toward

the private accumulation of wealth. The penetration of rich country attitudes, values and standards
also contributes to a problem widely recognized and skilled personnel who were often educated in
the developing country at its great expense. Examples include doctors, nurses, engineers and
economists.
The transfer of technology is a complex phenomenon involving a wide variety of forms including,
the classical, and perhaps the most dominant form which is the transfer by multinational
corporations, in either partly or wholly owned subsidiaries. Another form would be export and
import of capital goods. Although these forms of technology transfer are widely used among the
developed market economics as well, they may not be particularly efficient ways of transmitting
the use of modern technologies between economics at different levels of development. Some
would take the view that they may widen the gap in development between exporters and importers
of technology.
Transferring technology from the developed to the developing countries is an obvious alternative
which should aid the promotion of both economic development and international peace. However,
the situation is not as simple as it seems the main obstacle is the absence of skilled labor force.
Some countries like china and India have these resource, but most other have not. In addition,
social, cultural, and political factors inhibit this transfer. Multinational corporations expedite the
transfer, but they create many additional problems. It is important to examine all these factors
critically to determine an appropriate strategy for economic development.

1.3 Literature Review

There are many different viewpoints on technology transfer. A first distinction can be made
between vertical and horizontal transfer of technology. Ramanathan (1994, p. 253) describes
them as Vertical technology transfer represents a flow from laboratory research through
developmental stages and ultimately to commercialization. Horizontal technology transfer is
essentially the transfer of established technology from one operational environment to another.
Steenhuis and de Boer (2002) distinguish at least 16 types of technology transfer. Their
categories are based on the type of technology that is transferred in combination with the

direction of the transfer, i.e. whether it occurs in a vertical or horizontal manner. From this point
on, our focus is on horizontal transfer of production technology.
Several authors have used the perspective of multinational companies and emphasized the choice
of technology, the channel of technology transfer related to the amount of control that can be
exercised, and the cost of producing in other countries (Al-Ali, 1995; Al-Obaidi, 1993;
Amsalem, 1983; Baranson, 1970; Hirsch, 1976; Hymer, 1976; Mansfield, 1975; Mansfield,
Romeo, Schwartz, Teece, Wagner and Brach, 1982; Stobaugh and Wells, 1984; Teece, 1976;
Teece, 1981;Tsang, 1997; Vernon and Wells, 1991). These focus on one, or at most a few,
strategic issues and how decisions with regard to these have been made. For example Hirsch
(1976) showed that the choice between export and foreign direct investment depends on the
opportunity of a firm to take advantage of its firm specific know-how and the local production
cost. Although the issues treated are fundamental for our understanding of the strategic decisions
for multinational companies, they do not discuss the success or effectiveness of technology
transfer.
Other authors have used the perspective of industrially developing countries and have studied the
appropriateness of technology and the price industrially developing countries were or should be
paying for technology (Bruun and Mefford, 1996; Cooper, 1973; Dahlman, Ross-Larson and
Westphal, 1985; Madu, 1989; Marcelle, 2003; Stewart, 1979; UNCTAD, 1978; UNIDO, 1979;
Wallender, 1979). These studies deal with a few issues for strategic decision making from an
industrially developing country perspective. For example Madu (1989: 121) states that the
MNCs are blamed for transferring inappropriate technology. This is because the technology is
often capital intensive and ill-suited to the local production needs. Although the issues treated
are fundamental for our understanding of the strategic decisions from an industrially developing
country perspective, they are limited in their scope.
Another strand of literature took a more comprehensive viewpoint by looking at the success of
technology transfer, i.e. effectiveness, and identifying a combination of key factors (Agmon and
von Glinow, 1991; Al-Ghailani and Moor, 1995; Chen, 1996; Djeflat, 1988; Godkin, 1988;
Heston and Pack, 1981; Kumar, 1995; Mital, Girdhar and Mital, 2002; Perlmutter and Sagafinejad, 1981; Robinson, 1988; Rosenberg and Frischtak, 1985; Samli, 1985; Yin, 1992). These
studies offer much more insight into the complexity of technology transfer and the numerous
5

factors that influence the success of technology transfer, i.e. whether the receiving company is
able to utilize the technology. For example, Samli (1985: 4-8) provides geographical, cultural,
economic and government factors that influence successful technology transfer. Some factors
have been identified as extremely important such as high culture differences (Hussain, 1998;
Kedia and Bhagat, 1988) and tacit knowledge characteristics (Gorman, 2002; Grant and Gregory,
1997b; Howells, 1996; Marcotte and Niosi, 2000) both leading to difficulties in technology
transfer. In general, these studies add to our understanding of the importance of a range of factors
to the success of technology transfer. However, these studies treat factors as distinct and they do
not relate them to specific activities. This leaves us with a collection of factors whose combined
effects on technology transfer activities are not known. They also focus on effectiveness of
technology transfer, i.e. was the technology transferred, rather than the efficiency of technology
transfer, i.e. how many resources were required to transfer the technology.

1.4 Methodology of the Report:

The data for the report is collected from secondary sources.
Secondary Sources of Data:
Internet websites (WTO, World Bank etc.)
relevant articles
Journals
Websites of different MNCs
Country profile of different LDCs

1.5 Objectives of the Report:

To present an overview of technology transfer.
To understand the factors affecting the success or failure of technology transfer in
developing countries.
To understand why MNCs transfer technology to LDCs.
To evaluate how technology transfer helped both MNCs and LDCs.

1.6 Limitations of the Report:

Time constraint: The main constraint of the study is insufficient time to cover such an
important & interesting study within such short period of time.
Inadequate Access to Information: There was inadequate access to information, which
has hampered the scope of the study.
Secrecy: Every organization has its own secrets that are not revealed to others. Thats why
it was not possible to collect information of most of the selected MNCs for the study.
Personal Knowledge: Limitation of personal knowledge is another limitation. Knowledge
knows no bounds, so this study is incapable to present everything up to the expected level
of depth.
Lack of Information on the Context of Bangladesh: Due to lack of practicing of
technology transferring in Bangladesh, the study could not focus the issue on the context
of Bangladesh.

CHAPTER 2: CONCEPTUAL ISSUES OF TECHNOLOGY TRANSFER

2.1 Defining Technology Transfer:

Hamid Jafarieh, 2001 explained that Technology transfer has been defined initially as the process
whereby technology is moved from one physical or geographic location to another for the purpose
of application toward an end product. This transfer can take place either domestically from one
sector or firm to another or, it can take plate across national boundaries, from one country to
another, which is generally accepted as international technology transfer. According to Gee, 1981
technology transfer is the process by which technology developed for one purpose is employed
either in a different application or by a new user. Kayak, 1985 has defined technology transfer as
the transition of know-how to suit local conditions, with effective absorption and diffusion both
within a country and from one country to another. According to another definition, technology
transfer is the utilization of an existing technique in an instance where it has not previously been
used'. Derakhshani, 1983 defines technology transfer as the "acquisition, development, and
utilization of technological knowledge by a country other than that in which this knowledge
originated'. This definition is similar to that presented by Van Gigch, 1978. He believes that
technology transfer involves the acquisition of "inventive activity" by secondary users. It shows
that technology transfer may not always involve the transfer of machinery or physical equipment.
Knowledge can also be transferred through training and education. Which could include training
on how to effectively manage technological processes and changes.
Technology transfer is the dissemination of technical knowledge, skills, and products from a point
of origin into a broader sphere of use. The term can describe any number of such actions, but
according to David Kucera in Encyclopedia of Business 2nd ed. the main two stages of technology
transfer are as follows:
1. Noncommercial to commercial the transfer of knowledge from research settings such as
universities, institutes, and government laboratories to the commercial sector.
2. Industrial economy to developing economy the spread of knowledge from wealthier,
developed economies to less developed economies.
In general, these stages occur in this sequence, although they can also happen in reverse order or
simultaneously. As the definitions above highlight, the most important aspect of technology
transfer is the underlying knowledge of how technology works and how it can be applied to reallife problems. The skills needed to implement this knowledge in a practical form are also crucial,
9

and it may be beneficial to physically transfer technology as well, but the physical transfer is
usually least important from a technology - transfer perspective.

2.2 Nature of Technology Transfer:

While technology is transferred internally in developed countries and LDCs alike, studies of
technology transfer are often concerned specifically with transfers from the more advanced
economies to LDCs. In this sense, technology transfer is central to the study of newly developing
economies.
In his essay "International Business and the Trans border Movement of Technology," Denis Simon
defined three classes of technology transfer: material transfer, design transfer, and capacity
transfer. Material transfer refers to physical goods ranging from product parts to fully operational
plants. Design transfer refers to blueprints or other types of information used to build products or
production facilities. Capacity transfer refers to education and training not only to operate existing
plants but also to develop innovations in products and processes.
Japan is often referred to as a case of an advanced country that developed in large part through
technology transfer. Previously developed capitalist countries such as Britain, the United States,
and Germany relied to a larger extent on domestically produced technologies. Japan's
developmental success in the postwar years provides a contrast with the patterns observed in many
LDCs. In particular, many LDCs have depended heavily on exports of raw materials, which often
suffer from unstable prices in world markets, and have consequently run up large trade deficits
and suffered from crushing debt burdens. Part of the appeal of technology transfer is that it creates
the possibility for development that is less reliant on native sources of raw materials and is more
self- sustaining. The newly industrialized countries of the Pacific Rimincluding Taiwan, Hong
Kong, South Korea, and Singaporealong with Brazil and India have recently emerged as
significant beneficiaries of transferred technologies.
David Kucera in Encyclopedia of Business 2nd ed., stated that the viability of technology transfer is

determined by the general level of industrial development in LDCs. New technologies are more
readily able to be implemented if similar or complementary technologies have been previously
established. Key among these considerations is the capacity of producers within an LDC to serve
as suppliers of parts or services. Whether a transferred technology can be supported by suppliers
10

within the country has a potentially large impact on the competitiveness of production, given the
potentially higher costs of relying on parts from abroad as well as the greater lead times involved.
In addition, toxin- producing industrial processes are potentially much more problematic in LDCs.
In order to control environmental damage, these processes require pollution- abatement
technologies, which are generally less developed in LDCs.

2.3 Methods of Technology Transfer:

The choice of a technology transfer method should be based on technology analysis, future strategy
of cooperation with a companys supplier, investment resources and technical capacities of the
company to implement the technology. When choosing a transfer method, it is necessary to
understand that the more complex is the technology, the closer should the connections be between
the buyer and the supplier. As noted earlier, technology transfer doesnt end with equipment
delivery. In itself, equipment doesnt generate new competences. The real changes in the
companys work can be introduced by transfer of knowledge, skills, and intellectual property
rights.
The following discussion is about the main technology transfer methods, their strengths and
weaknesses by Denis on August 17, 2013 in Business Development:
Licensing
Licensing is an agreement under which the owner of a patent, trademark or other intellectual
property gives permission to another company to use the technology developed by him (her), in a
certain area during a certain period of time. There are two main types of licenses: 1) one which
grants an exclusive right to use the technology; 2) another with non-exclusive right, which implies
that the patent owner may transfer the right to use the technology to other companies in the same
area. Additionally, the licensing agreement could include a sublicensing clause which permits the
licensee to grant to someone else the right to use the technology. The advantage of buying a
license/patent is that it has lower costs, compared with other technology transfer methods.

11

However, the purchase of a license requires sufficient knowledge, experience, relevant expertise
and manufacturing base for the further in-house technology implementation.
Support Contract
According to this agreement, the technology owner participates in the technology implementation,
providing at each stage of the transfer technical support, as well as personnel training. The
involvement of technology developer in the technology transfer process ensures a closer
cooperation between two parties which favors a complete transfer of all knowledge and skills
related to the technology. In this way, the support contract may be a part of the licensing agreement,
in order to improve the transfer efficiency.
Joint Venture
A joint venture is an agreement concluded between two or more companies in order to execute a
particular business. The joint venture implies mutual assets, management, risks, profit sharing, coproduction, services and marketing. Benefits from a joint venture in case of technology transfer
are the following: long-term cooperation between the parties, motivation of all participants in the
successful transfer, lower costs than if the companies have been working separately. The
disadvantages of a joint venture are often associated with the different vision and goals of both
partners, their inability to be independent in management. Also, companies are not always able to
determine objectively the value of capital contributed by each of them and, therefore, subsequent
profits distribution. (The foreign company provides innovative technology and management
competence, while the local company is familiar with the market and regulation. Finally it is
difficult to determine the value of each asset).
Franchising
Franchising is an agreement where one company grants to another the right to use its trademark
and business model. The buyer of the franchise starts manufacturing and selling the goods
according to the sellers specification. Normally, the company owner of a trademark also shares
its experience in operating and managing the franchised product/technology. The main advantage
of franchising is the fact that the company gets an already-made brand. With the franchised
product, the company acquires a proven business model, knowledge in management and
marketing. The disadvantages are the companys dependence on the technology owner. In most
12

cases, the company has to purchase raw materials, equipment and other products from specific
vendors. It must follow internal rules and procedures of the technology owner. Generally, the
company cannot bring the product to other markets as well as sale the franchise. In addition, the
decline of the franchise owner reputation could have an impact on the company that has bought its
franchise.
Strategic Alliance
A strategic alliance agreement is usually concluded between two or more big companies in order
to use specific skills of each of them in the development of new innovative technologies. Strategic
alliance could be in form of joint laboratories, research programs, production and promotion of a
new product. Typically mutual efforts of different partners give better results than an independent
development of a new technology. During joint operations, each company can get the needed
experience in new areas and in different forms of management. The major weakness of strategic
alliances is the complexity in managing companies with different cultures. There will be at least
two teams of managers with different approaches. The companies may have different goals and
strategies in further business development of the new technology.
Turnkey Agreement
In case of a turnkey agreement, the general contractor is responsible for all the procedures related
to technology transfer, such as technology design, financing, equipment supply, construction and
commissioning. The advantages of a turnkey agreement are that the company concludes a contract
only with one supplier who takes full responsibility for the project execution; except a force
majeure, the project will have a fixed price; the supplier guarantees the performance and the
efficiency of technology. The disadvantages could be the following: company should know in
advance all the features and output parameters which the technology should have after its launch;
a complex or large-scale technology requires a deep knowledge in the corresponding field (in this
case an independent expert organization could be employed to determine the technologys features
and output characteristics); transfer price under a turnkey agreement is generally much higher than
with any other method (the more risks the supplier takes, the higher the price is); during the transfer
implementation, a company doesnt have full control over the progress and quality of each stage
of the transfer; contractors financial problems may lead to the project suspension (it is difficult
for company to determine suppliers financial capacity and its ability to self-finance all stages of
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the transfer). One of the ways to reduce the risks of the turnkey agreement is to involve the supplier
in the capital of the new entity. This will motivate the supplier to ensure the quality of the new
technology, as well as it will bring the suppliers experience in the further operational processes.
Equipment Acquisition
Equipment Acquisition is a simple and, therefore, one of the most common methods of technology
transfer. The main disadvantage of this method is the fact that the company limits itself to mere
technical knowledge incorporated in the equipment and does not get any new competences in the
management and production. Moreover, equipment available on the market does not give unique
privilege to the buyer, as this equipment may be purchased by any other competitor.

Management Contract
Technology can be transferred through a competent expert, who could be entice from another
company. This method of technology transfers involves minimum costs. But, generally, it can be
effective only for small projects with relatively simple technology. Furthermore, technology
should not be patented.
Foreign Company Acquisition
A company may acquire a foreign startup which is developing a new technology. As a result, the
company will not only get the technology, but also a team capable to develop it in the future.
Moreover, the acquisition of a foreign firm automatically places the company on the new
international market. Among the main risks of buying an existing firm, is the possible resignation
of key employees after the acquisition. Besides, the founders of the successful startup would agree
to sell it only for a price significantly higher than the market. This increases the risk of the
profitability in the future.
Direct Foreign Investments
Direct foreign investments is one of the main methods of technology transfer at the state level.
Generally, a foreign company invests in developing countries in order to create a new market,
remove export barriers and get an access to cheap labor. In this case, a developing country gets all
the benefits of technology transfer, particularly the development of its own research environment.
Besides, it is a way to create new jobs and raise taxes. However, to attract foreign investors, the
14

developing countrys government, generally, has to make some concessions in its policy. As we
can see in practice, without these concessions large international corporations are not motivated in
long term investments in developing countries.
Buy-Back Contract
A buy-back contract is a form of agreement between developing countries and large foreign
companies. Under this agreement, a foreign company supplies industrial equipment in exchange
for profits derived from the sale of raw materials or goods produced on this equipment. This kind
of technology transfer is often used in the construction of new plants in the developing countries.
In that case the state becomes a shareholder in the created enterprise. For a developing country this
represents a possibility to get a high-tech equipment without direct investment in it. Moreover, the
foreign company is responsible for the performance of supplied technologies. Potential
disadvantages of a buy-back contract are the motivation of the foreign company to start
production at least costs which, certainly, will affect the execution quality. Typically, under a buyback agreement the price for a new technology is much higher than in case of direct investments.
Original Equipment Manufacturer (OEM)
OEM can be considered as a form of subcontracting, where a local firm starts manufacturing
according to the foreign company specifications. A foreign company transfers a part of its
technologies and equipment. It conducts training and management reorganization. Afterwards, the
foreign company sells produced goods through its own channels and under its own trademark.
OEM agreement enables local companies to absorb new technologies and to reorganize their
production. With new equipment and skills, these firms can produce new goods for the domestic
market under its own brand. The main drawback of this agreement is the obligation to supply to
the foreign company products at a fixed price which is normally much lower than the market one.

2.4 A New Model of Technology Transfer

A countrys competitive advantages increasingly lie in its capabilities to generate further
innovations and to use effectively new technology, which is generally a function of the capacity
15

of its population to absorb new technologies and incorporate them into the production process
(Kolfer & Meshkati, 1987). This implies that a successful transfer of technology has a large impact
on the advancement of a nation and it significantly depends on the capacity of people to assimilate,
adapt, modify, and generate new technology. Consequently, educational infrastructure to develop
human capital is the basic component for a successful technology transfer. After accumulating
a high quality of human capital, a recipient of technology should develop an elaborate plan to
increase the willingness of both the recipient and the donor of technology transfer. This plan could
facilitate the transfer of technology by strengthening the collaboration between the donor and the
recipient. Lastly, the recipient should be able to generate new innovations based on the successful
transfer of technology. This model can be shaped as shown in Figure 1.

Figure 1. The role shifting model of technology transfer

This figure is titled the role shifting model of technology transfer because its ultimate goal is to
generate new innovations. This model depicts how recipients of technology in 2009 can be
tomorrows donors of technology: It shows the conditions that enable fruit to ripen or in other
words, new innovations. Thus, a high level of continuing education and training results in the role
of fertilizing or helping an apple tree (technology transfer) grow well. In addition, elaborate plans
for collaboration between recipients and donors help achieve successful technology transfer as
16

either sun or rain is helpful for the growth of a tree. Consequently, farmers who are recipients of
technology will be able to produce a plenty of fruit (new innovations) based on a high level of
continuing education and training (fertilizer) and elaborate plans that play a role of sun and rain.
South Koreas successful transfer of technology for its national economic development might have
followed the role-shifting model of technology transfer. South Korea transformed itself from an
agrarian society to one of the worlds most highly industrialized nations. The South Korean
economy has grown remarkably through strong government support and engaged people (i.e., high
quality of human capital) since the early 1960s. Koreans have tried to accumulate a high quality
of human capital through education because Korea has few natural resources. Koreans regarded
the export of its industries as the only means to get above poverty the early 1960s. As a result,
government and business leaders together fashioned a strategy of targeting export-oriented
industries for development in the early 1960s. The strategy involved plans for the successful
transfer of technology that generates new innovations. This strategy was implemented in a series
of economic development plans. Textiles and light manufacturing were the first targeted industries,
followed in the 1970s by such heavy industries as iron and steel and chemicals. Later, the focus
shifted to the automotive and electronics industries.
In the early stage of industrialization, Korea made concrete plans that included multiple steps for
the transfer of technology due to strong government support. In addition, Korea possessed enough
highly educated citizens to assimilate, adapt, modify, and generate this new technology. These
factors made technology transfer in Korea successful, and they ultimately helped to achieve its
remarkable economic growth. As a result, Korea became a donor of technology in high-tech fields,
such as electronic, information technology, and communication.

2.5 Appropriateness of Technology Transfer

One of the central problems regarding technology transfer is whether the technology is
"appropriate" for the recipient country. Although there is a consensus that developing countries
need the transfer of technology to improve their social, environmental and economic conditions,
there has been a debate for many years regarding the level of technology that should be transferred
17

to them. The debate revolves around 'appropriate technology' versus 'advanced technology.' The
proponents of appropriate technology affirm that developing countries do not need most advanced
technologies as epitomized in Schumacher's 'Small is Beautiful' (Schumacher, 1973). The
argument is that the introduction of advanced technologies into poorer and less developed societies
raises more problems than it can solve, they are very costly relative to the income of the local
population, they require an educational and industrial infrastructure that takes decades to build and
most importantly, they inhibit the growth of indigenous innovation capabilities (Jequier, 1976).
Hokoon Park, President of the Korea Institute for Science and Technology (KIST), argues that it
will continue to be difficult for developing countries to narrow the technological gap with
developed countries because developing countries have weak technological bases and lack
resources for research and development (Park, 2000).
The proponents of advanced technology affirm that developing countries can benefit from
acquiring advanced technologies. They argue that (1) modern science and advanced technology
are inextricably interrelated, (2) advanced technology is critical for economic growth, (3) advanced
technologies can greatly accelerate the alleviation of poverty and underdevelopment, (4) advanced
technology can enhance the overall institutional and organizational capacities for growth and
change (Shahidulah, 1991), and 5) advanced technologies are cleaner, healthier and more efficient.
In the 2001 annual report entitled 'Human Development Report 2001: Making New Technologies
Work for Human Development', the United Nations encourages the transfer of new technologies
to developing countries in order to improve their economic and social systems to overcome
poverty. It warns, however, about the risks of managing these new technologies.

2.6 Factors Affecting the Success or Failure of Technology Transfer

There are some key factors that can assist the recipient country to adopt and adapt foreign
technologies more effectively and efficiently. Here, we are going to identify some specific factors
that affect the efficient acquisition and assimilation of foreign technologies that could certainly be
very useful for the policy makers in the LDCs. Some of the most important factors are itemized
below:

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1. Public Policies
Over the years, technology has been tightly controlled for several reasons. It can, for instance, be
used as a weapon against unfriendly allies. When governments restrict the exportation of certain
technology, as they normally do in the case of defense technology, they protect their allies against
potential enemies.
2. Effective Management
Managers are a complex process, especially in the presence of new technologies. Technology
has to be effectively managed in order to achieve a societys goals. In order for the implementation
of new technology

to be effective, managers must be innovation-oriented. Thus, managers have

to be both sensitive to their environment develop the ability to anticipate, diagnose and solve
problems. Less developed countries do not operate in isolation. Their economies and subsequent
social standings are influenced

by what happens in

other parts of the world.

3. Education and Training

In order for the appropriate technology to be transferred and effectively maintained in the LDC,
appropriate educational systems and personnel training must be developed. In the absence of these,
the LDC will continue to be largely dependent on the transferor to supply the right labor force,
to carry on technological innovations, to in and engage research development. The education and
training are the system and programs must address needs problems of the LDC and how they may
be solved through technology.
4. Research and Development (R&D)
The research and development(R&D) activity is among the most important factors which not
only assist the recipient country to modify and adapt the imported technologies to its local
conditions but it may also lead to creation and generation of new technology and products. The
allocation of a substantial R&D expenditure as a percentage of gross national product (GNP) is if
to its indigenous necessary a country wishes

promote technological capability.

5. Market Size
Larger firms can afford specialized engineering departments, larger R&D budgets, more
expensive external advice, more complete sources of information, and so on. But what is large
19

deal from

industry. It is

that large considered varies a great one another clear

a machine

tool firm, for example, is tiny in comparison with plants in other metalworking sectors such as
automobile or consumer durable production. Thus size needs to be considered in relation to the
specific industrial field of activity.
6. The Absorptive Capacity of a Recipient
The level of absorption indicates the competence of an economy that acquires

technology

acquires to utilize or adapt it to its advantage. The lack of complementary assets, particularly
administrative and organizational capabilities of

some countries to

assimilate foreign

technology efficiently, is often as important an obstacle to economic developments the failure of

these countries to obtain the technology in the first place.
7. Government Regulations and Policies
A government permit is often required for the adoption of new technologies. The governments
policy is, however, somewhat different from one country to another. For instance, the law does not
require any governmental approval when a company wishes to introduce a new technology into
Thailand.
8. Social and Cultural Values
Social and cultural values are the other important factor which can affect the success of technology
transfer.

The social and cultural values of a country can include traditions, religions and

ideological beliefs, historical habits attitudes of towards the new devices.

9. The Willingness of Transferor and Transferee
For any technology transfer to occur there is a donor (supplier of technology) and recipient. The
donor transfers an item of technology through a certain channel (licensing, turnkey operations,
joint ventures, patent rights, etc). To achieve an efficient transfer, one needs to look suppliers
needs, knowledge and skills as well as the absorptive capacity of the receiver. One obstacle to a
better transfer is that persons in different countries, organizations, or departments have their own
way of doing things. Making sure that the donor and the receiver are willing and able to work
together in an effective manner is a major issue and a precondition of any effective transfer.

20

10. Export Promotion Policies

The adoption of an export promotion

policy in the LDCs is one of the most important

factors for successful acquisition of foreign technology and promotion

of its technological

capability.
11. Human Resource Development Policies
Most economists would probably agree that it is the human resources of a nation, not its capital or
its material resources, that ultimately determine the character and pace of its economic and social
development.
12. Resource Availability
Resource availability may enhancer hinder socio-economic development. Some poor nations
shelter themselves by blaming their impoverishment on a lack of natural and mineral resources.
They consider adequate recourses a necessity for any meaningful socio-economic development.
Most of these countries continue to depend largely on foreign aid to sustain their growing
population.
13. Quality of Life
The LDCs seek technology in order to improve their weak social and economic conditions. The
ultimate aim is to improve their quality of life. Unfortunately, many authors continue to assess the
success or failure of technology transfer by evaluating only the LDCs economic indicators using
measures like GNP. Such measures, including per capita income, are often inadequate as the
structural differences of these countries are rarely made a part of formula.

21

CHAPTER 3: MNCs AND TECHNOLOGY TRANSFER

22

3.1 Role of MNCs in Technology Transfer

MNCs are among the main sources of new technology for developing countries. MNCs transfer
technologies directly to foreign host countries in two ways:

a) Internalized to affiliates under their ownership and control and

b) Externalized to other firms.

Internalized transfer takes the form of direct investment and is, by definition, the preserve of
MNCs. It is difficult to measure and assess directly the amounts of technology transferred in this
manner. However, even when measured by payments for royalties and license fees (a partial
measure, since these do not include the cost of technology provided outside of contractual
arrangements), a substantial part of technology payments are estimated to be made intra-firm.
Furthermore, the trend towards the forging of strategic alliances between competing firms for the
development and application of new technologies has created networks within which technology
is transferred, and has tended to blur the distinction between internalized and externalized
technology transfer.

Externalized modes of transfer by MNCs take a variety of forms: minority joint ventures,
franchising, capital goods sales, licenses, technical assistance, subcontracting or original
equipment manufacturing arrangements. MNCs are not the only type of firm that can supply
technology by some of these means. Purely national firms can also transfer technology through
such means. However, MNCs are very important in high-technology areas and in providing entire
packages, including not only the technology but also management, marketing and other factors
that can make the technology work to its best limits. What determines the mode of technology
transfer? This can be answered by reference to a number of variables. The most important of these
are the nature of the technology, in that internalized transfer is more likely in highly complex and
fast-moving technology areas so that a firm can retain control over its competitive advantage as
the developer and owner of the technology in question; the business strategy of the seller, as when
he/she decides that establishing an affiliate with the exclusive global mandate to produce a
particular product line is the best way to exploit its competitive advantages; the capabilities of the
buyer, in that an externalized transfer assumes the existence of a competent licensee, the absence
23

of which may require an internalized transfer to a new affiliate (often at higher cost and risk than
licensing to a third party) where projected demand for the product or service involved justifies
such expenditure; and host government policies that may stipulate the licensing of technology to
local partners as the only permitted mode of TNC participation.
From a purely commercial perspective, it may be desirable to allow MNCs a free choice of
means in determining whether to transfer technology internally or externally. However, from a
development perspective there may be certain advantages and disadvantages stemming from the
choice of transfer mode. Naturally, this discussion assumes the possibility of a choice: where no
suitable external recipient exists, an internalized transfer becomes the only feasible way forward.
This can occur either through the establishment of a new affiliate in a host country, or through the
acquisition of a local firm that can be turned into a suitable recipient (UNCTAD, 2001). Given the
existence of a commercially feasible choice, the advantages to development from an internalized
transfer include:
The provision of financial resources along with technology;
The possibility of expanding the technological base of the host economy (though this is not
exclusive to internalized transfer);
The use of advanced technology that may not be available through externalized transfer or
the use of mature technology applied in an international production network;
Greater speed of transfer
Access to the technological assets of a TNC providing essential components as well as
offering learning opportunities for the host economy.

By contrast, the disadvantages of internalized transfer include:

The host economy must pay for the entire package brought by a TNC which, in addition
to technology, may include brand names, finance, skills and management. Internalized
transfer may prove more expensive than externalization, especially where local firms
already possess these other components of the package.
The retention of technology and skills within the network of a TNC may hold back deeper
learning processes and spillovers into the local economy, especially where the local
affiliate is not developing R&D capabilities.
24

Thus, where a choice exists between internal transfers to foreign affiliates or external transfers to
local technology recipients, governments may wish to intervene to affect the terms of transfer
associated with each modality, as, for example, where incentives are offered to MNCs for the
transfer of advanced technical functions. Another approach is to upgrade the capacity of the host
economy to receive and benefit from technology transfer (UNCTAD, 2001).

3.2 Why Do MNCs Transfer Technology to Less Developed Countries?

Various authors agree upon a number of possible factors influencing the decision of MNCs to
transfer technology to the LDCs. Many LDCs, compelled by their national interests have imposed
restrictions on imports and are pursuing a policy of import substitutions. Faced with a possibility
of losing their market, the MNCs are forced to establish manufacturing facilities in the LDCs. In
many cases they might be forced to enter into joint collaborations, although they prefer setting up
a branch or subsidiary. International rivalry among the M`NCs may also force them to invest in a
LDC, strengthening their position against rivals. The rivals may be establishing enterprises, and
may be producers in the LDC or suppliers of competing imports. The search for new markets and
of a sufficient size could be very important in certain regions and, all other factors may be ignored
in efforts to capture a potentially big market. Another trend has been the establishment of
manufacturing facilities in the LDCs due to their cheap labor. Garment and electronics are the
major examples of this kind. MNCs are often faced with higher wages at home so prefer to invest
in the LDCs where the labor cost is low. Many of the activities involved in such operations are
essentially restricted to assembling and packaging.

Advantages Enjoyed by the Multinational Corporations

M`NCs control more than 70% of that trade and dominate production, distribution and sale of
many goods from developing countries; e. g. tobacco, cereals. They have become in effect "global
factories" searching for opportunities anywhere in the world. Many M`NCs have annual sales
volumes in excess of the GDP of the developing nations in which they operate. For example, the
largest M-NC in 1993, American GM (General Motors) had sales revenues in excess of the GDP
of Thailand. After GM, there are Ford Motors (U. S.), Exxon (U. S.), Royal Dutch/Shell (U. K.
25

/Netherlands), and Toyota Motor (Japan), respectively. Now, it is desirable to describe very briefly
some of the advantages enjoyed by the MNCs in their operation in the LDCs. Most of them are
the results of their enormous size and technical expertise.
The major advantages are:
1) Cost advantages:
Cost advantages arise from MNCs control over the supply of raw materials and other inputs of
production at a favorable price. This is more common in some industries, such as petrochemicals.
In such cases firms either own the sources of supply or have long term contracts with the supplier.
Small firms are not in a position to own these sources or to convince the supplier to undertake a
contract with them.
2) Advantages of product differential:
Massive advertising helps the MNCs to acquire these advantages. New products, which might
differ slightly from the older ones, may be presented as a breakthrough in that field. Such claims,
when backed up by heavy advertising, which only the MNCs can afford to undertake, provide the
firm with a definite advantage over the smaller firms. Other factors are the possession of patents
and the reputation of their trade and brand names. Simply by owning brand names the MNCs can
acquire an unchallengeable position in the market. Challenging such proprietary rights is not only
time-consuming, but also extremely expensive.
3) Advantages of large scale operation:
Large-size MNCs generally have specialized divisions performing different functions. In all their
operations, they enjoy substantial economies of scale. Such advantages could be the result of
a) Already developed facilities of R&D in the home countries of MNCs. Most of the MNCs are
concentrated in the technically advanced industries and are backed by massive R&D programs. At
no substantial additional cost they can utilize the results of this R&D in the LDCs. As the MNCs
operate in a number of countries, the experience gained through R&D and previous operations
makes them much more competitive than the smaller firms. Connected with R&D are the facilities
and capability to undertake feasibility studies, design and plant construction. For erection of a large
industrial plant it is essential that the investor should have access to the necessary "know-how",
expertise and organizational capability. Having acquired this, the MNCs have a distinct advantage

26

over small competitors. Modern management skills also contribute to the cost reduction of the
M`NCs.
b) Access to international advertising and promotion: Many of their products are consumed in the
LDCs by those who are influenced by the taste of developed countries. The M`NCs have the
advantage of a ready market built by the over spills from their advertising in the developed
countries.
c) International economies in organization due to the large-size of operation and development of
modem management techniques, also provides the MNCs with competitive advantages. Why some
firms choose to become MNCs, is an interesting and unresolved question in economics [35].
Clearly, firms that operate in foreign countries are at a disadvantage relative to their locally based
foreign competitors. That is, they face additional costs, including the costs of co-coordinating
activities over long distances that their competitors do not acquire. Economic theory suggests then,
that there must be special advantages to being multinational or else they would stop such
operations. These special advantages could be: Firstly, MNCs might have access to special
technology. Control over this technology would enable the MNCs to compete successfully with
local firms. Secondly: it is possible that there may be increasing returns to scale that accumulate
to a firm that operates plants in many locations.

Costs and Benefits to the Less Developed Countries

There is no question that multinational firms act as effective agents of international transfer of
technology from their home country to foreign host nations. On the other hand, developing
countries regard FDI (foreign direct investment), which includes capital, technology; export
contact, managerial know-how and entrepreneurship, as a suitable package of the necessary
ingredients for their industrialization. And yet, especially in developing countries, critics say that
foreign firms bring in the wrong technology or that FDIs do not function well as implementers of
international technology transfer.
The arguments of those who support the case of MNCs are as follows.
There is a serious shortage of capital in the LDCs; the low rate of saving makes it impossible to
raise enough capital domestically. Coupled with this is the fact that in most of the developing
countries the production methods are unfashionable, inefficient, and hence, uneconomic. To
reorganize industry, the introduction of modem, large-scale technology is essential; as such
27

technology is not available locally. Because no industrial infrastructure exists to produce it;
importation is essential. This would require a substantial amount of foreign exchange, which is
actually short in the country. MNCs are considered as the only organization capable of supplying
a package of modem sophisticated technology and capital. The supporters of MNCs also point
towards the lack of trained manpower in LDCs to run these modern plants. They stress that only
the MNCs are able to set up the operation of these plants as well as to train the local manpower.
The MNCs have many times contributed negatively to the two most urgent problems of the LDCs,
namely, mass poverty and unemployment. Host countries, both developing and developed, have
their own social benefits. They would like to spread out inflationary pressure, create new
employment opportunities, increase their population's living standard, and correct their balance of
payments by increasing foreign exchange earnings and savings. In developing countries, these
problems are very critical and, indeed, the social benefit of their operations has been little as
compared to the cost. A study of 156 manufacturing firms in six LDCs shows that nearly 40% of
these firms have a negative effect on overall operations in the host economies.

3.3 Mechanisms by which Multi-National Corporations (MNCs) may have an

impact on the educational system and human resources development of host
countries
There are three different mechanisms by which Multi-National Corporations (MNCs) may have
an impact on the educational system and human resources development of host countries:
(i)

Changes made in the educational system to improve a countrys capacity to attract

MNCs ;

(ii)

Changes in the educational system promoted by MNCs once they are established in the
host country, to guarantee their development in said country; and

(iii)

Generation of knowledge spillover and spin-off effects on the rest of the host countrys
economy.

28

(i) Changes in educational systems to attract MNCs

Without access to high-quality formal basic education, those countries that want to serve as
operations bases for multinational corporations face difficulties to attract those businesses,
especially those oriented to the production of high value-added goods and services; in addition,
they lose opportunities to improve the benefits of this interaction by improving their workers
skills. Some studies have quantified the impact of investment on education to attract multinational
corporations. For instance, Axarloglou (2004) found that, in different states of the United States,
a 1% increase in per capita expenditure in education increased direct foreign investment flows
towards those states by 1.3% approximately. Among the formal education initiatives that have
been developed worldwide, the program Education for All stands out an intergovernmental
effort whose purpose is to increase the quality and quantity of basic education in developing
countries. This program was subscribed by most of the countries in the world, and it has six main
goals aimed at achieving high-quality basic education for all the children without exclusion, and
continuous education throughout their adult life, which will enable them to adequately perform
their day-to-day activities.
Various policies have been implemented through the years by countries that are seeking to improve
their educational level and attract multinational corporations, and through them, promote the
countrys development and growth. Efforts to promote secondary and tertiary education have been
made through joint programs with various industries, to be able to identify their needs, develop
desirable and necessary human resources skills, and to emphasize education, so that it
complements and more closely corresponds to businesses requirements. Singapore, Ireland and
Africa, through their different investment promotion agencies, have aimed their efforts at
developing programs such as the World Class Universities, Experts Group on Future Skills Needs,
Education Skills and Research African Virtual University. The European Union is also an example
with its Minimal Knowledge Platform.

(ii) Changes promoted by MNCs in the educational system

Multinational corporations may play an important role in strengthening a countrys human
resources. This process may be carried out through training offered directly to workers in the
business place, supporting formal education, or through direct collaboration with local universities.
These firms interact with knowledge- or education-oriented institutions, such as universities and
29

public research institutes; they produce and develop research and development skills, and provide
technical services to other businesses that may require them (WIR, 2005). They may also
collaborate with educational institutions providing financial assistance or managing research
projects. The impact of multinational corporations on educational systems varies significantly
depending on the context of the host countries and the type of business. However, many of the
MNCs analyzed have defined policies in place to offer strong support to educational systems. The
most common ways of support are: donations of didactic equipment and materials; infrastructure
and technical support; technology supply; training to teachers; creation of education, research and
development institutions; donations of equipment for educational centers, and prizes granted on
research development, among others.

(iii) Generation of knowledge spillover and spin-off effects

Many developing countries may not only expect to receive potential benefits from FDI, such as
employment generation, capital generation and export promotion, but most importantly, to acquire
new technology which may spill over to the host country, allowing domestic firms to improve their
own performance. This transfer of knowledge can be either voluntary through technology transfer
arrangements, or involuntary through knowledge spillovers. FDI may constitute a valuable source
of productive spillovers for developing countries through various mechanisms4. The best one
known consists of knowledge spillovers from multinationals to domestic firms in host countries,
which may be generated through different channels. For instance, there is worldwide evidence
showing that MNCs make significant efforts to train their local workers (ILO 1981), and that
multinationals offer more training to their technical and administrative staff than local firms. In
fact, (Sousa 2001) presents the most comprehensive analysis of multinationals training activities.
The relevance of these findings is that an important channel of knowledge spillovers may occur
through labor mobility, whereby workers trained by or working in multinationals decide to leave
and join existing domestic firms (spillover), or start new enterprises (spin-offs), taking with them
some or all of the knowledge acquired from multinational corporations.

30

3.4 Capacity Building

There is no doubt that most developing countries lack capacity within their educational institutions
to absorb the transfer of technology. Capacity building is a broad concept that includes individuals,
organizations and societies that interact within an environment; it can be applied to different areas
such as technology, science, leadership, education, community development and others. The
United Nations Development Program (UNDP) defines capacity building as "the process by which
individuals, organizations, institutions and societies develop abilities (individually or collectively)
to perform functions, solve problems and set and achieve objectives (Management Development
and Governance Division, 1997)." The International Petroleum Industry Environmental
Conservation Association (IPIECA) provides a definition emphasizing the role of the private
sector and defines capacity building as 'a process of constructive interaction between countries and
the private sector designed to develop the capability and skills to achieve environmentally-sound
forms of economic development through the use of modern technologies and management
systems, a competitive workforce and appropriate laws and regulations' (International Petroleum
Industry Environmental Conservation Association, 1995). Both definitions consider the
development of skills and abilities as the main purpose of capacity building and these definitions
imply

how

an

organization

can

build

capacity.

Problems faced by organization to build capacity or the barriers to capacity building

There are serious barriers to increasing the capacity of educational institutions in developing
countries (Shahidulah, 1991; Garcia, Gonzalez and Thompson, 1999). These are:
Resources and managerial barriers: Most developing countries institutions do not have the
necessary resources and management skills to focus on research and development. Employees are
not well paid and laboratories and research centers are not well equipped. Various departments do
not have sufficient budgets required to keep up to date information on scientific developments.
Professional orientation barriers:

Organizations in developing countries are generally

inadequately focused in terms of their research and professional orientations. Department members
are often not well trained to conduct research and those who are, do not have access to current
literature and/or do not have adequate resources to conduct their research. There is also a

31

bureaucratic control and hierarchy that influence the organization that acts as a retardant in this
development.
Cultural barriers: The lack of a 'scientific culture' in developing countries is another barrier to
capacity building. Most organizations training methods are teaching-oriented and not oriented to
applied research. Additionally, most of developing countries' national policies focus on health and
education, giving little attention to enhancing capacity to produce, organize, and utilize scientific
knowledge and technology.

How to implement capacity in the organization and the levels of capacity building
Capacity building is concerned with creating or enhancing the ability of society to perform specific
tasks and attain development objectives (Ohiorhenuan and Wunker, 1995). To implement
capacity building, it is important to understand the levels in which capacity building may occur:
(United Nations Development Program, 1998):
The system: This level would cover the entire country or society and all the subcomponents that
are involved, including both formal and informal organizations within the defined system.
The entity: This level is a formal organization, a private operation, or an informal organization.
The individual: This level includes individuals both within entities involved in the management
and delivery of an initiative, as well as those who are beneficiaries or are otherwise impacted by
the initiative.

32

CHAPTER 4: DEVELOPING COUNTRIES AND TECHNOLOGY

TRANSFER

33

4.1 Technology Related Policy and Technology Transfer:

Policies related to technology differ from one organization to another based on type of activities
they do in their life cycle. But these organizations must have policies on some common fields like
use of information, information security.
One of the most important factors which explain the remarkable economic development in many
developing economies during the past four decades is the existence of international technology
transfers. The involvement of international technology transfers has been acknowledged as
bringing positive roles on the economic developments of some East Asian and Latin American
developing economies since 1970s. This includes their roles in encouraging the accumulation of
indigenous technological capabilities (hereafter referred to as TC) in the manufacturing sectors
(Tolentino, 1993).
However, the roles of international technology transfers have apparently appeared to vary in each
of the developing economies. Some successful economies have made a technologically closer
catch-up with the developed economies, for instance, in the cases of the newly industrialized
economies of Hong Kong, Taiwan, South Korea, Singapore, and Brazil. But many others
performed moderately or poorly in their technological developments. Furthermore, while
technology transfers may occur in an economy, eventually the true challenge is how the domestic
companies or workers in the host economy could absorb and master the transferred technologies
and how not to let the technologies remain isolated in the foreign companies or expatriate workers
(Thee, 2005). In this regard, there are two clear observations. First, many developing economies
have benefited from international technology transfers. The majority of the worlds research and
development (hereafter R&D) activities is in hands of few industrially developed economies, yet
productivity gains are widespread across developing economies. Second, international technology
transfers are not frictionless and their impacts on the productivity of the recipient economies are
neither automatic nor evenly distributed (Xu and Chiang, 2005; Unesco, 2010). The latter implies
that technology transfers might be stipulated under certain conditions, in which absorptive
capacities of the economies such as human capital, technological level, and other institutional
factors play important roles (Thee, 2005). This raises a question on the precise mechanisms of the
technology transfers and how they give effect to the recipient economies. The main objective of
this paper is to give a case in point on the impacts of foreign technology transfers on the TC level
34

of domestic company which operated in developing economy. Furthermore, it aims to study how
the company manages its absorptive capacities toward the foreign technologies. This is particularly
discussed in relation to the knowledge management of the domestic company. The evidences
revealed in this study may enrich the previous findings and contribute to deepening the analysis
on the studies of international technology transfers in developing economies. Moreover, the focus
on the impacted domestic company will give more understanding on the developments of
indigenous TC in a developing economy. This offers a distinctive feature compared to the previous
studies in this field which often did not exclude the case of foreign companies in their
examinations. The results also suggest several important managerial implications regarding the
issue of knowledge management for domestic companies in developing economies.

4.2 Evidence from China, Cost Arica, Indonesia, Nigeria, Hungary

It is often argued that the key to increasing the competitiveness and productivity of small and
medium-sized enterprises (SMEs) in developing countries is to build the capacities of these
enterprises through improved technology. This technology development can take place internally
(inside the firm) or can be fostered through access to outside sources, including transfer of
technology from multinational companies (MNCs). Technology here is defined broadly including
the product, process, as well as management skills.1 there is a large body of literature on
technology transfer, particularly from MNCs to firms in developing countries. However, very little
work, especially empirical studies, has been done on technology transfer to SMEs in developing
countries. Thus, with Indonesia as the case study; the main objective of this chapter is to fill this
gap. It addresses the following two research questions. First, what role does MNCs plays in
technology transfer to SMEs in Indonesia? Second, under what conditions do MNCs play such a
role? Methodologically, this study is based on a review of key literature on technology transfer to
Indonesia, and for its empirical part, a case study on the Tegal metalworking industry in Central
Java was undertaken. For this case study, in-depth and semi-structured interviews and focus group
discussions were conducted in Tegal district. The structure of this study is as follows. Section II
discusses the importance of MNCs as a source of technology transfer in Indonesia. Section III
presents and discusses findings from the Tegal metalworking industry. Section IV gives
concluding remarks.
35

There is a large body of literature on channels through which technology is transferred

internationally. The channels include: MNCs foreign direct investment (FDI); technical licensing
agreements between foreign and local firms; imports of intermediate and capital goods; education
and training in technologically advanced countries; turnkey plants and project contracts; technical
consulting by
Foreign companies/consulting firms; and simply through participation in world trade (export).
From the developing countries perspective, given that MNCs opt to produce in these economies,
they are the preferred route and are therefore a prominent channel of technology transfer. For
Indonesia too, MNCs are a more attractive means of developing technology in their industries than
is obtaining technical licenses or other sources. The reason for this preference for MNCs over other
sources of
technology transfer is that with the latter, technology is provided, whereas with the former, it
involves continuous interaction between the acquirer and the supplier of technology, and such
continuous interaction is important for effective technology transfer since tacit knowledge is a
component of virtually all technologies, and at the same time it is a long-term and difficult process.
Therefore, for firms in developing countries, transfer of technologies through cooperation with
MNCs is not only easier but also a better learning process than through, for example, imported
capital goods. Probably, the importance of MNCs FDI as a source of technology transfer in
developing countries can be best shown by South Korea and Taiwans success in developing their
technology.
The impact of technology transfer on their innovative performance was analyzed for all the
responded firms and similar analyses also addressed the issue from perspectives of general
industrial firms versus high-tech firms, and large firms versus small and medium firms. Several
critical types of technology transfer activities were identified and both positive and negative
impacts were discussed along with the Pearson correlation analysis and stepwise regression
analysis. The study revealed that the innovation activities in Chinese manufacturing firms could
not be boosted substantially merely through the acquisition of key equipment and apparatus from
abroad. The findings also suggested that Chinese firms should develop their technological
absorptive capacity and transformative capacity, and foster technology transfer and

36

communications among trading partners. Moreover, it would be crucial for Chinese firms to stress
the nurturing of indigenous innovation capabilities so as to sustain their performance improvement.

4.3 Evaluating Technology Transfer Success: How Technology Transfer helped

both MNCs and LDCs:
Transfer of technology by Multinational Companies is considered as a boon to the developing
countries. Every developing nation rather than depending on the cheap labor to develop economy
should also focus on the intellectual capital and innovation capabilities. So there should be
attractive polices from the government to make sure that multinational companies should cooperate to raise the research and development capability in the nation. Multinational companies
are capable of technology diffusion, knowledge creation and research & development capacity
(Worasinchai and Bechina 2010).
There are several means of technology transfer and mutual benefit is derived out of it for both the
developing nations and the multinational companies. Some of the factors that have major impact
upon the knowledge sharing mechanisms are firm characteristics, industrial characteristics and
business models. During the last decade with the growing globalization spectrum, foreign direct
investments (FDI's) are coming to developing countries. Multinational companies are capable of
creating new jobs thereby contributing to the development of economy and welfare of the region
in particular. This will also improve the number of taxpayer due to improvement in the salary of
the employees. This allows the government to spend this economic source in the areas of health
care, education and infrastructure development (Bruce 1979).
Establishment of multinational companies paves way to the entry of developing nations into the
global market which helps it to understand the modern values and business practices. Attracting
multinational companies and thereby improving the foreign currency and foreign direct investment
is a better option. Brining loans from the national development organizations, World Bank and
other organizations with lot many agreements is difficult and instead, it is easy to encourage
multinational companies to invest. Multinational companies are recognized as powerful engines
for economic development than any other source (Bruce 1979).

37

Multinational companies improve competitiveness in the developing nations by influencing few

aspects such as capital, exports, competence/skill, technology and infrastructure. Transfer of
technology with synergistic effects are based on achieving "reasonable compatible" goals between
low developed countries and multinational companies (Madu and Jacob 2002).
With the WTO and GATT regime the entry of multinational companies became easy even in the
developing orthodox communist nation like China. For every company and country technology
and innovation are important in brining competitive edge. By liberalizing its policies China is
planning to build its technology and innovation capacities through foreign direct investments. The
technology transfer is done by multinational companies through various methods:
1. Forward and backward linkages of MNC's with the local customers and firms.
2. Induction by the local firms after observing the patterns and process of MNC's.
3. Recruiting the employees with experience in MNC's.
4. Carrying out the research and development activities of MNCs in the host countries.
Direct transfer of technology is done through introducing new process techniques, capital goods,
new products and new management skills. Direct transfer is the result of spillovers such as forward
and backward linkages, competition effects and trained worker migration. The amount and level
of knowledge transfers may be linked to the local industry characteristics. There should be a
balanced level of absorptive capacity and technology involved in the work. So host country
capability in absorbing that technological spillover is also a determining factor in technical
advancement (Glass 2001).
China tops the developing nations with huge magnitude of foreign direct investment inflows with
one third of total world FDI investments and even received more FDI inflows than US in early
2000s (UNCTAD 2005). Technology transfer to China from MNC's is mostly through indirect
effects. Several researches were conducted on these subjects revealed interesting conclusions. A
research conducted in Venezuela during 1976-89 pointed out that "spillovers" are minute from
foreign enterprises or even negative from the joint ventures. A study conducted in Indonesia, found
that domestic firms benefited through the high productivity leading to spillovers and not due to the
foreign ownership.

38

4.4 Summary and Conclusions

Sometimes there are conditions of an imperfect market, where only the MNCs and other large
firms possess the technology desired by the entrepreneurs of the LDCs and where the MNCs are
doing their utmost to transform hostile consideration in the host countries to more favorable market
conditions. In these cases, it is difficult to imagine situations, which could help the LDCs acquire
technology on better terms. By employing a variety of modes and methods, the international firm
seems able to effectively transfer many different kinds of technology under many different
circumstances. The results of different kinds of technology transfer offer some managerial
implications for firms involved in international technology transfer. While the manufacturing
experience, size and R&D to sales ratio of the transferee were identified as statistically significant
determinants of transfer costs for the sample, there was also evidence to suggest that any firm with
such characteristics would be a good candidate to absorb the technology at low cost. Another result
is related to the efficiency of the multinational firm in technology transfer. Although there were
no observations available to allow comparisons of transfer costs by organizations other than
multinational firms, it was possible, however, to collect estimates on variation in total project costs
according to the organizational form of the transferee (subsidiary, joint venture, independent
enterprise, government enterprise). The results suggest that total project costs increased
considerably as control declines. Yet even if the multinational firm is a relatively efficient
instrument for allocating world resources, the money coming in for this attempt may not always
be received as improving world welfare. These payments will nevertheless have important effects
on the world distribution of income. In the past, countries have adopted different policies towards
inward direct investment according to how they have perceived such investment might affect
national economic objectives. Two main views have been expressed. The first is that FDI speeds
up the process of economic development and restructuring. It does so both by providing
technology, entrepreneurship and organizational skills at a lower cost than any alternative usage
of resources and by its competitive stimulus and spillover effects on the rest of the economy. The
compositions of both FDI and trade changes with the process of industrialization. As MNCs
become more regionally or internationally integrated in their value-added activities, so trade
switches from being based on traditional factor endowments. It becomes based more on createdcountry-specific assets and capabilities, demand characteristics and actions taken by governments.
Countries are constantly changing their views on the importance of environmental issues,
39

particularly as it affects economic development. Also, MNEs are developing and building
environmentally-friendly acts into their competitive strategies. There is little doubt that MNCs
have the resources and the competences both to help develop environmental management policies
and programs, and to prevent the rate of environmental deterioration. It is believed that LDCs can
learn valuable lessons from the successful experience of industrial and technological development
in some East Asian and Latin American Newly Industrialized Countries (NICs). The successful
experience of these countries showed that their massive acquisition of appropriate and modern
technology enabled them to increase their productivity and consequently led to their rapid
industrialization. These counties such as China, Cost Arica, Indonesia, Nigeria, Hungary, South
Korea, Taiwan, Brazil and Mexico have been industrialized mostly through borrowing and
transferring foreign technology rather than by generating new products or processes. Although
these countries are diversified in some overall economic indicators such as per capita income, size
of economy and process of their industrialization, the factors, which led to their success can
provide insights for the other LDCs which attempt to follow the same pattern of industrialization.

40

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