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Table of Contents

1. 2. 3. 3.1. Introduction ................................................................................................................................ 2 Inside the Long Wave .................................................................................................................. 2 Information Technology Revolution: The Installation Period........................................................ 5 Technology transmission via Global Trade ............................................................................... 6

The global outlook in summary, 2007-2011 ............................................................................................. 8 3.2. 3.3. 3.4. 3.5. 3.5.1. 3.5.2. 3.6. 3.7. 3.8. 3.9. Technology transmission through Global Flows of Investment ................................................. 9 Technology transmission and Trans-National Corporations .................................................... 11 Technology transmission through Production Sharing ............................................................ 13 Technology transmission and Newer forms of business organizations ..................................... 16 Business Process (Services) Out-sourcing ........................................................................... 16 Business Clusters ............................................................................................................... 16 Technology transmission through Globalization of R&D ........................................................ 18 Role of International Migration and Remittances in technology transmission .......................... 19 Technological Progress in Developing Nations ....................................................................... 21 Evolution in Institutional Framework of Globalization ........................................................... 25

The global outlook in summary, 2007-2011 ........................................................................................... 28 4. 4.1. 4.2. 4.3. 4.4. 4.5. 4.6. Conceptual Paradigm Shift in the Framework of Technology transmission research ................... 31 Shift from Contract Bargaining to Sourcing Paradigm of technology transmission policy ....... 32 Progress in the Mainstream Economics study of Technology Transmission ............................ 34 Emergence of a Knowledge Based View of Technology Transmission ................................... 40 The innovation systems concept ............................................................................................. 45 Introduce Evolutionary and institutional economics ................................................................ 45 Then innovation systems concept and types ............................................................................ 45

4.6.1. Then developing countries versions, evolutionary perspective, role of international regional, geographical and cultural factors besides the economic forces Classifying the economies and explaining the poverty traps, demographic trends, emerging markets, energy and environment .......... 45 4.7. 4.8. 4.8.1. 4.8.2. the new Conceptual Framework ............................................................................................. 46 International technology transmission a generic model ........................................................... 46 Technology and economic development ............................................................................. 46 Market driven core, the linkage, source and recipient .......................................................... 46


4.8.3. Non market forces, historical path dependence as in evolutionary economics, institutions, geography, technological distance, cultural distance, international relations, and global technoeconomic paradigms .......................................................................................................................... 46 4.8.4. Preparing the ground for the case of China and Pakistan ..................................................... 46

1. Introduction
Today, ten years into the twenty-first century, we are experiencing first hand, another shift in techno-economic paradigm. Throughout the modern history, scholars like Adam Smith, Carl Marx, Joseph Schumpeter and others have understood and explained the capitalist economy and its growth as an evolutionary process involving a complex interaction of economic, technological, societal and cultural forces. The innovation based economic perspective as explained by Christopher Freeman, Carlota Perez, Edwin Mansfield, DJ Teece, SG Winter, RR Nelson, B. Verspagen, and other, has recently found greater acceptance. Technology and its broader impact is still a challenging concept for traditional disciplinary structures to explain and study. However we have accumulated a greater understanding of the concept of innovation, and looking at it as a holistic process containing radical and incremental innovations, resulting ultimately in creation and destruction of complete techno-economic paradigms, provides a sound foundation for explaining a whole spectrum of economic and social problems. The case of ‘technology transfer from China to Pakistan’ is a part of a greater system of international technology transmissions and evolution of national economies within the global techno-economic context. Current paradigm has unfolded with an unmistakable similarity with previous paradigms in its characteristics and indications, allowing us to pin point our recent past, current situation and with a greater confidence, the possible future course of events. Technology transmission and diffusion theory has also undergone a paradigm shift, rendering some of the traditional approaches less relevant while rejuvenating others, and also presenting a host of completely new perspectives. Specific characteristics of the recent paradigm and the latest theoretical framework of international technology transmissions are covered in the earlier half of this chapter. In the later half we shall review and use the latest and most useful concepts of technology transmission to construct a theoretical and analytical model. The model presented in this chapter should provide a holistic picture of technology transmission and economic development, (esp. for developing nations), specifically in the case of China and Pakistan. And finally we would run the assertions made in the model against the available statistics, indicators facts and figures, in order to ascertain its validity and applicability.

2. Inside the Long Wave
Freeman's associate, Venezuelan scholar Carlota Perez (1983 :358), maintains a "Schumpeterian view" of innovations in the long wave but sees long waves as "not a strictly economic phenomenon (e.g. business cycles), but rather the manifestation, measurable in economic terms, of the harmonious or disharmonious behavior of the total socioeconomic and institutional system (on the national and international levels) . " Perez proposes that capitalism contains two "sub -systems": one "techno-economic" and the other socio-institutional, long waves involve both subsystems and are seen as "successive phases in the evolution of the total system" or "successive modes of development". Each phase in this evolution of economic life is marked by a "technological style . . . based on a constellation of interrelated innovations". A technological style generates a "dynamic complementarity" of economic and social/institutional factors that sustains the long upswing until the technological style approaches the "limits of its potential," culminating in a "structural crisis." Such a crisis indicates "a breakdown in the complementarity between the . . . economic subsystem and the . . . socio-institutional framework" and "forces the restructuring of the socio-institutional framework" to correct this. Perez (2003)1 breaks the long wave into four phases: Eruption, Frenzy, Synergy and Maturity, with a major disruptive disconnect between the first two (comprising the Installation Period) and the last two (the Deployment Period). According to this interpretation the ongoing technological revolution has already completed the installation period and reached the mid-term turning point marked by a financial crisis.


Carlota Perez, 2002: Review of technological revolutions and financial capital: the dynamics of bubbles and golden ages. Edward Elgar, London


Maturity and level of Diffusion

---Installation Period---

---Deployment Period--Maturity Synergy

Turning Point (Financial Collapse)

Paradigm Shift

Frenzy (Bubble)


Time Dual Technology Opportunity for catch-up
Simultaneous access to mature and generic technologies and State and Production as Facilitators organizational models creates opportunity to rejuvenate mature technology and lead in Finance and Entrepreneurs as Drivers the next paradigm Led by Techno-Economic subsystem Generic Technologies Radical Innovations

We are here
Incremental Innovations Standardized Technologies Led by Socio-Institutional Subsystem State and Production as Drivers Finance and Entrepreneurs as Facilitators

Figure 3.1: Inside the technological revolutions Keeping in view that, it’s the technological, managerial and institutional innovations, not just the accumulation of capital that is the essence of the Schumpeterian interpretation of capitalist growth, by the time a technological revolution reaches maximum diffusion and most of its innovative potential has been exhausted, a new generic technology starts appearing on the scientific frontier. This new generic technology is still not refined enough and the techno-economic framework not prepared enough to find general application of this new knowledge. Known as the ‘Gestation period’ this phase exists parallel to the maturity phase of the previous revolution, and only after a period of trial and error does the new revolution erupt and the paradigm shift starts. This period of paradigm shift entails a ‘dual technological opportunity’ that can be availed by those nations that have mastered the mature technologies of a previous paradigm. Developing nations often use this opportunity by mastering a mature technology through technology transmission, imitation and incremental innovation and a basic capability to master the new more complex technologies. Nations can invest in the new generic technologies and rejuvenate their existing strength as well as compete at the technological frontier in the new economy. Patterns of innovation vary during the life of a technological revolution, starting with a burst of disruptive innovations in a generic technology, and financing rushing in to manipulate the emerging opportunities. New technologies alone do not translate into economic benefits and this burst of new disruptive inventions subsides giving way to incremental innovations that adapt the organizational and institutional setup and help deepen the impact of the revolution. Ultimately, a techno-economic paradigm reaches maturity, most of the innovation potential in production sector as well as state policy space, is exhausted, leaving little room for further growth. Finance and state also shift roles during a technology revolution. At first state sponsors the development of new technologies as this type of research suffers from market failure. Once a new technology has been through the gestation period of early development, a broad set of opportunities becomes available for entrepreneurs and financiers. Since finance is the most dynamic force in a capitalist economy (compared to productive capital and organizational structures), eruption of a new generic technology and its great innovative potential opens up a goldmine for financial investments. While the state’s influence is reduced to a facilitator and service provider, the financial sector and entrepreneurs drive the economy. Dubbed as a gilded age (but not a golden age), this unchecked growth ultimately results in growing income disparities and financial bubbles. The installation period reaches its peak when the unregulated flow of finance forms a financial bubble and ends with a financial collapse, (table 3.1) that may last for a few years. As a historical proof of this phenomenon, one can find a recessionary period between each Installation period (and its bubble) and the deployment period (and its golden age). The recession results in enabling regulations and insuring social stability. The crisis also provides a reason for restructuring of the organizational models, institutions and conceptual frameworks, necessary to achieve the full potential of a technological revolution. Market structures shift towards a more oligopolistic model as the state takes 3

a more active role and regulate the economy. Instead of speculative financial expansion, a deeper restructuring of productive sectors takes place. In a regulated economy a widespread and deeper application of the technologies creates jobs and provides better services for the common man, making the deployment stage a golden age.
Great Surge 1 the Industrial revolution (1771) 2nd Age of steam and railways (1829) 3rd Age of Steel and heavy engineering (1875) 4th Age of Mass production (1908) 5th Information Technologies (1971)

Installation period (Gilded Age, Bubble) Canal Mania Railway Mania London Funded Global Market Infrastructure buildup (USA, Argentina, Australia) The Roaring Twenties, Autos, Housing, Radio, Aviation and Electricity Emerging markets, and Internet Mania, Financial Casino

Turning Point (Recession) 1793-97 1845-50 1890-95

Deployment Period (Golden age) Great British Leap The Victorian Boom Belle Époque (Europe) Progressive Era (USA) Post War Golden Age Sustainable Global Knowledge Society, Golden age?

USA 1929-43 Europe 1929-33 2000, 2007-?

Table: 1 Mid-revolution turning points (recessions) through history Source: Perez (consult that folder) Nations with advanced economic, institutional and social systems (or innovation systems) play a central role in birth and spread of technological revolutions, while less advanced developing nations receive only the leftovers of opportunities for growth and development. Analogous with the ripples in a pond, economies and regions at different levels of techno-economic and socio-institutional development can be seen as situated closer or further apart from the beneficial end of the bargain. A revolution takes longer to reach the nations further apart from the origin, in terms of technological sophistication or diffusion of the previous revolution. And when it does ultimately reach these nations, the benefits of innovativeness have already dried-up. The Current Financial Crisis As the economy made the transition to the electronic age, the rapid growth of core technologies in the eruption phase was followed by explosive expansion of infrastructure and additional technologies, fueled by financial speculation in the frenzy phase. These phases can be clearly seen in the growth of the IT industry and the boom. A speculative bubble covering roughly 1995–2000, boom reached a climax on March 10, 2000 with the NASDAQ peaking at 5132.52, during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more recent Internet sector and related fields (Galbraith, 2004)2. This phenomenon is also explained as a hype cycle or Gartner representing the early hype, bubble formation, bubble burst and reconciliation in diffusion, adoption and business application of specific technologies (Fenn, 2008)3. As with all bubbles, the bubble also eventually burst. NASDAC crash wiped out $5 trillion in market value of technology companies from March 2000 to October 2002 (Taibbi, 2009)4. But this was not the turning point between the installation and the deployment periods as mentioned by Perez. Actually the main crisis or recession was somehow delayed by this smaller bubble burst, Asian financial crisis and Mexican financial crisis? As the frenzy stage rush of the information technology was probably stronger than these smaller events until recently when finally the US mortgage crisis turned into a global financial crisis in 2007.. the mid cycle crisis or the transition phase.. Yale economist Robert Shiller said in 2005, “Once stocks fell, real estate became the primary outlet for the speculative frenzy that the stock market had unleashed. Where else could plungers apply their newly acquired trading talents? The materialistic display of the big house also has become a salve to bruised egos of disappointed stock investors. These days, the only thing that comes close to real estate as a national obsession is poker.”[17] The collapse, corporate scandals and recession mark the disruptive transition into the deployment period. If the model holds true (as it has done for the previous waves) the forthcoming synergy phase will be characterized by the development of associated services, the creation of institutionalized regulators and facilitators and a cultural adaptation to the combined impact of the new technologies, leading to quantum leaps in productivity among knowledge workers. Implications for technology planners in the second half of the long wave are that they need to focus increasingly not just on technology trends, but also on societal trends — including population demographics, consumption patterns, tastes, preferences, styles, world views or any other aspect of organized human activity — and business trends,


James K. Galbraith and Travis Hale (2004). Income Distribution and the Information Technology Bubble. University of Texas Inequality Project Working Paper 3 Fenn, Jackie; Mark Time. 2008. Understanding Gartner's Hype Cycles, Harvard Business Press 4 Matt Taibbi, 2009. The Great American Bubble Machine Rolling Stone July 9-23, 2009 Issue


including the reshaping of major processes, operating models, industry structures, management methods, core models, competencies or value propositions. Note that Gartner's hype cycle, which is used to track technologies through periods of overexcitement and disillusionment, overlays smoothly onto the long wave model, highlighting its applicability to both short-term and highlighting short long-term trends.

Strength of National Innovation System and Degree of Connectedness Low High Low

Figure 3.2: Spreading out of technological revolutions During every paradigm shift some developing nations did successfully break the shackles of technological and economic backwardness (e.g. China as the most recent example, Korea, Japan, US, Germany before it). ‘How did example, they do it, and how can other nations follow suit?’ this could be termed as the central question faced by less suit successful developing nations today None of the success stories of the past can be explained by endogenous today. explain changes alone, transition to development is a regional trend embedded inside global techno-economic patterns. Any techno nation seen in a holistic global background must be seen with reference to a hierarchy of interconnected micromesso and macro level systems. These systems are interdependent and connected to other systems through . horizontal and vertical linkages of sub national, national and international transmission of technology. Quality of internal system and strength of linkage with external or exogenous forces collectively explain a nation’s exposure to external opportunities and threats hidden in every new technological revolution. Different stages of a revolution offer different sets of opportunities and risks and different strategies are required to benefit from them. International required technology transmission model proposed later in this study would illuminate this concept at a higher level of detail and clarity. For this reason also it is important to unravel the dynamics of the current technological revolution. 0 technolo

3. Information Technology Revolution: The Installation Period
Kondratieff, Schumpeter, Freeman and Perez have estimated th technological revolutions last for over 40-60 years. that Silverberg and Verspagen (2005) 5, date the onset of information revolution from 1990, as the full scale of dated information technologies started to be felt after the launch of internet and personal computing and of course the end of the cold war (1989) provided a perfect occasion for unleashing the gales of a new industrial revolution. But Perez considers this time as the onset of frenzy stage and that the gestation and eruption stages had already started in 19601960 1980s. Maturity phase of the mass production era of automotive and petroleum technologies was marked by the onset of technologi productivity slowdown in the US economy in the 1970s (Nordhaus, 2004)6. Meanwhile information technologies (micro-electronics) were being developed and it took almost two decades of gestation period before its fullscale eruption. For instance; as late as 1987, when information technologies like the computers and micro-electronics had micro become quite commonplace at least in industrialized economies, the expected productivity gains were still not


Silverberg, G. and Verspagen, B., 2005, "A Percolation Model of Innovation in Complex Technology Spaces ", Journal of Economic Dynamics and Control, 29: 225-244. 6 William Nordhaus, 2004, Retrospective on the 1970s Productivity Slowdown, NBER Working Paper No. 10950 JEL No. O4, E1


registered. “Solow Computer Paradox” in reference to Robert Solow's 1987 quip, "You can see the computer age everywhere but in the productivity statistics" (Solow, 1987)7 proved to be only a lull before the storm. Eventually, in early 1990s the big bang erupted. With the end of the cold war, introduction of the internet and personal computing, coupled with a huge unquenched demand for information and knowledge, Information and Communication technologies started to appear and spread throughout the world.

Figure3.3 : Diffusion of ICTs and the global Digital Divide Source: ITU World ICT indicators

Figure 3.3 represents the eruption of ICTs, through the spread of mobile cellular telephone subscriptions, and the internet subscription (per 100 inhabitants) in advanced and developing economies. • Cellular phone service subscribers only started to show up in data in 1993, it’s estimated that in January 2010 there are 5.1 billion subscribers (from 6 to 61.1 persons per 100 people worldwide). • Mobile interconnection rates were 0.20 $ per minute in 2004, had declines to 0.01$ a minute in 2008 • The global usage of internet reached 1.5 billion users, a six fold increase from 4 to 23 persons per 100 inhabitants from 1998 to 2008. • Worldwide PSTN (public switched telephone network) or the ordinary land phone usage was around 97 billion minutes in 1998 which grew to 300 billion in 2008 a 25% annual growth rate. • Since 1999 VOIP (Voice-Over-Internet-Protocol) started to emerge as an even cheaper means of international telephony, which now (2008) accounts for 70 billion minutes or 44% of the total. • Retail price of international telephone calls that was around 1.25$ per minute in 1992 declined to $0.70 in 1998 and 0.20$ in 2003 and is decreasing constantly as better technologies and telecommunication infrastructures are being built. The eruption phase of Information technology revolution is actually much more powerful than all precedents and rate of diffusion is much faster as well. However the developing nations which had a lower level of diffusion of basic infrastructure technologies like electricity and fixed line telephones were much slower to adapt the new technology, resulting in expansion of the ‘Digital divide’. Besides the lack of infrastructure, these economies also lacked the resources and sophistication of business and government operations to either afford or profit from the new information technologies as effectively as the developed nations. As in case of the previous technological revolutions, this revolution was also accompanied by a wave of globalization of trade and investment. Barriers to trade and investment were removed to facilitate this rise, resulting in massive increases in international trade and investment at global level. But this increase is not simply a quantitative linier increase; there is a deeper qualitative change underneath it. New technologies and new institutional changes allowed the businesses to reorganize and redesign the business models of the previous age of mass production. Production sharing, out-sourcing, slicing-up of value chains and emergence of specialized clusters are the new organizational structures underneath the globalization trade and investment. This also means that the landscape of international technology transmission has altered all together and new framework conditions require a rethink of the mass-production era models according to information era perspectives. In the following section we would summarize the technological, organizational and institutional changes and emerging dynamics of the information age, esp. from a technology transmission perspective. 3.1. Technology transmission via Global Trade

Robert Solow, New York Review of Books, July 12, 1987


Figure 3.4 depicts, global trade upsurge started in 1990s, at first in developed countries, and since the beginning of new millennium the developing economies participation in global trade has also grown vigorously until the recent financial crisis when... During the period 1995-2006 global trade more than doubled in just one decade. • Manufactured goods (Figure 3.4- A) which are more technology intensive than primary commodities, are the most traded item, its share increasing from 69.3% to 73.7% • Overall manufactures exports by developing nations (Figure 3.4-B) increased from 929.96 billion dollars (one third of developed nations) to 2806.07 billion (half of the developed nations), a threefold increase. • Almost all (86.6%) of this manufactures exports (Figure 3.4-C) originated from Asian economies more specifically East Asian economies (70% of manufactures export originates from East-Asia, followed by South-East and South-Asia respectively). • Latin America and African nations together hold the remaining 14 % share of these exports (dominated by Mexico and Brazil) and their relative position remained almost unchanged throughout this period, thus growth of developing nations manufactures can be attributed almost entirely to the East Asian region. • Among the manufactured products exports, the biggest rise is in machinery and transport equipment category (Figure 3.4-D) which also indicates a rise in technological intensity of global trade. Trade in services rose significantly during the installation period of the IT revolution (Figure 3.4 E). This is generally attributed to increasing importance of information services on one hand, and increased tradability of services through new media or information technology on the other. Trade in services is unique as in general service sector is the biggest sector in most national economies accounting for about 70 % of internal product, but trade in services forms a mere 11% of world GDP (around 20 % of global merchandise trade). But recently there has been an increase in the production of intermediate services, and possibility of their outsourcing. • Two major components of international trade in services are the travel and transport services but these sectors have seen relative decline • Other business services, which are mainly business to business services including outsourcing services, has experienced fastest (up to seven-fold) increase, in its export value over the last twenty years (Amiti, 2004)8. This sub-sector has been characterized by Jones (2005)9 and Markusen (2005)10 as having increasing returns to scale. Particularly Markusen has categorized it as knowledge-intensive sector requiring a high initial investment in learning (i.e. expertise) intensive in skilled labor and highly differentiated. • Trade in financial services grew at the fastest pace (from around 3% in 1990 to over 7% in 2006) • Computer and information services are traded even more vigorously (from less than 1% in 1990 to more than 4.5% in 2006) Trade in services is directly linked to technology transmission especially in outsourcing of knowledge intensive services to low cost destinations in developing countries. It is estimated that • Services are the largest recipients of international investment flows, accounting for just over half of global outflows in 1999 (UNCTAD, 2000)11. • Royalties and License fees is a more direct indicator of technology transmission, their share has increased from around 3.5% of total service trade to above 5% in the past decade. The recent crash in global trade is how much and in which areas…in terms of technology
Subject: Total merchandise trade Unit: US dollar at current prices (Millions) Time Series Notes



Total merchandise




8 Amiti M.; S. Wei; Fear of Service Outsourcing: Is It Justified? IMF Working Papers, October 2004 9 Jones R., H. Kierzkowski and C. Lurong; What does evidence tell us about fragmentation and outsourcing? International Review of Economics & Finance; Vol. 14, issue 3, 2005 10 Markusen, J.; T. Rutherford and D.Tarr; Trade and direct investment in producer services and the domestic market for expertise Canadian Journal of Economics; Vol. 38, N° 3, 2005 11 United Nations Conference on Trade and Development, World Investment Report 2000: Foreign Direct Investment and the Challenge of Development (New York), 2000


The global outlook in summary, 2007-2011
Global Economic Prospects 2010: Forecast summary

The dollar value of world trade plummeted 31 percent between August 2008 and its low point in March 2009. The decline in volume terms was somewhat less pronounced when falling commodity prices and exchange rate fluctuations were taken out of the equation; nevertheless, by March 2009 global trade volumes were down by 22 percent. Although global trade has recovered from these troughs, as of October 2009 it was still 2.8 percent below its precrisis level. The lag in the trade rebound does not appear to be wholly a reflection of weak trade finance (although doubtless it has played some role). Rather, the lag appears to reflect the still- depressed level of investment activity (investment goods generally are heavily traded). Global investment fell by an estimated 9.7 percent in 2009 and even in 2010 investment is forecast to grow by only 4.9 percent. The initial fall-off in import volumes was relatively stronger in high-income countries, partly reflecting the growth slowdown that had already begun before the failure of Lehman Brothers. With the crisis, the decline accentuated and broadened, with global import volumes falling at a 40 percent annualized pace in the first quarter of 2009. At the trough, imports in high-income countries were 24 percent off their August 2008 level; in developing countries they were also down by 25 percent. The trade slump was less marked in Asian countries, in part because of fiscal stimulus in China. Most Chinese trade partners benefited from the rebound in Chinese imports. By the third quarter, import demand had strengthened among most countries. After a period of some weakness, reflecting faltering domestic demand, the United States' import volume growth jumped to 29 percent in October (saar), in Germany to 27 percent, and in Japan to 31 percent as of November. In general, services trade has been more resilient than merchandise trade, in part because a larger share is destined for personal consumption rather than investment expenditures. Tourism represents something of an exception—such expenditures tend to be luxury goods and therefore more volatile. The World Tourism Organization reports that compared with 2008, tourism arrivals were off 7 percent in the first six months of 2009. Regionally, Central and Eastern European nations recording the largest fall in tourism (11 percent), while Africa registered a modest increase in tourist arrivals. Mexico was particularly hard hit, with arrivals down 19 percent (year-over-year) in the second quarter, where the effects of the global recession were magnified by the outbreak of AH1N1 in that country and efforts by individuals worldwide to avoid infection. Most recently, global tourism arrivals appear to be picking up, with July volumes only 4 percent lower than a year earlier. Notwithstanding widespread efforts to support tourism through special tax deductions, the easing of visa restrictions, and investment plans, the World Tourism Organization expects global tourist volumes to have declined by between 4 and 6 percent during 2009. Overall, world merchandise trade volumes are estimated to have contracted by 17.6 percent in 2009, with goods and services down some 14.4 percent. Given the expected weak recovery and weak base effects, trade is projected to expand by only 4.3 percent in 2010 and by 6.2 percent in 2011. As a result even two years into the recovery, the overall volume of goods and services traded is forecast to be 5 percent lower than its 2008 peak. Remittances are another important source of external currency for developing countries, representing as much as 20 percent of GDP in some countries. Remittances have been more stable than capital flows and merchandise trade, but have nevertheless declined by an estimated 6.1 percent in 2009







Figure 3.4: Patterns of Global Trade (source, UNCTAD, World Trade Database)

3.2. Technology transmission through Global Flows of Investment Most significant effect of globalization during installation of IT revolution was the liberalization of financial capital flows, which is supported by new forms of electronic banking and integration of financial markets. Since 1990s, a 1990s surge in flow of financial capital is seen spreading around the globe (figure 3.5-A). An aggregate measure of . measur financial flows is ‘Gross private investment’, which represents the sum of private debt and non debt flows, include commercial bank lending, bonds, and other private credits, as well as foreign direct investment and portfolio equity investments, that flow across the national boundaries over a certain period of time(World Bank, 2005)12. Proponents time(World of financial deregulation claims that it helps capital deficient developing nations increase liquidity, lower the costs
12 World Development Indicators 2005, World Bank, 2005


of borrowing, and raise economic outputs. A substantial growth in private sector financial flows and an increased use of instruments such as debt securities and financial derivatives was supposed to help the financial institutions to manage and redistribute risks. In other words to hedge against risk such as natural, political and market disturbances and exchange rate fluctuations. Increase in foreign private investment was criticized for increasing the probability of financial crises in direct relation to increases in unregulated short-term capital flows (Weller 2001)13; (Easterly and Kraay 1999)14 e.g. the 1994 Mexican crisis, 1997-98 Asian crises and the 2000-2001 burst, were ample warnings that went unheard. • Flow of gross private investment saw a threefold increase in 15 years (1990-2005) and equaled 12-15% of developing nation’s gross domestic product, and up to 35% for developed economies. On the other hand foreign direct investment is considered as a major channel of international technology transmission, as it made to acquire a lasting management interest, as a share of voting stock, building of a factory, merger and acquisition etc. FDI is long term, less volatile, involves higher management cost (and decision effort) and return on investment takes longer to realize. FDI is preferred by developing countries as it means more domestic value creation by bringing modern technologies and management techniques from abroad, as well as employment opportunities, improved export competitiveness, and natural resource prospecting. Figure 3.5 (B and C) present the trends in FDI (since 1995 to 2007) inflow and outflow separately for the developing nations and developed nations. Some highlights of global FDI are as follows • Over the past 15 years, FDI inflows to developing countries have nearly doubled as a percentage of GDP • High income group is the biggest source and destination of global FDI and more than half of High income FDI is directed to other high income economies • The minor bubble burst ( burst and Nasdaq Crash) affected the high income group’s FDI patterns, more violently than the middle and lower income economies; however FDI flows from High income group to the rest picked up after this shock As far as the developing economies are concerned, • Middle income group is (figure 3.5-C)the biggest recipient of FDI followed by Lower middle income group • Middle income group reached a historical high rate of FDI in 2007, around 500 Billion US $, whereas the high income group’s highest level in FDI outflows in the same year was more than 2000 billion US $ • Among the lower middle income group, China is the biggest FDI magnet (figure 3.5-D) followed by Mexico and India • Low income economies have generally failed to attract significant share of global FDI flows, most probably due to their poor location, human resource and smaller market size • Outward FDI flow from middle and upper middle income countries is rising (figure 3.5-C). Such flows, if directed to other developing nations (south to south FDI), are expected to be more beneficial to the recipient nations • Global FDI peaked in 2007 at a record US$1.9 trillion. It fell by roughly 15% in 2008, but most of the brunt was borne by advanced economies. Developing countries overall still experienced a slight increase in 2008 (UNCTAD, 2009)15. The easing of restrictions on FDI has also contributed to technology diffusion within developing countries. FDI is a major source of process technology and “learning by doing” opportunities. FDI can have significant spillover effects on domestically owned enterprises. The global economic down turn, that started with US ‘sub prime crisis’ is still continuing and its full extent and implications are yet not known. However there is wide spread call for a conceptual rethink of the globalization concepts, regarding the role of governments and markets, broadening the participation of developing countries in international economic decision-making or a reform of Breton Woods Institutions and correction of unfair nature of global agricultural trade.

13 Weller, C. "Financial Crises After Financial Liberalization: Exceptional Circumstances or Structural Weakness." Journal of Development Studies 2001 14 Easterly, W., and A. Kraay. 1999. "Small States, Small Problems?" Policy Research Working Paper No. 2139. Washington, D.C.: World Bank. 15, News from the Office of the Secretary-General, 04 May 2009


(A) Gross Private Investment Flows, 1990 and 2005

(B) Foreign Direct Investment Net In and out Flows high income economies1995 to 2007 (Source; World Bank, World Development Indicators Database. 2009)

(C) FDI flows, lower income economies, 1995 to 2007 (Source; World Bank, World Development Indicators Database. 2009)

(D) Major recipients of Foreign Direct Investment among Lower middle income countries, 1995 to 2007 (Source; World Bank, World Development Indicators Database. 2009)

Figure 3.5: Patterns of Global Finance and Investment 3.3. Technology transmission and Trans-National Corporations Transnational Corporations dominate international trade, finance and technology; as they possess strong financial, managerial and technological as well as technology transmission capabilities. From 1960s till late 80s, many developing country governments set forth numerous protective measures to make up for their disadvantaged position in the global economy (Deo 1986)16(Swamy, 1980)17( Clairmonte & Cavanagh, 1983)18. However this attitude towards TNCs changed during the recent globalization. TNCs are now seen as "the embodiment of modernity and

16 Som Deo, Multinational Corporations and the Third World, Ashish Publishing House, New Delhi, 1986 17 Dalip S. Swamy, Multinational Corporations and the World Economy, Alps Publishers, New Delhi, 1980 18 Frederick Clairmonte, John Cavanagh The World in Their Web, 1983


the prospect of wealth: full of technology, rich in capital, replete with skilled jobs" (The Economist, 1993)19. As a result governments have been "queuing up to attract multinationals" and liberalizing investment restrictions as well as privatizing public sector industries. For TNCs, developing countries offer a potential for market expansion, lower wages and fewer health and environmental regulations than in their home countries. According to various UNCTAD world Investment reports (WIR 1990, 1999, 2008), • in 1970, there were around 7,000 parent TNCs, • this number had jumped to 38,000 in 1996 and • 79,000 in 2007, with as many as 790,000 foreign affiliates and • 90 percent of these TNCs are based in the industrialized world Global TNCs are classified as the financial and non-financial TNCs, e.g. Banks (like the Swiss UBS AG, British HSBC Holdings PLC and American Citigroup Inc) are the sources of a major chunk of commercial lending, bonds, and other private credits, where as Non-Financial TNCs dominate the manufacturing, services and extractive industries, foreign direct investment and portfolio equity investments. Financial TNCs have unique financial tools and investment techniques that provide liquidity to the greater networks of global trade and business of transnational corporations. • Total Assets of top 50 financial TNC equaled 35,613 billion US$ in 2005 (UNCATD, 2006)20 equal to 93.64 % of total world GDP i.e. 38,028 billion US $ (World Bank)21. • Most of the transnational’s wealth is concentrated in the top 100 firms, United States, United Kingdom, Japan, France and Germany host 73 of top 100 TNCs (UNCTAD, 2008). During the recent decades developing nations have also built some big transnational corporations of their own. According to UNCTAD World Investment report 2006, top100 TNCs from developing nations had total assets of 1441 billion US$ that is just 16.6% of the global top 100 TNCs total assets (8783 billion US $ in 2005). Developing nation’s TNCs are different from the developed nation’s TNCs, not only in terms of size, but also sectors of operation, ownership structure and degree of transnatinality. Some distinct features of this new kind of Transnational Corporations are as follows: • Most of the developing nation’s TNCs belong to East and South-East Asian developing economies namely China, Korea, Hong Kong-China, Taiwan P.O China, Malaysia, Singapore, Thailand, and Philippines. Mexico leads the Latin American developing economies TNCs, followed by Brazil and Venezuela, African TNC come from South Africa and Egypt, and from South Asia (India) also joins the club • Highest ratios of foreign sales are of Korean TNCs which also have a smaller workforce, high foreign employment and very high sales revenues. Exhibiting their very high productivity as well as their concentration into more skill and knowledge intensive industries • Most of these corporations are state sponsored national giants, usually having quasi- monopolistic access to natural resources or national markets. • Due to its strategic nature, many state sponsored developing nations TNCs are concentrated in energy sector • the second biggest category of developing nation TNCs is tertiary industries like electrical, electronic equipment, telecommunications, computers and related products, based in Taiwan (p.o. China), Korea, Hong Kong-China, mainland China and Singapore Table 3.2 exhibits the outburst of TNCs assets and operations during the installation phase of IT revolution and accompanying globalization, more is revealed upon closer inspection of these figures, some interpretations are as follows:

Table3.2: Indicators of TNCs position in Global Technology transmission (Source: UNCTAD FDI/TNC database 2008)
Item FDI inflows FDI outflows FDI stock Value at current prices ($ billions) 1982 1990 2006 58 207 1411 27 239 1323 789.327 1941 12470 2007 1833 1997 15211

19 Economist. "Everybody's Favourite Monsters: A Survey of Multinationals." The Economist, 1993 20 UNCTAD World Investment report 2006 21 World bank World Development database


Income on inward FDI Income on outward FDI Value of Cross-border M&As Sales of foreign affiliates Gross product of foreign affiliates Total assets of foreign affiliates Export of foreign affiliates Employment of foreign affiliates (thousands) GDP (in current prices) Gross fixed capital formation Royalties and license fee receipts

44 46 2 741 676 2206 688 21524 12083 2798 9

74 120 200 6126 1501 6036 1523 25103 22163 5102 29

950 1038 1118 25844 5049 55818 4950 70003 48925 10922 142

1128 1220 1637 31197 6029 68716 5714 81615 54568 12356 164

Worldwide FDI stock is considered a proxy of the productive capacity of TNCs outside their home countries, according to UNCTAD estimates, roughly one third of the home countries outward FDI is done by transnational corporations (UNCTAD, 2007)22. • Value-added activity of foreign affiliates (given as Gross product of foreign affiliates, US $ 6.029 trillion) accounted for 11% of global gross domestic product (GDP, 54.568 US$ Trillion) in 2007 • Global TNC’s subsidiaries sales reached 31.19 trillion dollars in 2007, when global export of goods and services was around 17.13 trillion. Having surpassed global arms length trade, TNCs are now the principal vehicle to deliver goods and services to foreign markets • Out of 31.19 trillion dollar sales of affiliates, exports account for only 5.714 trillion or one sixth of total sales. This means that TNC’s subsidiaries primarily focus in the host country markets not exports to other nations including the home country of the TNC According to a study released by the European Commission, the top 2000 companies (1000 EU and 1000 non-EU) invested €372 billion (520.948 US $) in R&D in the year of reporting (i.e. 2006/7) (European Commission, 2008)23 approximately 80% of global business expenditure on R&D. • Royalties and license fee represents a higher degree of technological and managerial knowledge transmission from parent to the subsidiary. Global aggregate value of such transfers saw a 465% increase. France, Germany, Japan, the UK and the United States of America accounted for 82% of royalty and licensing fee receipts in 2004, there are also other emerging exporters of technology, such as Canada, the Republic of Korea and Sweden. • At the regional level, Asia’s royalty and licensing fee payments increased almost 3-fold between 1998 and 2004 while those of Latin America and the Caribbean almost doubled. Africa’s payments for royalties fell from about USD 0.84bn to USD 0.77bn during the same period. And over 80% of global royalty payments for international transmission of technology were made from subsidiaries to their parent firms (UNCTAD, 2008). • A change in lending behavior was seen since mid-2007, caused by a general reassessment of credit risk. However the growth of cross-border M&As in the second half of 2007 reached a peak of $879 billion. This was essentially due to the completion of large deals, many of which had begun earlier. • More cautious lending behavior of banks hampered M&A financing in the first half of 2008, especially the financing of larger acquisitions, which plummeted to their lowest semi-annual level since the first half of 2006. • Number of Greenfield projects remained almost at the same level in the first quarter of 2008 as in the previous quarter.(Greenfield Investing is usually offered as an alternative to another form of investment, such as mergers and acquisitions, joint ventures, or licensing agreements.)

3.4. Technology transmission through Production Sharing
As with every techno-economic paradigm, new models of production/organizational design and operations management have sprung up with the recent paradigm shift. Information technologies have increased knowledge content (technology) in the products and processes in general and also helped businesses to communicate and coordinate throughout the globe at ever increasing speed and quality and consistently decreasing costs. Strong computational technologies like computer assisted manufacturing (CAM) and design (CAD) and computer numerical controlled (CNC) machine tooling etc. have revolutionized manufacturing process like machining,

22 UNCTAD, “World Investment report” 2007 23 The 2008 EU Industrial R&D Investment Scoreboard European Commission, 2008


complex assembly, aluminum die casting, grinding, broaching, gears, and forging (Gunasekaran, 1999)24. Development of newer materials, chemicals, and processes has also helped manufacturing techniques to evolve from traditional process centered work organization, to more flexible and efficient 'Agile manufacturing’ and ‘Modular Production Systems’. The term “production sharing” was coined by management consultant Peter Drucker (1977) 25, referring to geographic separation of activities involved in producing a good (or service) to drive down the cost of production through economies of scale without needing to own and operate a factory. Rise of contract manufacturing necessitated new global organizational structures like value chains and production networks, outsourcing and offshoring of non-critical or peripheral operations to geographically dispersed sites allowed the businesses to focus on their core competencies like research and development, branding or marketing; leading to a greater responsiveness to swiftly changing consumer tastes, cost effectiveness, improved production quality and shorter product life-cycles. In modern economic and management literature one finds alternative terminologies as well, e.g. outsourcing (Katz and Murphy, 1992)26, (Feenstra and Hanson, 1996)27, de-localization (Leamer, 1998)28, fragmentation (Deardorff, 2001)29; (Arndt and Kierzkowski, 2001)30, intra-product specialization (Arndt, 1997)31, intra-mediate trade (Antweiler and Trefler, 1997), vertical specialization (Hummels, Ishii, and Yi, 2001)32, and slicing the value chain (Krugman, 1995)33. Developing countries on the other hand serve as favorable locations for labor, and material intensive and environmentally hazardous operations. Acquisition of technological capabilities and market linkages that enable developing nation firms to improve their competitiveness and move into higher-value activities is of prime interest to the developing nations. Analyses of upgrading from a value chain perspective, pays particular attention to the ways in which value chain linkages facilitate or obstruct upgrading. Technology remission is a crucial factor in such linkages, as on one hand TNCs need to transmit technology to their suppliers for the sake of quality assurance on the other hand they need to prevent spillover of these technologies to their competitors. Legal and cultural differences across firms, regions and especially countries can be a serious challenge in this regard. One solution to this dilemma is establishment of subsidiary firms or through mergers and acquisitions of vital suppliers in the value chain, (Douglas, 1996)34. Evaluating these global trends is still a major challenge. A number of studies (Feenstra and Hanson, 199635: Brainard, 199736 Zeile 199737 : Markusen and Maskus, 200138 : OECD 200239 : Hummels, Raporport, and Yi, 199740 : Campa and Goldberg 199741 : Swenson, 200042 : Coe and Helpman, 199543:Feenstra and Hanson, 199644, Yeats
24 Gunasekaran, A., ‘Agile manufacturing: A framework for research and development,’ International Journal of Production Economics, Gunasekaran, A.1999 25 Peter Drucker “The Rise of Production Sharing,” The Wall Street Journal, March 15, 1977 26 Katz, Lawrence F. and Kevin M. Murphy, “Changes in Relative Wages, 1963-1987: Supply and Demand Factors,” Quarterly Journal of Economics, 1992 27 Feenstra, Robert C., Gordon H. Hanson and Deborah L. Swenson (2000) “Offshore Assembly from the United States: Production Characteristics of the 9802 Program,” in Robert Feenstra, Editor. The Impact of International Trade on Wages. NBER and University of Chicago Press, 2000 28 Leamer, Edward E. “In Search of Stolper-Samuelson Linkages between International Trade and Lower Wages,” in Susan M. Collins, ed., Imports, Exports, and the American Worker, Washington, D.C.: Brookings Institution Press, 1998 29 Deardorff, Alan V. “Factor Prices and the Factor Content of Trade Revisited: What’s the Use?”, Journal of International Economics, 2000 30 Arndt, Sven and Henryk Kierzkowski, eds., Fragmentation: New Production and Trade Patterns in the World Economy, Oxford University Press, Oxford 2001 31 Arndt, Sven. “Globalization and the Gains from Trade,” in K. Jaeger and K.-J. Koch, eds. Trade, Growth and Economic Policy in Open Economies. Springer-Verlag: New York. 1997 32 Hummels, David, Jun Ishii, and Kei-Mu Yi “The Nature and Growth of Vertical Specialization in World Trade,” Journal of International Economics, 2001 33 Krugman, Paul, “Growing World Trade: Causes and Consequences,” Brooking Paper on Economic Activity, 1995 34 Douglas, Irwin, “The United States in a New World Economy? A Century’s Perspective,” American Economic Review, 1996. 35 Feenstra, Robert C and Gordon H. Hanson, “The Impact of Outsourcing and High-Technology Capital on Wages: Estimates for the U.S., 1972-1990,” Quarterly Journal of Economics, 1999 36 Brainard, S. Lael , “An Empirical Assessment of the Proximity-Concentration Tradeoff between Multinational Sales and Trade, American Economic Review 1997 37 Zeile, William J., “Foreign Direct Investment in the United States: Preliminary Results From the 1997 Benchmark Survey,” Survey of Current Business, 1999 38 Markusen, James R. and Keith Maskus, “Multinational Firms: Reconciling Theory and Evidence,” in Magnus Blomström and Linda S. Goldberg editors, Topics in Empirical International Economics: A Festschrift in Honor of Robert E. Lipsey The University of Chicago Press. 2001 39 OECD, “Intra-Industry and Intra-Firm Trade and the Internationalization of Production,” Economic Outlook, 71, Chapter VI 2002 40 Hummels, David, Dana Raporport, and Kei-Mu Yi, “Globalization and the Changing Nature of World Trade,” Federal Reserve Bank of New York, Economic Policy Review, 1997 41 Campa, Jose and Linda Goldberg, “The Evolving External Orientation of Manufacturing Industries: Evidence from Four Countries,” [1997], Federal Reserve Bank of New York, Economic Policy Review, 1997 42 Swenson, Deborah L., “Firm outsourcing decisions: Evidence from U.S. foreign trade zones.” Economic Inquiry 2000


200145, Kaminski and Ng, 200546) attempt to establish stylized facts on the extent of globalization, common assumptions used in such evaluations are that, • When off-shoring is high, trade in intermediate goods (parts and components as well as semi-finished goods) is also high • A large share of intermediate goods indicates that the country or region is well integrated internationally and participates in global production-sharing. In order to evaluate the scope of international production sharing, one needs to look at the international outsourcing of manufacturing, processing of intermediate inputs and intra-firm trade by foreign affiliates. Some major findings relevant to the recent surge in production sharing are as follows: • Worldwide trade in parts and components quadrupled between 1993 and 2006, increasing from 17 percent of total manufacturing exports to 27 percent (UNCTAD, 2008)47 • Ratio of intermediate and final goods in world trade approached almost 60:40 in 2006 • Half of the global intermediate goods trade is in parts and components and the other half is in semi-finished goods • Majority of final goods are capital goods (60%) while consumption goods have the smallest share • Cross-border fragmentation of production initially began as North-North trade and recently it is rapidly transitioning into north-south trade Kaminski and Ng 2005. • During 1980s until the early 1990s, the U.S. and Japan were the largest exporters of transport and machinery components and parts in the world, (in total dollar value and as a share of their total exports), which has steadily declined from 22% and 16% in 1987 to 16% and 11 % in 2003, respectively, while • East Asia's share grew from 8% in 1987 to 25% in 2003. A similar upward trend has been documented for the transition economies of Central Europe • Recipients of parts and components exports of East Asia and Central Europe are not only North America, Japan, and Western Europe, but also an increasing number of low and middle-income countries (Yeats 2001; Kimura et al. 2007). Intra-firm trade refers to products which are traded internationally, but which stay within the ambit of a transnational enterprise (Grubel and Lloyd, 1975)48 unlike international trade among unrelated parties (also called arm’s length trade). Data on intra-firm trade is also hard to acquire and is generally available through firm surveys, involving the preparation of questionnaires by national authorities. One such surveys was conducted by Arndt and Kierzkowski (2001)49, found that • About 43 percent of all US intermediate goods imports arrived through intra-firm channels in 1992, rising to 52 percent in 1997 • Ratio of US Intra-firm trade is estimated to have reached nearly 50 percent of exports and 80 percent of imports in 2003 (Zeile 2005)50 • Two-thirds of developing nations exports involve a foreign multinational buyer or seller • Intra-firm exports of developing countries foreign affiliates to the parent TNC account for one-third of all exports from developing countries Gross, (1986)51 pointed out increase in intra-industry trade in Pacific Asian economies started in early 1980s and attributed it to the globalization of corporate activities by U.S. and Japanese firms, while Asian firms were just starting to rise. Interregional trade still involves assembly-line production based on imported parts and components in different countries in East and South East Asia, Kawai (2005) reports East Asia had an intraregional trade share of 44% in 2003. In his analysis of US intra-firm trade Bardhan (2004)52 found a strong correlation between physical capital intensity of the partner nation and intra-firm trade shares.
43 Coe, David T. & Helpman, Elhanan,. "International R&D spillovers," European Economic Review, Elsevier, 1995 44 Feenstra, Robert C. and Hanson, Gordon H.,Globalization, Outsourcing, and Wage Inequality. NBER Working Paper No. W5424, 1996 45 Ng, F. and A. Yeats, “Major trade trends in Asia - What are implications for regional cooperation and growth,” The World Bank, World Bank Policy Research Working Paper 3084, 2003 46 Kaminski B. and F. Ng, Production disintegration and integration of Central Europe into global markets, International Review of Economics & Finance, 2005 47 UNCTAD, ‘Diversification and Growth in a Competitive World’, Working paper series 2008 48 Grubel, H. G. and Lloyd, P.-J., lntra-Industry Trade: The Theory and Measurement of international Trade in Differentiated Products, MacMillan, London, 1975. 49 Arndt, Sven W., and Henry Kierzkowski eds.[2001], “Fragmentation: New Production Patterns in the World Economy”, OUP, Oxford. 50 William J. Zeile, ‘U.S. Affiliates of Foreign Companies Operations in 2003’ Survey of Current Business. BEA, 2005 51 Gross, M., “lntra-firm trade with ASEAN countries by Japanese and US. multinational corporations”, Working Paper No. 273, Kiel Institute for World Economics, 1986. 52 Bardhan, A. and D. Jaffee, “On Intra-Firm Trade and Multinationals: Foreign Outsourcing and Offshoring in Manufacturing”, mimeo, Haas School of Business, University of California, Berkeley. 2004


3.5. Technology transmission and Newer forms of business organizations 3.5.1. Business Process (Services) Out-sourcing
Businesses are also outsourcing business processes and services like customer support, call center functions, telemarketing, CAD drafting, market research, manufacturing, designing, web development, content writing, ghostwriting and engineering. Empirical evidence on the scope and scale of business process and services outsourcing is even harder to gather, since universally available data, especially at macro level is still not available. McKinsey Global Institute conducted a comprehensive study titled ‘The Emerging Global Labor Market’ in 2005, covering this phenomenon in great detail. According to their estimates • From 1995 to 2005 number of jobs out-sourced was increasing at roughly 30% per annum, however • Only 0.5 % of worldwide employment in services was out sourced to foreign destinations by 2005 • IT services and packaged software had the highest number of offshore jobs, making up to 7 % of the total high-wage labor demand in the home countries. • Outsourcing of services was estimated to grow from 565,000 jobs in 2003 to 1.2 million jobs in 2008, or 1.3 percent of total developed country employment in these sectors (but only 0.6 percent of total developed country employment) Companies in the United States, the United Kingdom and Germany were the biggest in labor off-shoring. Yet this varied by company size and by sector. In general, large multinational companies pursued off-shoring the most. In most cases there is not so much off-shoring but "near-shoring", then there is out sourced to neighboring countries but in some cases, their sites are continents apart (Farrell, 2005)53. The factors that drive companies to offshore jobs are • continuous pressure for cost reduction and earnings growth, • existing global scope and experience and • a desire for access to attractive markets (like China and India) (Wilson, 2006)54, (Korczynski and Macdonald, 2008)55. Factors inhibiting companies from resourcing labor globally are of two categories, • regulatory barriers (that have declined over the past few decades to a great degree) and • company-specific barriers e.g. operational issues, management attitudes towards off-shoring and structural issues, more important except in the pharmaceutical industry Global value chains and slicing of the value chains

3.5.2. Business Clusters
Since 1990s clusters analysis became a hot topic, the term clusters was popularized by Michael Porter’s ‘The Competitive Advantage of Nations’ (1990)56. The importance of economic geography, or more correctly geographical economics, was brought to attention by Paul Krugman in ‘Geography and Trade’ (1991)57. Clusters are identified and classified in four major groups as, • geographical cluster (based in location), • sectoral clusters (based on economic or industrial sector, e.g. electronics, textiles, shipping etc.), • Horizontal cluster (formal and informal cooperation regarding manpower mobility, R&D etc.), • Vertical cluster (e.g. a supply chains). Enterprises tend to gather together into a cluster, due to a host of reasons, like • access to a shared natural resource (e.g. steel industry near iron ore or coal, agriculture commodities like cotton etc.), • proximity to a shared market like a big urban area and recently • availability of skilled human resource (near big universities) are the main reasons that brings enterprises together into clusters (Nadvi, 1995)58.

Diana et al. The Emerging Global Labor Market: Part 2 — The Demand for Offshore Talent in Services. San Francisco: McKinsey Global Institute. 2005 54 Beth Anne Wilson, Geoffrey Keim India and the Global Economy, Business Economics, 2006 55 Marek Korczynski, Cameron Lynne Macdonald Service Work: Critical Perspectives Routledge, 2008 56 Michael E. Porter “Competitive Advantage of Nations”, and Michael E. Porter (Harvard Business Review Nov. 1998) “Clusters and the new Economics of Competition”. 1990. 57 Paul Krugman, ‘Geography and trade’, MIT Press, 1991 58 Nadvi, K. “Industrial Clusters and Networks: Case Studies of SME Growth, and Innovation” case studies prepared for the Small and Medium Industries Branch, UNIDO1995



Besides the similar and related businesses that form the core of a cluster, other supporting organizations like financial, logistics, transportation etc. also complement the competitiveness of a cluster. The exchange of knowledge and experience (or technology transmission) through a shared pool of competent manpower has become the highest valued advantage of clustering in recent decades. Mytelka (1987)59,(1999)60 defines the impact of the IT revolution on clusters with ‘the growing knowledge-intensity of production’ and the emergence of ‘innovation-based competition’. As traditional barriers to trade and investment are being dismantled, the production chains are splitting into smaller sequences and spreading to ever new locations and new locations which are redesigning themselves accordingly. Globalization is actually localization anywhere on the globe where ever the best production at the lowest cost is offered. The new economy is strengthening the clusters around the core competences of the enterprises. Core competences are the capabilities that are difficult to copy or relocate, form the actual strength of modern clusters… the “clusters of competence”, (Smith, 1999)61. It’s the learning that matters most and clusters provide a perfect platform for both learning by cooperating and learning by competing. Learning by competing is most relevant in case of problem solving process for novel and unprecedented challenges imposed by the customers or other situations. As novel problems are never solved at an optimal level in first attempt and require a certain degree of trial and error. If done by multiple rival enterprises in a cluster the possibility of arriving at an optimal solution much earlier and with lower cost is possible (UNCTAD, 1995)62. Besides mutual learning there is a prominent mutual teaching effect, when enterprises share the same set of labor, suppliers and subcontractors, who benefit from economies of scale as well as continuous upgrading and cost reduction which in return improves overall efficiency for all client firms in the cluster. International transmission of technology as seen in the previous paradigm to involve a sender and a receiver firm only is now seen in terms of value chains, and clusters of competence, a completely new conceptual framework. Demarcating a cluster is more of an art then a science and evaluating its size, inputs and outputs and its long term dynamics is also ambiguous, at least with currently available data. Some scholars have based their evaluation on the International Standard Industrial Classification (ISIC) of United Nations along with case studies and special investigation to identify the industrial clusters around a product, technology or service (Dosi, 1988)63 (Best, 1990)64. The phenomenon of clustering and concentration of competence plays a key role in shaping the global economy, evident from the extent to which an overwhelming amount of trade and industry sectors (from textiles to telecom) are concentrated or clustered in a few countries and regions and not evenly dispersed all over the globe. At national level, a given country may specialize within certain industry sectors, while other sectors are being underrepresented. The sectors underrepresented in one country will on the contrary be found in high concentrations in other countries. Comparing the export patterns of various countries, one may find a given country’s specific potential and strength. Advanced industrial clusters are formed near the educational or research institutions and other forms of knowledge infrastructure. Governments at all levels: municipal, regional, national and regional (e.g. European Union), try to foster the creation of clusters by providing infrastructure and tax holidays in science and industrial parks, incubators, export processing zones and technopoles (Mytelka, 199165; Vavakova,199566). More recently, development agencies and governments in the developing countries have taken their cue from such policies and have vigorously pursued similar clustering initiatives. Developing countries small and medium enterprises (SMEs) have benefited from clustering by attracting international players from advanced countries through outsourcing and off shoring and by leveraging this advantage with domestic linkages with users and producers. East Asia particularly China remains the top destination for offshore production, evident from receipts of FDI over the past two decades. China has a large number of important ports and special export processing zones located nearby, where intermediate products are received and processing exports are shipped directly (or through Hong Kong) to other countries. While India has made its mark in business process off shoring in information technologies sector almost all of which is centered in Bangalore’s IT park.
59 Mytelka L.K., “The Evolution of Knowledge production Strategies within Multinational Firms”, in J. Caporaso (ed.) A Changing International Division of Labour, Boulder, Colo: Lynne Reiner, 1987 60 MYTELKA, L.K “Competition, Innovation and Competitiveness: A Framework for Analysis” in L.K. Mytelka (ed.) Competition, Innovation and Competitiveness in Developing Countries, Paris, OECD, 1999 61 Smith, K., Industrial structure, technology intensity and growth: issues for policy, paper prepared for the DRUID conference on National Innovation systems, Industrial Dynamics and Innovation Policy, Rebild, Denmark, 1999 62 UNCTAD Promoting and Sustaining SMEs Clusters and Networks for Development 1998 63 Dosi, G. & L. Orsenigo “Coordination and transformation: an overview of structures, behaviors and change in evolutionary environments” in G. Dosi, C. Freeman, R. Nelson, G. Silverberg, and L. Soete (eds.) Technical Change and Economic Theory, U.K.: Pinter Publishers, 1988 64 Best, Michael The New Competition Institutions of Industrial Restructuring. Cambridge: Polity Press 1990. 65 L. Mytelka “Crisis, technological change and the strategic Alliance” in L. Mytelka (ed). Strategic Partnerships and the World Economy, London, Pinter Publishers 1991 66 Vavakova, Blanka (1995) “Building “Research-industry”partnerships through European R&D programs” International Journal of Technology Management, Vol. 10, Nos.4/5/6, pp. 567-586.


3.6. Technology transmission through Globalization of R&D
TNCs are off-shoring more and more R&D (figure:3.6) in different parts of the world through both FDI and technology alliances (non-equity mode). This pattern of locating R&D differs radically from that of the past (the 1950s and 1960s). During that period, TNCs derived competitive advantages, particularly technological knowledge, from their distinctive domestic environments, which led to the exploitation of this advantage abroad through exports and outward FDI (Hymer 196067; Vernon 196668)(Patel and Pavitt 1991)69. Globalization of R&D activities started by early 1990s, but initially it remained concentrated in Triads (Elder, Meyer-Krahmer and Guido 2002)70, however 71 the recent expansion of R&D centers in East Asia and other developing countries (Doz and Winson, 2006) raises 72 73 questions on previous arguments (Gassmann and Zedtwitz, 1999 ; Torbjorn Fredriksson, 2006) . The spread of R&D-related FDI to new host countries can be seen as a part of the increasing magnitude of global production networks (Ernst 2002)74 and also a qualitative rise from production to design and R&D facilitated through internet. The factors influencing positioning of R&D centers in the world are complex (Reddy 2000)75. TNCs positioning of R&D activities across world depends on country general environments and characteristics of the national system of innovation in which they are investing (Archibugi and Michie, 1995)76. Foreign R&D centers are attracted to both high quality human resources (as in case of small populations of Korea, Taiwan, Singapore) and market size (as in case of China and India). Access to market and size necessitates interaction with market for: • Localization of products to local situation (Cornet and Rensman 200177; Narula 200078;) • Production experience and capability (Fors and Zejan 199679; Gao 2001)80, • Proximity to supplier and manufacturing capacity and existence of competitive industry. In the case of science-intensive R&D activities, human resources in universities and research institutes are important for attracting TNCs (Kummar 200181). According to the UNESCO Institute for Statistics UIS The number of researchers in developing countries jumped from 1.8 million to 2.7 million in five years (2002-2007). Asian students returning from the US have also enhanced these nations R&D capability. For developing nations participation in a global research network offers more opportunities for division of labor in R&D or knowledge-intensive engineering as outsourcing of R&D represents the higher end of the value-added 82 spectrum (Cantwell, Janne, 1999) .TNCs positioning of R&D activities is not general but concentrated in specific
Hymer, S. H. (1960): “The International Operations of National Firms: A Study of Direct Foreign Investment”. PhD Dissertation. Published posthumously. The MIT Press, 1976. Cambridge, Mass. 68 Vernon, Raymond (1966). “International investment and international trade in the product life cycle”, Quarterly Journal of Economics, 80, pp.190-207 69 Patel and Pavitt, 1999 P. Patel and K. Pavitt, National systems of innovation under strain: the internationalisation of corporate R&D. In: R. Barrell, G. Mason and M. Mahony, Editors, Productivity, Innovation and Economic Performance, Cambridge University Press, Cambridge (1999), pp. 217–235. 70 Edler, Jakob, Meyer-Krahmer, F. and Reger, Guido, Changes in the Strategic Management of Technology: Results of a Global Benchmarking Study. R&D Management, Vol. 32, pp. 149-164, 2002. 71 Yves Doz & Keeley Wilson, INSEAD, 2006. Source: 'Innovation: Is Global the Way Forward?' INSEAD & Booz Allen Hamilton, 2006 72 Boutellier, R., Gassmann, O., & von Zedtwitz, M. (1999). Managing global innovation: uncovering the secrets of future competitiveness. Berlin: Springer. 73 Anne Miroux and Torbjorn Fredriksson, 2006. Measuring restrictions on FDI in services in developing countries and transition economies, UNCTAD/ITE/IIA/2006/1 74 Dieter Ernst & Jan Fagerberg & Jarle Hildrum, 2002. "Do Global Production Networks and Digital Information Systems Make Knowledge Spatially Fluid?," Economics Study Area Working Papers 43, East-West Center, Economics Study Area 75 Reddy, P. 2000. Globalization of corporate R&D: Implications for innovation systems in host countries (1st ed.). London: Greenwood, Routledge. 76 Archibugi, D. & Michie, J. (1995). 'The globalisation of technology: a new taxonomy', Cambridge Journal of Economics, 19(1), 121-140. 77 Cornet, M. and M. Rensman, (2001), The Location of R&D in the Netherlands. Trends, Determinants and Policy, Centraal Planbureau (CPD) document no. 14, Den Haag. 78 Narula, Rajneesh & John Dunning, 2000, Industrial development, globalisation and multinational enterprises: New realities for developing countries, Oxford Development Studies, 28 (2) 79 Fors, G., & Zejan, M. 1996. Overseas R&D by multinationals in foreign centers of excellence. Working paper no. 111, The Economic Research Institute, Estocolmo: Stockholm School of Economics. 80 Shi-Ji Gao and Gang Xu 2001, Learning, combinative capabilities and innovation in developing countries: the case of video compact disc (VCD) and agricultural vehicles in China, International Journal of Technology Management Volume 568 - 582 22, Numbers 5-6 / 2001 81 Kumar, N., Determinants of location of overseas R&D activity of multinational enterprise: the case of US and Japanese corporations . Research policy, 30, 2001, 159-174 82 Cantwell J and Janne O (1999). “Technological globalisation and innovative centres: The role of corporate technological leadership and locational hierarchy”, Research Policy 28: 119–144.


field in the country’s area of specialization (Patel and Vega, 1999)83. It could be for utilizing externalities of intensely populated firms in a specific cluster (Cantwell and Piscitello, 2003)84. Thus along with a favorable general economic and scientific environment, developing nations should pursue world class expertise in a few specific areas of research that have promising future. Global innovation system
0.02 0.01 0.01 0.01 0.01 0.01 100% 0.06 0.04 0.07 0.08 0.99 0.11 0.20 0.14 0.20 80% 0.31 0.33 0.31 0.31 60% 0.55 40% 0.49 0.47 0.40 20% 0.38 0.32 0.34 Home Country 1975 1980 1985 1990 1995 2000 2005 0.04 0.02 0.09 0.19 0.08 0.05 0.05 0.18 0.09 0.05 0.09 0.16 0.30 USA 0.31 0.28 Western Europe Others India China

Figure 3.6: Changing Distribution of R&D Sites Source: Doz and Winson (2006)


3.7. Role of International Migration and Remittances in technology transmission
Technology transmission is a little studied outcome of high skilled mobility, but one that theoretically can yield significant economic benefits (Bhagwatti, 1977). Research indicates that cooperation in academic and research settings improves the conditions for economic growth in developing economies (Smallwood and Maliyamkono 1996). Many observers presume that knowledge or technology transmission are a primary way for developing countries to benefit from high skilled emigrants (Teferra 2000). The global picture In spite of the limited data on migration of S&Es (Box 2) some broad trends are widely established. • All migration is rising due to globalization. A growing proportion of migrants are highly skilled (HS), or educated to tertiary level. According to one study, as of 2000, 20 million of the 59 million migrants3 in member countries of the OECD were HS. New information communications technology (ICT) is giving rise to ‘virtual mobility’ whereby S&Es engage in international activities without physically relocating. Moving People and Knowledge: Scientific Mobility in an Enlarging European Union, Summary Report. H.L.Ackers, B.Gill, J.Guth, 2007. International Migration occurs when peoples cross state boundaries and stay in the host state for some minimum length of time. Migration occurs for many reasons including pursuit of economic opportunities, to be with family members who have migrated, political conditions in their countries and recently education is a major reason for international migration, as students pursue their studies abroad. During the recent globalization international migration, especially from lower middle and middle income countries, has risen steadily (Figure 3.7 A). Immigrants from developing nations include both unskilled labor and highly educated professional. Traditionally high skilled immigration was termed as ‘Brain Drain’ and damaging to the growth rate of sending countries (Straubhaar and Wolburg 1997, Hague and Aziz 1999; Wong and Yip 1999). But recently there is growing interest in economic offsets that redress the effects of brain drain. First of all the
Patel and Vega, 1999 P. Patel and M. Vega, Patterns of internationalisation of corporate technology: location vs. home country advantages, Research Policy 28 (1999), pp. 145–155. 84 John A. Cantwell & Lucia Piscitello, 2003. "The Recent Location of Foreign R&D Activities by Large MNCs in the European Regions. The Role of Different Sources of Spillovers," ERSA conference papers ersa03p322, European Regional Science Association


remittances sent home by the high earning immigrant workers are becoming a major source of foreign exchange and direct contribution to the national income enhancing domestic savings and investments (Figure 3.7 B) Taylor et. al. (1996). Indirect effects include improved education and health outcomes (Rapoport and Docquier, 2005) Stark and Prskawetz (1998), Vidal (1998), and Beine, Docquier and Rapporport (2001) not only due to income raise of the recipient family, but also as potential migrants invest in higher education when they see that their migration prospects would increase (Stark and Wang, 2002). But the most significant long term effect is that migrants promote brain circulation instead of brain drain, when returnees contribute to the diffusion of more advanced technology Domingues Dos Santos and Postel-Vinay (2003) and Stark, Helmenstied and Prskawetz (1997). One of the most visible aspects of globalization is student mobility. More than 2.5 million students were studying outside their home countries in 2008(De Wit, H. 2008)85. Of the sending countries, China and India have almost quadrupled numbers between 1995 and 2005(Figure 3.7 C). Although advanced nations are the biggest destinations for international students (figure 3.7 D), South to South mobility of students has been increasing. Estimates predict the rise to 7 million international students by 2020. Outflows of foreigners from OECD countries are far from negligible: depending on the country, they can represent anywhere between 20% and 75% of the volume of yearly inflows (OECD, 2010)86. Since the late 1990’s, the economics literature shifted from brain drain to “brain gain” exploring the potential benefits of skilled migration arising from remittances, return migration, creation of trade and business networks, and the possible incentive effects of migration prospects on human capital formation at home. Japan, Korea, and Taiwan (China) are examples of economies that have tapped into their diaspora as a source of knowledge of international best practice. The governments in these economies promoted the return of foreign educated students or established networks of knowledge exchange with them. The recent socio-economic literature on the role of Diasporas argues that trade, technology diffusion, capital formation and entrepreneurial activity are facilitated by migrants. The argument is that migrants facilitate host and source country bilateral trade and investment because they help to overcome information asymmetries and other market imperfections (Funkhouser 1992, Yang 2004, Woodruff and Zenteno 2001) Immigrants, students and returning migrants help form ‘dense and highly complex networks spanning vast spaces’ that are transforming many kinds of social, cultural, economic and political relationships (UNESCO, 2009)87. This complex form of contact can even foster changes in thinking along with the foreign investment and deeper integration in global economy through networks of scientists and R&D personnel, business networks of knowledgeintensive start ups and networks of professionals working for multinationals (Pack 1993) (Mountford 1997) (Saxenian 2005).

De Wit, H. (2008) ‘Changing dynamics in international student circulation: meanings, push and pull factors, trends, and data”, in: H. De Wit, P. Agarwal et al. (eds.) (2008) The Dynamics of International Student Circulation in a Global Context Rotterdam: Sense Publishers), pp.15-45. 86


Philip G. Altbach, Liz Reisberg, Laura E. Rumbley, Trends in Global Higher Education: Tracking an Academic Revolution World Conference on Higher Education, UNESCO, 2009


A: Total migration, by income group, Source: World Bank WDI 2010

B: Workers Remittances received as a % of GDP, by income groups. Source: World Bank WDI 2010

C: Growth in foreign education. Source de Wit et. Al. 2007 Figure 3.7: Patterns of Global Migration

D: Host destinations for international students 2008 (OECD)

Involvement of the diasporas in sending countries’ economies can take several forms: • licensing agreements to provide technology transfer and know-how between diasporas owned or managed firms in host countries and sending country firms; • direct investment in local firms, as a joint venture; • knowledge spillovers when diasporas members assume top managerial positions in foreign-owned firms within their country of origin; • networks of scientists or professionals to promote research in host countries directed toward the needs of sending countries; • virtual return, through extended visits or electronic communications in professional fields such as medicine and engineering; • return to permanent employment in the sending country after work experience in the host country. (World Bank, 2005)88 Many developing nations are adapting policies that promote this kind of linkages, for example, the government of the Peoples Republic of China has offered investment packages to overseas Chinese. (Hsing 2003). Replication of successful experiences in smaller countries will be more difficult, however, because they may be unable to reach a critical mass of influential people in any given sector (e.g., medicine, engineering, large corporations, etc). Dunlevy (2003) presented a hypothesis that “The more distant their native language is from English, the greater will be the immigrants’ advantage in dealing with members of their origin countries.” He finds that the elasticity of exports with respect to the immigrant stock is significant at 0.29.

3.8. Technological Progress in Developing Nations

John Page and Sonia Plaza, 2005, Migration Remittances and Development: A Review of Global Evidence The World Bank August 18, 2005


Technology is at the very heart of human progress and development. It accounts for much of the economic and social progress of the past few centuries. And it will help meet the developmental and environmental challenges of the twenty-first century. To a significant degree, technological progress is what makes the difference between fastgrowing developing economies and slow-growing ones. The international technology transmission of technology from advanced nations to the developing nations progressed steadily during the installation phase (1970s-2007) of IT revolution through international communication, trade, investment, international immigration, business and other linkages. An overall rise in the intensity of these aspects of globalization is generally expected to have boosted international technology transmission. However, exposure to new ideas and techniques is not enough to ensure that technology diffuses throughout the economy, developing countries also need to have a strong indigenous capacity to effectively absorb these ideas and techniques. Developing nations have been exerting concerted efforts to boost their domestic technological capabilities as well as absorption capacities, though through different strategies and at varying degrees. Exactly how much technological progress was actually made and what is the resulting economic and social outcome cannot be estimated by a single number as such. In this section we attempt to capture this aspect of the recent global techno-economic paradigm using some of the popular indicators available through multiple secondary sources. Measuring different aspects of technology is still a challenge for econometricians and statistians alike. This could be because of two reasons, first technology and its value is hard to define and pinpoint, and also because statistics collection and their widespread availability is still very underdeveloped. However a recent report published by World Bank, titled, Global Economic Prospects 2008, under the main theme of ‘Technology Diffusion in the Developing World’ (World Bank 2008)89 is a comprehensive study of creation, diffusion and utilization of technology in both developed and developing nations. Some of the important findings of the report are summarized in the figure 3.790 and the text below: One ordinary measure of technological progress can be the scientific invention and innovation, which can be measured by the number of patents and journal articles attributable to a country. Figure 3.7 (A) shows that developing countries are scarcely active at the global technological frontier. However, China now contributes a larger share of global patent applications (10 percent in 2004, up from 1.5 percent in the late 1980s). Similarly the Europe and Central Asia region (former Soviet bloc countries) also have a sizable scientific and technological infrastructure in place. For the rest of developing nation their absence from global science and technology generation indicators is mainly because they lack the critical mass of technological competencies, many people from developing countries perform their cutting-edge research in high-income countries, cultural and political differences and a multitude of other reasons. The lack of advanced technological competencies in these countries also means that technological progress in developing countries occurs through the adoption and adaptation of pre-existing but new-to-themarket or new-to-the-firm technologies. Figure 3.7 (C and D) shows how have various pre-existing technologies spread in developing countries? As purported earlier in this chapter, every technological revolution diffuses across the globe at varying speed and intensity. These figures would also shed light on this assertion. First of all low-income countries currently employ only a quarter of the level of technology in developed countries and the picture is somewhat different for older technologies than it is for newer ones. Mature technologies (Figure 3.7 C) or innovations of the previous revolutions such as steam power, electricity, and telephones, exist to some degree in virtually every country. But access to these older technologies varies widely between countries, depending on both the country’s capacity to absorb technology and whether the technology is

‘Global Economic Prospects, Technology Diffusion in the Developing World’ 2008, TheWorld Bank, 2008. Figure 3.7 A contains the result of an index of scientific inventions and innovation, (developed by the World Bank), based on total number of scientific and technical journal articles (from World Development Indicators), Patents granted by the U.S. and European Patent and Trademark offices (Lederman and Saenz, 2005). Intensity of imported technology in domestic economy (Figure B) is calculated by World Bank using FDI net flows, Royalties and license fee payment, imports of high-tech goods and capital goods and intermediary goods all as a % of GDP, source of data is World development indicators and CEPII BACI database. Weights are assigned to each component of the index using Principle component analysis (as in Gwatkin and others 2000, McKenzie, 2003 etc.) The same methodology is used in working out the level of penetration of older and new technologies (figure 3.7 C and D) on the base of input and output sub indicators (Comin and Hobijn 2003). Input indicators include electric power consumption (KWH per capita), international outgoing telephone traffic (minutes), air transport (registered carrier departures worldwide % of GDP), and agriculture machinery (tractors per 100 hectares of arable land), all of which are present in world development indicators online. And output indicators are export of manufactures and medium-tech exports (both as % of merchandise exports). Penetration of recent technologies is calculated using internet users, personal computers (per 100 people), cellular subscription (per 1000 inhabitants), percentage of digital mainlines and high tech exports (% of total exports). TFP (Figure 3.7 E) is an indirect measure because it attributes to technology all income growth that cannot be explained by investment and increases in labor supply. It is commonly used because measuring technology directly is difficult as unlike other objects of economic value, technology cannot be easily counted in physical terms.



affordable. While countries of the former Soviet bloc enjoy near-universal access to electricity, only 8 percent of the rural population in Sub-Saharan Africa has access to electricity, and just over half the urban population. Older technologies have spread quicker in some sectors than in others for example agriculture technologies have spread much faster than medical technologies as in South Asia and Sub-Saharan Africa averaging immunization rates of just 59 to 63 percent in 2003. Such infrastructure technologies are provided by the state and for most developing nations, especially in the past, high cost and excessive indebtedness have limited the extent of investments in these technologies. Weak institutions and lack of capacity to maintain infrastructure systems has made it even more difficult for such technologies to spread. Newer technologies (Figure 3.7 D) have penetrated developing countries much faster than older technologies. Mobile phones have spread the fastest, while internet bandwidth consumption and the number of broadband subscribers have also more than doubled from 1999 to 2004 in developing countries. Personal computers, which are more expensive than shared Internet connections, have spread more slowly. Three-quarters of low-income countries have 15 or fewer personal computers per 1,000 people, and a quarter have fewer than five. But some low-income countries do much better. Slow penetration of modern technologies in any developing region in the world partly reflects a lack of mature technology based infrastructure, which makes newer technologies prohibitively expensive. Figure 3.7 E and F are more cumulative figures of technological progress. First of all figure 3.7 E measures the relationship between income and technological achievement. This relation is complex as level of income affects the ability to gain access to technology, while the level of technology helps to determine income levels. A common measure of technological progress in relation with economic performance is growth in total factor productivity (TFP). This is the relative efficiency with which an economy produces goods and services given a certain quantity of labor and capital. In the graph, the main difference between regions where GDP per capita has been growing quickly since the early 1990s (East Asia, South Asia, and developing countries in Europe) and those where growth has been weaker (Latin America, the Middle East, and Africa) has been the rate at which technology has progressed (Poncet, 2006)91. Rapid GDP per capita growth translates into rising incomes. In this way, technological progress has helped reduce the share of people living in absolute poverty in developing countries from 29 percent in 1990 to 18 percent in 2004 (UN, MDGs). Finally the World Bank, Technological Achievement Index (figure 3.7 F) measures technological achievement along four dimensions: the extent of scientific invention and innovation, the spread of older technologies, the spread of newer technologies and the use of foreign technologies in domestic production. By these measures, technological progress in developing countries between the 1990s and 2000s has been very strong, though the “technology gap” between rich and poor countries remains large.


Poncet Sandra, 2006, The Long Term Growth Prospects of the World Economy: Horizon 2050, CEPII, Working Paper No 2006-16


100 % 80% 60% 40% 20% 0%

Intensity of imported technologies summery index (2000s), High-Income countries=100

High Income

Upper Middle Income

Lower Middle Income

A: Scientific innovation and invention (2000–03) Source: World Bank, Global Prospects, 2008

B: Developing nation’s participation at global technology frontier. Source: World Bank, Global Prospects, 2008

C: Penetration of older technologies (2000–03): Source: World Bank, Global Prospects, 2008

D: Penetration of recent technologies (2000–03) Source: World Bank, Global Prospects, 2008 160%

Average Total Factor Productivity Growth

120% 80% 40% 0%

High Income Upper Middle Lower Middle Income Income

Low Income

E: The Relationship of Technology and Economic Development Source: Poncet, 2006.

F: Change in Technological Achievement, 2000s vs 1990s Source: World Bank 2008

Figure 3.7: summery of findings from ‘Global Economic Prospects, Technology Diffusion in the Developing World’ 2008, source: The World Bank, 2008 To conclude this argument one can say that on bright side: • • Over the past 20 years in many developing countries exposure to foreign technologies has dramatically increased (The ratio of high-tech imports to GDP in developing countries has more than doubled since 1994) The pace at which technology has spread among countries has increased dramatically over the past two centuries. (In the 1800s, a new technology took an average of 84 years to reach all developing countries. By the 1950s this had fallen to 26 years and by 1975 to 18 years (Comin and Hobijn 2003)92)


Diego Comin and Bart Hobijn 2003, Cross-Country Technology Adoption: Making the Theories Face the Facts, The Carnegie Rochester Conference on Public Policy, April 2003


Political and macroeconomic instability slows the spread of technology. Over the past 15 years, the number of countries involved in international conflict or domestic conflict (as measured by the International Crisis Behavior Project)93 has fallen significantly. In Sub-Saharan Africa, where the number of countries in conflict has declined since 1998. • There has been significant progress in developing countries in health, incomes, and literacy rates over the past 15 years. (Since more children are enrolled in school, literacy rates have increased in low-income countries from less than 50 percent in 1990 to more than 62 percent today, and more than 74 percent among youth) • Improvements in the spread of older technologies has contributed significantly to faster technological progress in low-income countries • Within sectors, the most productive firms tend to be five times more productive than the average firm. If their technologies were adopted by other firms (and their workforce had adequate skills), GDP could be increased by between four and five times But technological and thus economic gaps among the advanced and poorer nations of the world are still immense and there is a bleak of the picture, as: • Few countries have improved their technological absorptive capacity by more than 10 percent between 1990 and 2000. • Technology does not spread as quickly within countries, weak internal diffusion of technology holds back overall technological achievement in many countries. While major centers and leading firms in China, Brazil and India may operate close to the global technological frontier, most firms in these countries operate at less than a fifth of the top productivity level • The use of the most effective technologies tends to be limited to urban areas and the most productive firms. For example, India’s IT-enabled services sector employs world-class technologies, but less than 10 percent of the country’s rural households had telephone access as of 2007. • Firms that want to try out untested techniques or problems face serious challenges in developing countries. They are less likely to obtain financing and are more likely to bear higher capital costs • Developing countries’ capacity to absorb technology is weakened by low technical literacy, the uneven spread of older technologies such as electricity and telephones, and low penetration of technologies in rural areas • Regulatory restrictions and unwise deregulation that impair the economy’s flexibility may slow down the absorption of technology • Developing countries lag behind high-income countries on a wide range of governance indicators. For example, government effectiveness and regulatory quality are typically considered to be at half of OECD levels, with indicators for corruption, rule of law, and voice and accountability being even lower And some broad policy directions include: • Improving the overall investment climate so as to allow innovative firms to grow and flourish • The most important determinants of technological adoption are the country’s human capital endowment, type of government, degree of openness to trade, and adoption of predecessor technologies. (Comin and Hobijn, 2004)94 • Committed national leadership and international support is needed for strengthening basic infrastructure (roads, electricity and telephony), raising the quality and quantity of education throughout the economy, reinforcing dissemination systems and the market orientation of R&D programs and Maintaining openness to trade, foreign direct investment, and participation of migrant populations.

3.9. Evolution in Institutional Framework of Globalization
Douglas North suggests that: institutions are constituted by a set of formal and informal rules that govern the behavior of individuals and organizations, the latter being entities that bring together individuals pursuing common goals (enterprises, trade unions, NGOs, etc.). In this context, institutions structure the incentives that affect behaviors and provide a framework for economic exchanges (North, 1990). There is no single optimal institutional model that applies to all countries regardless of their levels of development and institutional heritage (North, 1994;
93 94

International Crisis Behavior database.

Comin, Diego, and Bart Hobijn. 2004. “Cross-Country Technology Adoption: Making the Theories Face the Facts.” Journal of Monetary Economics 51 (1): 39–83.


Aoki, 2001). An institutional configuration is characterized not only by its relevance at a given moment, but also by its capacity to be called into question or adapted along with the transformation of society and the economy, or when difficulties arise (Acemoglu, Aghion and Zilibotti, 2002). The malleability of institutions (measurable by the aptitude of reforms to produce change) is therefore an important variable in describing the institutions (Brousseau, 2000). Meisel and Aoudia, (2007)95 have maintained a global interactive database of institutions broken down according to nine themes, grouped into four types: Public Institutions, Civil Society; 1. Political institutions: 2. Law and order: 3. Public administrations: functioning of political institutions, public rights and freedoms; safety of persons and goods, conflict management within society and between society and the State, external security; transparency and efficiency of public action, corruption, independence and level of application of the justice system;

Market for goods and services; 4. Markets' operating freedom: share of the private sector in the productive sector and financial system, share of non-administered prices (including interest rates), degree of flexibility of the labor market; 5. Co-ordination of actors and anticipations: the State’s capability to bring about convergence of interests and anticipations, authorities' strategic vision, capacity to absorb technology;

Capital market; respect for property rights, contract law, handling of commercial disputes; 7. Market regulation, corporate governance: competition on the markets for goods and services, capital and labor, arrangements for the regulation of competition, corporate governance, regulation and supervision of the financial system, instruments for social dialogue; 8. Openness to the outside world: free circulation of goods and services, capital, persons and information; Labor Market and Social Relations 9. Social cohesion and mobility: social and regional balances, equality of treatment (according to gender, ethnic origin, etc.) by tradition and through formal institutions, social mobility, solidarity (traditional, institutional). 6. Security of transactions and contracts:

This database covers all developing, in transition and developed regions, accounting for 90% of world population and GDP and presenting a wide range of economic and institutional trajectories. The database reflects the most recent convergence of reforms towards public governance or, in other words, the progressive movement of reforms that shifted from market liberalization in the 1980s and 1990s to governance in the 2000s. Referring back to the opening argument, that the information technology revolution has passed through the installation period and is undergoing the mid-revolution financial crisis before the deployment stage and a golden age would begin. Carlota Perez 1983 explains crises and depressions in terms of a mismatch between social and political institutions and the techno-economic paradigm. Therefore this financial crisis is actually the impetus for restructuring of an older institutional structure with a new one based on governance and regulation that would lead to a new period of growth and stability. The present global institutional setup was erected after the World War II, under the influence of the US Treasury Department and with support of other victorious western powers. The General Agreement on Tariffs and Trade (GATT), and its successor the WTO and key International Financial Institutions like the World Bank and the IMF and even UNO are the icons of the present day global politico-economic institutional framework. As these

Nicolas Meisel and Jacques Ould Aoudia, 2007, ‘A new institutional database: Institutional profiles 2006 DGTPE Working Papers number 2007/09


institutions slowly expanded their influence and adapted new forms, a global economic policy framework emerged by end of the age of mass production and eruption of the IT revolution (as early as 1970s). Mainstream economists advocated market based economic reform, e.g. Little et al. (1970), Krueger (1974)96, however the process of the reform formally started with the introduction of the Structural Adjustment Programs (SAPs) and Stabilization Programs (SPs) of the World Bank and the IMF in early 1980s (World Bank, 1987 )97. Wide variety of arguments and recommendations of this framework can be summarized in a more precise expression ‘Washington Consensus’ coined by John Williamson. The ‘ten commandments’ of Washington consensus were meant to roll back the reach of the state. Thus, governments, in both rich and poor nations, were urged to practice ‘macroeconomic prudence’ (a euphemism for the control of inflation and for maintaining tight budgets), deregulation, privatization and economic liberalization (primarily through trade and capital account liberalization) (Williamson 1994)98. There are, of course, references to restructuring government budgetary priorities for sustaining social spending in basic health and education, but, as Williamson (1999)99 himself concedes, this proposition is typically neglected in practice. The reform process became global by early 1990s, as almost all the nations took up the reform process either voluntarily or under pressure from the global financial institutions. UNCTAD classify the reforming countries into three groups. • first group consists of a number of countries in East Asia which continued their own dynamic industrial and trade policies initiated in 1960s. Economic reforms of China however standout as an exception • second group includes a large number of countries, mostly in Africa, which have gone through the reform programs designed and dictated by the International Financial Institutions. • third group comprises a number of Latin American countries that undertook economic reform since early 1980s, initially under pressure from international financial institutions (Shafaeddin, 2005)100. This institutional framework is of great significance in determining the international technology transmission as it regulates the global finance, trade, state policies and even the conceptual interpretation of basic techno-economic and social ideas. The import substitution framework was replaced by a free trade regime, international technology transmission concepts changed altogether from a proactive state led contract bargaining paradigm to the present day sourcing paradigm led by TNCs and private firms. Actually these changes are the main theme of technology transmission research presented here. In terms of institutional changes a significant trend is the emergence of numerous bilateral, regional and interregional trade agreements, common markets and other similar institutions all over the globe.

Figure 3.8: Increasing regional integration (source, UNCTAD, World Trade)

96 Krueger AO The political economy of the rent-seeking society. American Economy Review (1974). 64(3):291–303. 97 World Bank (1987). World Development Report. Washington, DC, World Bank. 98 Williamson, J., ‘In search of a manual for Technopols’, in Williamson, J. [ed.], The Political Economy of Policy Reform, Washington: Institute for International Economics, 1994 99 Williamson, J 1999 ‘What Should the Bank Think About the Washington Consensus’? Paper Prepared as a background paper to the World Development Report 2000, July 100 S.M. Shafaeddin, .Trade Liberalization And Economic Reform In Developing Countries: Structural Change Or De-Industrialization? UNCTAD, 2005


A regional trade agreement (RTA) is an economic trade agreement to reduce tariffs and restrictions on trade (also called ‘WTO Plus’) between two or more nations within a certain region. The rationale behind this setting is primarily to attain regional competitiveness against global competition. Regional free trade and customs unions help promote efficient distribution of resources, and technology transfer (Steers and Nardon, 2005)101. • There were 205 agreements in force (as of July 2007), 300 RTAs have been reported to the WTO (Lamy, Pascal 2007)102. • Biggest and most significant of these are the seven regional integration agreements APEC, the European Union, NAFTA, ASEAN, CEFTA, MERCOSUR and the Andean Community. Figure 3.8 reveals the global regional integration trend for the past 60 years. The trend lines represent the % share of regional trade in a regions total trade; first group is the developed nations as a group, having 70 to 80% of their trade with other developed nations throughout the period. The orange, red and brown, dashed lines represent APEC, EU and NAFTA as the trade blocks dominated by developed nations. The barbed blue line represents developing countries as a group, trading about 20 % of the good with other developing nations in 1950. Eastern Asia was a highly integrated region in 1950s but had a steep decline, till mid 1960s and picked up again in mid 1970s. Developing economies were much less integrated initially show a continuous trend towards integration, by 2006 doing more than half of their international trade with other developing nations. Among the developing nations, East Asia is the most integrated region, followed by ASIAN and Latin America while Africa is the least integrated region. No wonder the scale of economic integration closely matches the economic development and technological advancement of these regions. A negative repercussion of globalization is the immediate spread of cyclical disorders in individual economies, through integrated and very fragile mechanism of international finance, which produced financial crisis in Mexico (1994), Russia (1998) South-East Asian countries (1997-1998), Brazil (1999), Argentina (2002) and the contemporary global financial crisis generated by the collapse of financial market in the U.S.A. (Stefanović, 2008)103. The current global financial crisis, increased income disparities between and within the nations, and concern for environmental sustainability are all clear signs of a historical turning point where the institutional framework of world governance erected since World War II has ultimately failed. Without debating the normative values of one system over another we can conclude that “the main reason of the crisis is the exhaustion of accumulation possibilities within the current system (Wallerstein, 1998).The OECD is predicting major rebalancing of ownership structure in global industries (Safadi, 2009)104. At national level, deregulation and privatization has created huge informal economies and a slow pace of state development has left the institutional framework of governance too weak to ensure social welfare of the common man. However over the last 20 years of globalization and increased openness has accelerated the inflow not just of goods and services but also knowledge, useful technologies and above all a mutual respect for the diversity of social, political and economic systems. We can expect a new round of protectionism that can only be effectively contained through continued dialogue and coordination. Future progress of humanity requires an institutional framework, with common values. "Free-market globalization alone cannot achieve social justice," What the world needs is a global New Deal."105. Not a world government but a new multipolar institutional framework aimed at shaping globalization in the interests of all citizens, that can govern, manage and monitor based on sustainability, common values and principles.

The global outlook in summary, 2007-2011
Global Economic Prospects 2010: Forecast summary
Available in: 中文, Español, Français

101 Richard M. Steers, Luciara Nardon, ‘Managing in the global economy’, M.E. Sharpe, 2005 102 DG Pascal Lamy, Proliferation of regional trade agreements “breeding concern”. Geneva, 2007 103 Zoran Stefanović, 2008, Globalization: Theoretical Perspectives, Impacts and Institutional Response of the economy, Facta Universitatis Series: Economics and Organization Vol. 5, No 3, 2008, pp. 263 - 272 104 Raed Safadi, Workshop on Developing Countries and the Global Crisis, OECD Trade and Agriculture Directorate, 2009 105


Percentage change from previous year, except interest rates and oil prices

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2.0 2.9

3.1 3.8

-0.2 -0.5

1.1 1.6

1.7 2.4

17.1 71.1 10.6 5.5

21.0 97.0 36.4 6.0

-21.6 61.8 -36.3 -4.9

5.3 76.0 23.1 1.5

0.7 76.6 0.8 0.7

Oil price (percent change) Manufactures unit export value Interest rates $, 6-month (percent) €, 6-month (percent) Real GDP growth World Memo item: World (PPP weights) High income OECD Countries Euro Area Japan United States Non-OECD countries Developing countries East Asia and Pacific China Indonesia Thailand
f e d

5.2 4.3

3.2 4.8

1.2 1.5

1.8 2.2

2.8 3.0

3.9 5.0 2.6 2.5 2.7 2.3 2.1 5.4 8.1 11.4 13.0 6.3 4.9

1.7 2.7 0.4 0.3 0.5 -1.2 0.4 2.6 5.6 8.0 9.0 6.1 2.6

-2.2 -1.0 -3.3 -3.3 -3.9 -5.4 -2.5 -2.3 1.2 6.8 8.4 4.5 -2.7

2.7 3.5 1.8 1.8 1.0 1.3 2.5 2.9 5.2 8.1 9.0 5.6 3.5

3.2 4.0 2.3 2.3 1.7 1.8 2.7 3.9 5.8 8.2 9.0 5.8 4.0


Europe and Central Asia Russia Turkey Poland Latin America and Caribbean Brazil Mexico Argentina Middle East and North Africa Egypt Iran
g g

7.1 8.1 4.7 6.7 5.5 5.7 3.3 8.7 5.9 7.1 7.8 3.0 8.5

4.2 5.6 0.9 4.9 3.9 5.1 1.4 6.8 4.3 7.2 2.5 3.0 5.7 6.1 2.0 6.2 5.1 3.7 5.3 1.7

-6.2 -8.7 -5.8 1.6 -2.6 0.1 -7.1 -2.2 2.9 4.7 1.0 2.1 5.7 6.0 3.7 5.9 1.1 -1.8 4.3 2.8

2.7 3.2 3.3 2.2 3.1 3.6 3.5 2.3 3.7 5.2 2.2 3.9 6.9 7.5 3.0 5.5 3.8 2.0 4.8 3.3

3.6 3.0 4.2 3.4 3.6 3.9 3.6 2.4 4.4 6.0 3.2 4.0 7.4 8.0 4.0 5.8 4.6 2.7 5.1 4.8

Algeria South Asia India





6.4 6.5 5.5 6.3 7.1

Sub-Saharan Africa South Africa Nigeria Kenya Memorandum items Developing countries excluding transition countries excluding China and India Source: World Bank.

8.1 6.2

5.6 4.3

2.5 -2.2

5.7 3.3

6.1 3.9


4. Conceptual Paradigm Shift in the Framework of Technology transmission research
A technological revolution is not just a set of new technologies, not merely a set of new products and processes no matter how impressive and powerful these may appear. It is a growing constellation of interdependent technical and organizational, managerial and social innovations. It merits the name of "revolution" precisely because it is all pervasive, because it oversteps the initial cluster of new industries and provokes an upheaval across all industries and activities. As the new technologies propagate, a new "logic" begins to take shape in the minds of engineers and entrepreneurs, of managers and investors, which is applicable to other industries and activities, to other products and processes. It is this all-pervasive nature that makes technological revolutions so powerful and so disruptive (Perez, 2002)106. Every paradigm shift is built upon a previous paradigm deeply ingrained in the minds and skills of managers, embedded in the business environment (suppliers, consumers, governments, scholars and societies) that they appear as universal and everlasting "common sense". Thus a paradigm shift is a shift in common sense. It happened during the onset of the mass-production paradigm, when Henry Ford introduced the revolutionary model-T and the world could not believe his promise ‘that cars would be so cheap that even the workers who made them could buy them’ (find reference to 5 dollar a day quote). But in post war golden age the same principles of continuous mass production of standardized products, developed by Henry Ford five decades before, for the fabrication of cheap automobiles resulted in the development of mass production of electrical appliances for the home, synthetic materials and products, detergents and pharmaceuticals, canned, dried and frozen foods, fertilizers and pesticides of the "green revolution" etc. Mass employment, mass education, esp. management science, mass communication and mass consumption mass migration and urbanization and mass transit, mass entertainment and tourism, all are the manifestations of a previous paradigm that became an ideal commonsense of development and technological advancement in those days. And obviously the study of economics, economic development, technology transmission and other social sciences was also embedded in that all encompassing common-sense of the time. Then, since the 1990’s, after many years of diffusion of the information revolution and the flexible managerial model, consumers began to get accustomed to the growing presence of computers and remote controls, automatic tellers machines, credit cards, faxes and Internet, and also to extreme variety and choice in other products and services. Large firms started learning to flatten their traditional hierarchical pyramids and turn into flat networks, to cooperate with suppliers, clients and even competitors, to train and retrain a multi-skilled workforce and to give it conditions and rewards that would stimulate the innovative attitudes that allow continuous improvement and targeting of better market segments (table 3.3). Small firms started forming cooperative networks to obtain economies of scale in marketing, training, research or other activities, discovering possibilities in export markets and venturing in alliances with complementary firms or in long-term contracts to supply large companies. In the developing world this shifted the policies of protected subsidized industrialization to competitive production in a globalized world. Table 3.3: Changes of Paradigm, a Change in Management and Technological Common Sense (Perez, 2000)107
Input and value Mass Production Model Intensive use of energy and raw material in products, processes, transport etc. tangible products Standardized products, three tier mass markets One best way (optimum routine is perused goal) Fixed plans, Internationalization Centralized organizations, hierarchical pyramids, functional departments, rigid channels of communication Human resources. Labor viewed as cost, training viewed as expected externality Flexible Network Model Intensive use of information and knowledge, energy and raw material saving, intangible services and value Diversified and adaptable products, Highly segmented markets from mass product to small niches Continuous improvement, changes in the main routine, Flexible strategies and Globalization Decentralized networks: strategic centre,, semi-autonomous multifunctional units, interactive communication (vertical and horizontal) Human capital. Labor viewed as asset, training viewed as investment

Products and markets Form of operation Structure


Carlota Perez. Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages. London: Elgar 2002. (ISBN 184376-331-1) 107 Carlota Perez, 2000, Change of paradigm in Science and Technology Policy, Cooperation South, TCDC-UNDP, No. 1-2000, pp. 43-48



Focus of technological efforts Type of technology pursued Aim of technological development Where and by whom is technology developed What is innovation in society

Mainly manufacturing industry (to escape from raw materials dependency) Tangible technology (embodied in equipment and products, while human know-how was about using them) Radical innovations, patentable products which can be "sold" and/or processes that can be "packaged" In R&D departments inside firms or in university institutes by scientists, engineers and technologists Innovation is a "job" in a specialized organization (supply push)

All wealth producing activities, from raw materials to information and social services (it takes more technology to deliver fresh fish to New York than to put it in cans) Tangible and intangible technologies (not only software and design but also organizational know-how) Radical and incremental innovations. Those that can be sold and those that imply constant modifications, adaptations and improvements (that make a difference in results but cannot be sold as such. In firms, in institutes and between them, done by all members of the organization and by all members of society

Innovativeness is the way of living and working in the Knowledge Society (user pull, open innovation)

Here it is important to recall the fact that these changes are borne in the technologically and economically advanced core societies of the West: so is the dominant conceptual framework or theories of natural and social sciences. Their diffusion to the developing periphery is an exogenous or foreign influence that brings about a different set of reaction and consequences for the recipient societies.

the main problem of an import-substitution model was how to generate, in terms of quantity and quality, sufficient effective demand to induce technological learning and increasing returns to scale. As Oman (1994)108 points out, in many developing countries modern mass consumption had not combined to produce self-sustaining growth as it did in developed countries. Hoffman and Girvan (1990)109 summarize the mainstream consensus of that period as: the belief that the involvement of TNCs as suppliers of technology... resulted in both the recipient firm and the local economy incurring unnecessarily high financial and social costs to acquire what was often highly inappropriate technology.
The institutional framework of international technology transmission, being subject to direct influence of the global political, economic and institutional forces was among the first ones to selectively adapt to these changes. Encapsulated into a single sentence as the shift from “contract bargaining” to “sourcing” paradigm (Radosevic, 1999)110, this shift in developing nations attitude towards international technology transmission in 1990s, was both quick and wide spread. But at the same time, the conceptual framework which is composed of the collective understanding and interpretation of technological and socio-economic theory, and is also borne in the societies at the core of the paradigm, is much ‘stickier’ in nature and takes longer to be reinterpreted and redefined into developing nations perspectives. The natural and social sciences esp. economics and management concepts of the twentieth century formed the bases of the traditional technology transmission research, were embedded in the mass-production paradigm. Just as the new paradigm was build upon the older foundations and on overcoming the shortcomings of a previous paradigm: the new concepts entering into the modern conceptual framework are also built upon the accumulated knowledge of the previous concepts and by remedying the weaknesses of the previous conceptual frameworks. The reemergence of the Schumpeterian concept of innovations in 1990s, the new concepts of knowledge management and the overall shift towards the systems concept are some major shifts in the conceptual framework of the recent paradigm. What these concepts entail and how they can be put to use in untangling the mysteries of international technology transmission in developing nations is our quest for the remaining part of this section.

4.1. Shift from Contract Bargaining to Sourcing Paradigm of technology transmission policy
Slavo Radosevic contrasts the traditional approach of purchasing technology to promote infant industries (he terms this typical import-substitution, autonomous strategy ‘contract bargaining’) with the new approach of ‘sourcing’ 111 where it is vital for firms to ‘plug into’ global production and trading systems (Radosevic, 1999) .
108 109

Oman, C., 1994. Globalisation and Regionalisation: the Challenge for Developing Countries. OECD, Development Centre, Paris. Hoffman, K., Girvan, N., 1990. Managing international technology transfer: a strategic approach for developing countries. IDRC-

MR 259e, April.
110 111

Slavo Radosevic, 1999, International technology transfer policy: from “contract bargaining” to “sourcing”Technovation 19 (1999) 433–444

Slavo Radosevic, 1999, International Technology Transfer and Catch-Up in Economic Development; Edward Elgar, Cheltenham (UK) and Northampton, MA (USA)


The basic assumptions of the contract bargaining paradigm are: • The unrestricted flow of knowledge leads to high and rising costs in transferring technology; • The unrestricted import of technology inhibits the development of local technological capacity and the learning process; • Technology can be developed equally well in a protected environment; • The mechanisms for technology transfer do matter and equity control and ownership play important roles in it; • The business of pricing technology determines the international distribution of gains from technological advances; • The main problem in technology transfer is not availability or access to technology but its price and other terms of transfer. Based on these assertions technology transfer policies from that period had basically two objectives. The first and main objective was to reduce the costs and terms of transfer. The second objective was to maximize the learning effects of technology import. But the inter-national economic order of the recent globalization is a rules-based system whereby more and more previously domestic policies become the subject of international regulations. Thus national governments gradually lost control over previously undisputed areas of national policy. As TNCs now enjoy much more freedom and uninterrupted access to domestic firms and resources, but still TNCs are not in full control. The domestic economies are now organized as the non arm’s length, hierarchical relationships between firms, where one firm purchases subassemblies, components, or processed materials produced by an independent firm located in another country. The legal position of the enterprise, i.e. whether it is a subsidiary or independent firm, is secondary. What matters from a technology transfer point of view is the sourcing position of partners, which ultimately determines the extent and scope of knowledge flows between firms. Table 3.4: International technology transfer policy issues within “contract bargaining” and “sourcing” frameworks
Policy context The main technology transfer concerns “Contract Bargaining” Terms of Technology Transfer Technology rents Loss in dynamic technological capability Technology Access Hierarchy of technology transfer channels Disregard of foreign market as a learning inducement S&T infrastructure Infant protection learning Specific intra-firm learning paths Infant industry protection Technology transfer as a foreign trade policy Outright discrimination of foreign ownership “Sourcing” Position in production chain Firm specific Stagnation at low-value added FDI and sourcing positions Market and Technology access Multiplicity of channels Market access as learning inducement Latecomer firm Learning through networking Sourcing and linkage capabilities Macro-organizational strategy Technology transfer as a domestic policy Networking capability

The main policy focus in technology transfer The main carrier of technology transfer Government role

However, he rightly notes that just liberalizing economic policies is not enough to develop innovative capabilities: Governments need to provide a supportive environment for learning and global integration. Domestic enterprises, in particular, can bring themselves to world class levels only by interacting closely and continuously with foreign ones, the world leaders in innovation. He therefore distinguishes between shallow integration (of financial and trade liberalization), which may not promote technology development, and deep integration (of production and technology activity). Liberalization has to be promoted by deep integration and government policies have to gear themselves to this. To understand the way developing countries get integrated into the world economy at the level of production networks we have to look beyond the TNCs to a wider web of inter-firm links which are emerging in the world economy. Technological “catching-up” now requires country-wide capabilities (education skills) as well as firmspecific capabilities (“know-how”), international connectivity and strength of local industrial clusters, institutions and innovation systems. Leaving national and foreign firms to interact freely, now the governments can adapt indirect technology transmission (promotion) policies such as: • Fostering a liberalized trade and investment environment • To improve the skills of their labor force • Build a new infrastructure based around the modern technologies • Attract foreign investment and use it as a workhorse for their technological development


To move domestic firms from technologically simpler to more complex sourcing positions based on dynamic learning • Learning through continuous market and technology access which puts a firm on the path of technology accumulation and enables its “catching-up” or “forging ahead” • Nurturing of the multiplicity of technology transfer channels, not just the hierarchy of channels, • To increase connectivity between a national system of innovation and a foreign S&T base across a wide range of contact points • Links with foreign buyers and continuous feedback effects from foreign markets, coupled with organizational capabilities, are vital if latecomer firms are to move from technologically simple towards technologically more complex sourcing positions Radosevic points to a discontinuous character of learning with different threshold levels, which opens possibilities for “virtuous” or “vicious” circles. There is a danger that countries will become “locked-in” to low value-added activities by foreign partners. Now technology transfer is pursued primarily through domestic industrial policy aiming at clustering, networking or deepening relationships with foreign affiliates or partners. The possibilities for outright discrimination against foreign ownership are reduced. However, selective FDI policies can be pursued through regional free-trade agreements, rules of origin, investment incentives, performance requirements, etc. The scope for these policies is severely restricted in developing countries which have less power to impose their rules or fund investment incentives.

4.2. Progress in the Mainstream Economics study of Technology Transmission
There are many fundamental uncertainties involved in conduct of deliberate technology transfer e.g. which form or medium is more important and effective then other, which policies would actually result in technology transfer and economic development etc. are still major challenges to standard economists (Saggi, 2002)112. Although since 1990s globalization of finance and trade has increased rapidly, exactly how free trade promotes technology transfer and growth is not known yet. One can notice among economics literature that a few economists still advocate the imposition of trade restrictions. • open economies grow faster (Dollar, 1992113, Sachs and Werner, 1995114, Ben-David and Loewy, 1997 115) • but critical view is also prevalent (Rodriguez and Rodrik, 1999116 Baer and Miles,1999117) Traditional assumptions of exogenous growth models based on Solow’s (1956)118 theory, that • steady state per capita output grows at the rate of technological change; • the rate of technological change is assumed to be fixed and exogenously determined; • constant returns to scale and perfect competition; • per capita growth rates of all countries converged in steady state; These views are now often challenged, e.g • barriers to technology adoption like differences in legal, regulatory, political, and social factors are the main determinant of differences in per capita income across countries (Parente and Prescott, 1994)119 Endogenous growth models, dominated by Keynesian school of thought are the most popular in recent decades. The new growth theory emphasizes endogenous technological change and the accumulation of human capital (Lucas, 1988120, Romer 1990121, Grossman and Helpman 1991122, Aghion and Howitt 1990123, and Segerstrom, Anant, and
Saggi Kamal, ‘Trade, Foreign Direct Investment, and International Technology Transfer: A Survey’ The World Bank Research Observer, 2002 113 Dollar, David 1992. “Outward Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-85,” Economic Development and Cultural Change 523-544. 114 Sachs, Jeffrey and Andrew Werner 1995. “Economic Reform and the Process of Global Integration,” Brookings Papers on Economic Activity 1: 1-118 115 Dan Ben-David & Michael B. Loewy,. "Free Trade, Growth, and Convergence," NBER Working Papers 6095, National Bureau of Economic Research, Inc1997 116 Rodriguez, Francisco and Dani Rodrik 1999. “Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-Country Evidence,” NBER working paper no. 7081 117 Werner Baer, William R. Miles and Allen B. Moran, ‘The end of the Asian Myth: Why were the Experts Fooled?, World Development Volume 27, Issue 10, October 1999, Pages 1735-1747 118 Solow, R.M. (1956), A contribution to the theory of economic growth, Quarterly Journal of Economics, 70, 65–97. Parente, Stephen L. and Edward C. Prescott 1994. “Barriers to Technology Adoption and Development,” Journal of Political Economy 102: 298-321. 120 Lucas, R.E. (1988), On the mechanisms of economic development, Journal of Monetary Economics, 22, 3–42


Dinopoulos 1991124). These models were able to provide a coherent framework for the Schumpeterian notion of ‘creative destruction’ and are founded on the following set of assumptions: • endogenously determined knowledge capital and knowledge spillovers contribute to growth • increasing returns on investment are possible • knowledge, accumulated through R&D, learning by doing, and investment in education, create externalities that result in increasing returns at the aggregate level of the economy • R&D is expected to raise the productivity of the firm conducting the R&D as well as other firms who choose to adopt the technology • emphasize the role of technology diffusion within and among the economies and its impact on development and • scope of diffusion is a determinant of growth and development (Coe, Helpman, and Hoffmaister 1997125, Eaton and Kortum 1996126, Grossman and Helpman 1991127) Within this line of research there are two widely used strands of R&D based endogenous growth models: • the ‘varieties only’ model (Dixit and Stiglitz, 1977128, Ethier, 1982129, and Romer, 1990130), and • the `quality ladders' model (Aghion and Howitt, 1990131, Segerstrom, 1991132 Grossman and Helpman, 1991133) which: builds on technology life cycle concept to explain international trade The variety only or R&D based models emphasize the role of technological diffusion in the economic growth of developed and developing countries. Common findings of empirical studies are that; • trade and FDI functioned as engines of growth in India and China since these countries adopted more open policies(Chakraborty and Basu, 2002134; Love and Chandra, 2004135; and Tian et al., 2004136) • but also criticism that only limited impact on productivity restricted to specific sectors and industries (Singh 2003137, Basant and Fikkert 1996138, and Young and Lan 1996139) The quality ladder modeling approach, considers knowledge spillovers (both north-north and north-south) as the main determinant of technology transfer led economic development (Krugman 1979140, Rivera-Batiz and Romer 1991141). Some findings are that:

121 122 123 124

Paul M. Romer, Capital, Labor, and Productivity Brookings Papers on Economic Activity. Microeconomics, Vol. 1990, (1990), pp. 337-367 Grossman, Gene M. and Elhanan Helpman 1991. Innovation and Growth in the Global Economy, Cambridge, MA: MIT Press. Aghion, Philippe and Peter Howitt 1990. “A Model of Growth through Creative Destruction,” Econometrica 60: 323-351.

Segerstrom, Paul S., T.C.A. Anant and Elias Dinopoulos 1990. “A Schumpeterian Model of the Product Life Cycle,” American Economic Review 80: 1077-1091 125 Coe, D. T., Helpman, E., and Alexander W. Hoffmaister 1997. “North-South R&D Spillovers,” The Economic Journal 107: 13-149. Eaton, Jonathan and Samuel Kortum 1996. “Trade in Ideas: Patenting and Productivity in the OECD,” Journal of International Economics 40: 251-278 127 Grossman, Gene M. and Elhanan Helpman 1991. Innovation and Growth in the Global Economy, Cambridge, MA: MIT Press.
128 129 126

Dixit, A. K. and J.E. Stiglitz 1977. “Monopolistic Competition and Optimum Product Diversity,” American Economic Review 67: 297-308.

Ethier, Wilfred J. 1982. “National and International Returns to Scale in the Modern Theory of International Trade,” American Economic Review 72: 389-405. 130 Paul M. Romer, Capital, Labor, and Productivity Brookings Papers on Economic Activity. Microeconomics, Vol. 1990, (1990), pp. 337-367
131 132

Aghion, Philippe and Peter Howitt 1990. “A Model of Growth through Creative Destruction,” Econometrica 60: 323-351

Segerstrom, Paul S., T.C.A. Anant and Elias Dinopoulos 1990. “A Schumpeterian Model of the Product Life Cycle,” American Economic Review 80: 1077-1091. 133 Grossman, Gene M. and Elhanan Helpman 1991. Innovation and Growth in the Global Economy, Cambridge, MA: MIT Press
134 135

C Chakraborty, P Basu, Foreign direct investment and growth in India: a co-integration approach - Applied Economics, 2002

An Index of Openness and Its Relationship with Growth in India Jim Love and Ramesh Chandra The Journal of Developing Areas, Vol. 38, No. 1 (Autumn, 2004), pp. 37-54 136 Tian, Xiaowen, Shuanglin Lin, and Vai Io Lo (2004), "Foreign Direct Investment and Economic Performance in Transition Economies: Evidence from China," Post-Communist Economies, Vol. 16, No. 4, 497-510 137 Singh, Tarlok (2003), "Effects of Exports on Productivity and Growth in India: An Industry Based Analysis," Applied Economics, Vol. 35, 741-749. 138 Basant, Rakesh, and Brian Fikkert (1996), "The Effects of R&D, Foreign Technology Purchase, and Domestic and International Spillovers on Productivity in Indian Firms," The Review of Economics and Statistics, Vol. 78, No. 2, 187-199. 139 Young, Stephen and Ping Lan (1996), "Technology Transfer to China through Foreign Direct Investment," Regional Studies, Vol. 31, No. 7, 669-679 140 Krugman, Paul R. 1979. “A Model of Innovation, Technology Transfer, and the World Distribution of Income,” Journal of Political Economy 87: 253-266.


national scope of technology diffusion is always more than international scope of diffusion, as in case of agglomeration of R&D intensive industries in Silicon Valley (Irwin and Klenow (1994)142 • scope of international diffusion of R&D in one nation trading with another is significant among geographically and economically similar nations e.g. North- North (Coe and Helpman 1995143 Eaton and Kortum 1996)144 • more open countries with greater number of skilled labor force and more trade with advanced countries tend to benefit most from such trade(Schiff, Wang, & Olarreaga, 2002)145 • trade in capital goods correlates even stronger with TFP than overall trade (Eaton & Kortum, 1999)146 • there is a risk that imports of technology may reduce R&D efforts of local firms (OECD, Science and technology Industry outlook, 2002)147 • Openness alone is not sufficient, strong absorptive capacity and the ability to adapt foreign technology is also paramount (Hoekman, Maskus and Saggi, 2005)148 • technology acquisition often amounts to adapting existing methods to local circumstances (Evenson & Westphal, 1995)149 First of all this line of research focuses on the TNCs international investment decisions, where the underlying assertion is that exports and direct investment are substitutes for one another. Beyond that a variety of international investment arrangements are available to a foreign firm e.g. Licensing, Franchising, Joint Ventures and FDI. Earlier empirical research reached a counter assertion that the relationship between exporting and foreign affiliate sales is not of substitutes but complementary, that affiliate sales are positively correlated with exports at the industry level (Lipsey and Weiss 1981150, 1984151: Grubert and Mutti, 1991152, and Blomström et. al. 1993153). Some of the significant findings are as follows: • exports of intermediate goods and sales of affiliates are complements whereas exports and sales of final goods are substitutes (Horstmann and Markusen, 1992154, Norman and Motta, 1996155, Saggi, 2002)156 • a switch from exports to FDI by one TNC creates an incentive for FDI on the other firm’s part (Lin and Saggi, 1999157)

Rivera-Batiz Louis A. and Paul Romer 1991. “Economic Integration and Endogenous Growth,” Quarterly Journal of Economics 106: 531556. 142 Irwin, Douglas A. and P. J. Klenow 1994. “Learning by Doing Spillovers in the Semiconductor Industry,” Journal of Political Economy 102: 1200-1227. 143 Coe, D. T., and Elhanan Helpman 1995. “International R&D Spillovers,” European Economic Review 39: 859-87. Eaton, Jonathan and Samuel Kortum 1996. “Trade in Ideas: Patenting and Productivity in the OECD,” Journal of International Economics: 251-278. 145 Schiff, M., Wang, Y., & Olarreaga, M. (2002). North–south and south–south trade-related technology diffusion: An industry level analysis (Manuscript). World Bank 146 Eaton, J., & Kortum, S. J. (1999). International technology diffusion: Theory and measurement. International Economic Review, 40(3), 537– 570. 147 Organization for Economic Cooperation and Development (2002). Science and technology industry outlook. Paris: OECD. 148 Bernard M. Hoekman, Keith E. Maskus, Kamal Saggi, 'Transfer of Technology to Developing Countries: Unilateral and Multilateral Policy Options World Development Vol. 33, No. 10, pp. 1587–1602, 2005 149 Evenson, R. E., & Westphal, L. E. (1995). Technological change and technology strategy. In J. Behrman & T. N. Srinivasan (Eds.). Handbook of development economics Vol. 3A, pp. 2209–2300 150 Lipsey, Robert E., and Merle Yahr Weiss 1981. “Foreign Production and Exports in Manufacturing Industries,” Review of Economics and Statistics 63: 488-494. 151 Lipsey, Robert E., and Merle Yahr Weiss 1984. “Foreign Production and Exports of Individual Firms,” Review of Economics and Statistics 66: 304-307 152 Grubert, Harry, and John Mutti (1991), "Taxes, tariffs and transfer pricing in multinational corporate decision making," Review of Economics and Statistics, 73:2, pp. 285-293. 153 Blomström, N., A. Kokko, and M. Zejan 1994. “Host Country Competition and Technology Transfer by Multinationals,” WeltwirschaftlichesArchive 130: 521-533. 154 Horstmann, Ignatius J. and J.R. Markusen 1992 “Endogenous Market Structures in International Trade (Natura Facit Seltum),” Journal of International Economics 32: 109-129. 155 Motta, Massimo & Norman, George, 1996. "Does Economic Integration Cause Foreign Direct Investment?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 757-83 156 Saggi Kamal, ‘Trade, Foreign Direct Investment, and International Technology Transfer: A Survey’ The World Bank Research Observer, 2002 157 Lin, Ping and Kamal Saggi. 1999. “Incentives for FDI under Imitation,” Canadian Journal of Economics, 32(5), 1275-98, 1999.



due to the role of sunk costs in determining the dynamic behavior of exporters and investors, companies first export and then if demand is big enough do FDI (Saggi, 1997)158 • information, both private and public, plays an important role in determining investment decisions (such as functioning of labor markets, literacy and productivity of the labor force, timely availability as well as quality of inputs etc.) which creates a band wagon effect of investment in a country, industry or product (Kinoshita and Mody, 1997159) • FDI decision is influenced by recipient nation’s market size, policy certainty and transparency, countries with substantial engineering skills and R&D programs for adaptation and learning are greater recipients of licensing flows than others (Yang & Maskus, 2001)160 • a firm’s R&D expenditure is negatively related to the probability of a joint venture and positively related to Greenfield entry (Smarzynska, 1999)161 • there is a step by step or dynamic approach in these decisions, based on the fact that local licensees have valuable information about the local market and TNCs choose to bear these agency costs at first (Horstmann and Markusen 1996)162 The developing nation’s perspective on FDI forms the other string of research where, Saggi (2002)163 identifies the conceptual bases of this research on two main premises; • the nature of interaction between the transferee and transferor and • the scope of technology spillover in the recipient nation Among the types of spillover effect there are spillover effects caused by demonstration effect, labor turnover, and vertical linkages. Major findings are as follows: • there is significant amount of spillover through demonstration effect, which includes not just material technology in operation but the whole system of profitable operations(Tybout, 2000)164(Blomstrom & Kokko, 1997)165 • on the contrary, competing domestic firms do worse as the foreign presence in their industry increases and results in negative or very limited scope of spillover in the host country (e.g. Aitken, Harrison, and Lipsey 1996166; Aitken & Harrison, 1999167; Djankov and Hoekman, 1999168) • productivity growth in domestic firms is high in low-tech industries and low in high-tech sectors (Haddad and Harrison, 1993)169 • TNCs try to restrict technology spillovers, monopolistic TNCs tend to be more protective of their technologies than competitive firms (Wang and Blomstrom, 1992170, Huizinga, 1994171)

Saggi, Kamal 1996. “Entry into a Foreign Market: Foreign Direct Investment versus Licensing,” Review of International Economics 4(1): 99104. Kinoshita, Yuko and Ashoka Mody 1997. “Private and Public Information for Foreign Investment Decision,” World Bank Policy Research Working Paper No. 1733. 160 Yang, G., & Maskus, K. E. (2001). Intellectual property rights and licensing: An econometric investigation. Weltwirtschaftliches Archiv, 137(1), 58–79. 161 Smarzynska, Beata K. 1999. “Technological Leadership and the Choice of Entry Mode by Foreign Investors: Evidence from Transition Economies,” 162 Horstmann, Ignatius and James R. Markusen 1996. “Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise,” International Economic Review 37 (1): 1-20. 163 Saggi Kamal, ‘Trade, Foreign Direct Investment, and International Technology Transfer: A Survey’ The World Bank Research Observer, 2002 164 Tybout, J. R. (2000). Manufacturing firms in developing countries: How well do they do and why? Journal of Economic Literature, 38(1), 11–44. 165 Blomstrom, M., & Kokko, A. (1997). How foreign investment affects host countries. World Bank PRD Working Paper No. 1745, Washington, DC 166 Aitken, Brian, Ann E. Harrison, and Robert E. Lipsey 1996. “Wages and Foreign Ownership: A Comparative Study of Mexico, Venezuela, and the United States,” Journal of International Economics 40: 345-371. 167 Aitken, B. J., & Harrison, A. E. (1999). Do domestic firms benefit from direct foreign investment? Evidence from Venezuela. American Economic Review, 89(3), 605–618 168 Djankov, Simeon and Bernard Hoekman 1999. “Foreign Investment and Productivity Growth in Czech Enterprises,” World Bank Economic Review, forthcoming. 169 Haddad, Mona and Ann Harrison 1993. “Are there Positive Spillovers from Direct Foreign Investment? Evidence from Panel Data for Morocco,” Journal of Development Economics 42: 51-74 170 Wang, Jian-Ye and Magnus Blomstrom 1992. “Foreign Investment and Technology Transfer,” European Economic Review 36: 137-155 171 Huizinga, Harry 1995. “Taxation and the Transfer of Technology by Multinational Firms,” Canadian Journal of Economics 28:648-655.



countries tend to acquire international technology more readily if domestic firms have R&D programs, there are domestic research laboratories and universities, and there exists a sound basis of technical skills and human capital (Maskus, 2000)172 Vertical linkages are established with TNCs local supplier and distributor firms, this kind of linkages prove to be better sources of technology spillover than horizontal linkages. • TNCs presence in horizontal linkages is counterproductive (Javorcik, 2004173, Blalock, 2001174) • local suppliers benefited substantially from backward and forward linkages with foreign firm’s subsidiary in recipient nation’s sectors dominated by foreign TNCs (Saggi, 2002175 ; Larrain, Lopez-Calva, and Rodriguez-Clare, 2000176; Moran, 1998177, 2001178) • increased competition among suppliers to upgrade steadily (Pack and Saggi, 1999)179 helps reduce entry costs for other potential investors (Aitken, Hanson, Harrison, 1997180) Research for impact of FDI on economic development found that there are: • positive correlation between FDI and productivity growth especially in high income and middle income countries (Xu, 1999181: Barrell and Pain, 1997182) • South-South imitation occurs at a lower cost than North-South imitation (Glass and Saggi, 1999)183 • FDIs contribution to domestic growth is more than that of domestic investment, provided the national economy has a minimum threshold stock of human capital (Borensztein et. al. 1998)184 • growth enhancing effects of FDI is stronger in countries that pursued a policy of export promotion rather than import substitution (Balasubramanyam et. al. 1996)185 • access to foreign technologies alone does not increase growth rates of developing countries (Keller 1996)186 • policy interventions, including implicit or explicit subsidies, lay behind the economic miracles in Korea and Taiwan (Amsden 1989)187 • postwar Japanese patent system was designed for both small-scale innovation and diffusion, which encouraged incremental innovation by Japanese firms and promoted the diffusion of knowledge into the economy and increased licensing through restrictions on FDI (Maskus, 2000)188 • Korea encouraged learning via ‘‘duplicative imitation’’ of mature technologies that were in the public domain or available cheaply (Kim, 2002)189 • Japan, Korea, Brazil, Mexico, Malaysia, and the export intensive regions of China and India are examples of movement from ‘‘pure’’ to ‘‘creative’’ imitation
Maskus, K. E. (2000). Intellectual property rights in the global economy. Washington, DC: Institute for International Economics Javorcik, B. S. (2004). Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages. American Economic Review, 94(3), 605–627. 174 Blalock, G. (2001). Technology from foreign directinvestment: Strategic transfer through supply chains (Mimeo). Cornell University 175 Saggi, K. (2002). Trade, foreign direct investment, and international technology transfer: A survey. World Bank Research Observer, 17(Fall), 191–235 176 Larrain, B. F., Lopez-Calva, L. F., & Rodriguez-Clare, A. (2000). Intel: A case study of FDI in Central America. CID Working Paper No. 58, Harvard University. 177 Moran, T. (1998). Foreign direct investment and development. Washington, DC: Institute for International Economics 178 Moran, T. (2001). Parental supervision: The new paradigm for foreign direct investment and development.Washington, DC: Institute for International Economics 179 Aitken Brian, Gordon H. Hanson, and Ann E. Harrison 1997. “Spillovers, Foreign Investment, and Export Behavior,” Journal of International Economics 43: 103-132 180 Pack, Howard and Kamal Saggi 1999. “Vertical Technology Transfer, Diffusion, and Competition.” Previous version issued as World Bank Policy Research Working Paper No. 2065 181 Xu, Bin and Jianmao Wang 1999b. “Multinational Enterprises, Technology Diffusion, and Host Country Productivity Growth,” mimeo 182 Barrell, Ray and Nigel Pain 1997. “Foreign Direct Investment, Technological Change, and Economic Growth within Europe,” Economic Journal 107: 1770-1786. 183 Glass, Amy J. and Kamal Saggi 1999, “Foreign Direct Investment and the Nature of R&D,” Canadian Journal of Economics 32(1): 92-117 184 Borensztein, E.; De Gregorio, J.; Lee, J. W. "How does Foreign Direct Investment Affect Economic Growth?" Journal of International Economics, 45, 1998, pp. 115-35 185 Balasubramanyam, Venkataraman N., Mohammed A. Salisu and David Sapsford 1996. “Foreign Direct Investment and Growth in EP and IS Countries,” Economic Journal 106: 92-105. 186 Keller, W. (1998). Are International R&D spillovers trade-related? Analyzing spillovers among randomly matched trade partner. European Economic Review,42(8), 1469–1481 187 Amsden, A. (1989). Asia’s next giant: South Korea and late industrialization. New York, Oxford: Oxford University Press 188 Maskus, K. E. (2000). Intellectual property rights in the global economy. Washington, DC: Institute for International Economics. 189 Kim, L. (2002). Technology transfer and intellectual property rights: Lessons from Korea’s experience. UNCTAD/ICTSD Working paper, Geneva
173 172


“encourage temporary movement of people” e.g. GATS visa regime has been suggested by a number of WTO members (Mattoo & Carzaniga, 2003)190 The mainstream research also sets forth a set of policy guidelines concerned with trade, FDI and Intellectual property rights, major recommendations are as follows: • literature does not provide an unconditional argument against trade protection (Miyagiwa and Ohno, 1995)191 • international knowledge spillovers strongly favor free trade but national spillovers require intervention that can combat path dependence resulting from historical accidents (Dinopoulos and Segerstrom, 1999) 192 Research on FDI policies, is based on success stories of Japan, Korea, Taiwan (P.O. China) and mainland China, concluding that all successful nations imposed restrictions on FDI at various points in time. `Outward oriented' economies of East Asia were not particularly keen on allowing multinational firms into their markets. And perused policies aimed at three targets: • First, increase access of local buyers to the international stock of knowledge and improve the ability of technology owners to signal the true value of their inventions to buyers • Second, reduce the costs of acquiring and absorbing existing technologies • Third, increase incentives for domestic innovation (Layton, 1982193; Ozawa, 1974194; Sakong, 1993195; Hobday, 1995196) Along with specific trade and investment policies, other general areas of national policies include: • development of effective infrastructure, transparency and stability in government, and a reasonably open trade and investment regime (World Bank, 2004197, 2008) • to subsidize the adoption of foreign technologies (Hausmann and Rodrik, 2003)198 • encourage joint ventures more than inward FDI as in case of China, but such JVs usually receive older technologies (Mansfield & Romeo, 1980199; Moran,1998) • absorptive capacity is crucial for obtaining significant spillover benefits from trade or FDI (Borensztein, De Gregorio, and Lee, 1998)200 • a policy challenge for developing countries is to facilitate temporary movement abroad and encourage returnees to undertake local research and business development (Hoekman, Maskus and Saggi, 2005)201 General findings about the appropriate intensity of intellectual property rights protection include: • patent applications from foreign firms are associated with productivity growth in recipient countries (Eaton & Kortum, 1996)202 • the lack of adequate enforcement of technology transfer agreements may encourage FDI relative to licensing (Vishwasrao, 1995)203

Mattoo, A., & Carzaniga, A. (Eds.). (2003). Moving people to deliver services.Washington, DC:World Bank Kaz Miyagiwa & Yuka Ohno, 1995. "Uncertain Innovation and Strategic R & D Policy," Departmental Working Papers _053, Chinese University of Hong Kong, Department of Economics 192 Dinopoulos, Elias & Segerstrom, Paul, 1999. "The dynamic effects of contingent tariffs," Journal of International Economics, Elsevier, vol. 47(1), pages 191-222, February 193 Layton, Duane W. 1982. “Japan and the Introduction of Foreign Technology: A Blueprint for Lesser Developed Countries?” Stanford Journal of International Law 18: 171-212. 194 Ozawa, Terutomo 1974. Japan's Technological Challenge to the West, 1950-1974: Motivation and Accomplishment, Cambridge, Massachusetts: The MIT Press. 195 Sakong, Il, 1993. Korea in the World Economy, Washington DC: Institute for International Economics.


196 197

Hobday, 1995 M. Hobday, Innovation in East Asia: The Challenge to Japan, Edward Elgar, Aldershot, England (1995)

World Bank (2004). World development report 2005: A better investment climate for everyone. The World Bank, Washington, DC. 198 Hausmann, R., & Rodrik, D. (2003). Economic development as self-discovery. Journal of Development Economics, 72(2), 603–633 Mansfield, E., & Romeo, A. (1980). Technology transfer to overseas subsidiaries by US-based firms. Quarterly Journal of Economics, 95(4), 737–749 200 Borensztein, E., De Gregorio, J., & Lee, J.-W. (1998). How does foreign direct investment affect economic growth? Journal of International Economics, 45(1), 115–135. 201 Bernard M. Hoekman, Keith E. Maskus, Kamal Saggi, 'Transfer of Technology to Developing Countries: Unilateral and Multilateral Policy Options World Development Vol. 33, No. 10, pp. 1587–1602, 2005 202 Eaton, J., & Kortum, S. J. (1996). Trade in ideas: Patenting and productivity in the OECD. Journal of International Economics, 40(3–4), 251– 278. 203 Vishwasrao, Sharmila 1995. “Intellectual Property Rights and the Mode of Technology Transfer,” Journal of Development Economics 44: 381-402


• • • • • • •

both innovation and licensing increase with stronger IPR protection in the South (Yang and Maskus, 2001)204 imitation is a costly activity for a wide range of high technology goods, ranging from 20 to 65 percent of the costs of innovation in high technology industries (Mansfield et al. 1981)205 the South's optimal IPR protection level is lower than that of the North (Lai and Qiu, 1999)206 global welfare may very well suffer if the South is forced to adopt the Northern standard(Ferrantino, 1993)207 international trade flows, especially in patent-sensitive industries, respond positively to increases in patent rights among middle income and large developing countries but not among poor countries (Smith, 2001)208 in poor countries, patents do not expand FDI (Smith, 2001)209 there is a sequence in protection policies, the poorest countries are unlikely to benefit from strong IPR (McCalman, 2001)210

4.3. Emergence of a Knowledge Based View of Technology Transmission
With a growing intensity of knowledge in business and due to cumulative effect of research focusing on intangible assets of an organization and an economy instead of the pure tangible asset based concepts, the knowledge based view has recently emerged in the business practices and scholarly research especially in the disciplines of management, economics and policy. The knowledge-based view of the firm is an extension of the Resource-Based View (Penrose, 1959) 211 of the firm and provides a strong theoretical underpinning for the management and economics researchers. One of the fundamental tenants of knowledge based view is the distinction between the 212 explicit and the tacit forms of knowledge, which Polanyi (1967) explained very nicely by quoting that “We know more than we can tell”. Knowledge is increasingly being recognized as a vital organizational resource that gives market leverage and 213 competitive advantage (Leonard-Barton, 1995) . In particular, knowledge has become a substance to be "managed" at its most literal sense. Knowledge is considered to be a special strategic resource that does not depreciate in the way traditional economic productive factors do. The most significant knowledge-based resources are mainly intangible and dynamic, allowing for idiosyncratic development through path dependency and causal ambiguity, which are the basis of the mechanism for economic rent creation in the Knowledge-Based View of the firm (Curado and Bontis, 2006)214. In relation to technology transmission, technology is seen as knowledge embodied in various forms (techno-ware, Infor-ware, Human-ware and Orga-ware) and its effective transfer is in effect knowledge transfer. Knowledge 215 transfer focuses on connection not collection and ultimately on choices made by individuals (Dougherty, 1999) . Knowledge transfer is essentially a ‘two-way process’ between the transferor and the transferee. As a crucial factor in determining a company's competitive advantage is its ability to convert tacit knowledge into explicit knowledge 216 through organizational learning (Maitland, 1999) . Its natural transfer, or unstructured exchanges and informal
Yang, G., & Maskus, K. E. (2001). Intellectual property rights and licensing: An econometric investigation. Weltwirtschaftliches Archiv, 137(1), 58–79. 205 Mansfield, 1981a. E. Mansfield, Composition of R&D expenditures: relationship to size of firm, concentration and innovative output. The Review of Economics and Statistics 63 4 (1981), pp. 610–615. 206 Lai, Edwin L.C. and Larry D. Qiu 1999. “Northern Intellectual Property Rights Standard for the South?” mimeo Ferrantino, M.J. 1993. “The Effect of Intellectual Property Rights on International Trade and Investment,” WeltwirtschaftlichesArchive 129: 300-331. 208 Smith, P. J. (2001). How do foreign patent rights affect US exports, affiliate sales, and licenses? Journal of International Economics, 55(2), 411–440 209 Blyde, J. S., & Acea, C. (2002). The effects of intellectual property rights on trade and FDI in Latin America (Manuscript). Inter-American Development Bank, Washington, DC 210 McCalman, P. (2001). Reaping what you sow: An empirical analysis of international patent harmonization. Journal of International Economics, 55(1), 161–186 211 Penrose, E. T. (1959). The Theory of the Growth of the Firm. New York: John Wiley



Polanyi, M. (1967). The Tacit Dimension. Anchor, Garden City, NY. Leonard-Barton, D., 1995, Wellsprings of Knowledge: Building and Sustaining the resources of Innovation. Harvard University Press 214 Carla Curado, Nick Bontis The knowledge-based view of the firm and its theoretical precursor International Journal of Learning and Intellectual Capital 2006 - Vol. 3, No.4 pp. 367 - 381
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Dougherty, V. (1999) “Knowledge is about people, not databases.” Industrial and Commercial Training, 31(7), 262-266.

Maitland, A., 1999, Management Knowledge Management: Lessons can be learned from failed attempts to capture and use employees' knowledge Management and Technology. The Financial Times


exchanges, are vital to a firm's success. But on the other hand it’s also a viciously protected asset that organizations do not want to be compromised. As on one hand techno-ware is a tangible form of knowledge, its transfer can happen through physical transactions, Infor-ware and parts of orgaware and human-ware are also in codified form, and their transfer is also possible via communication channels. But tacit knowledge (embedded in human-ware and orgaware), due to its non-codifiable nature has to be transferred through sustained ‘intimate human interactions’ (Tsang, 1997). International technology transfer research in recent decades has thus explored the transfer of both tacit knowledge, and explicit knowledge. Where manufacturing/service techniques/skills, promotion techniques/skills, distribution know-how, and purchasing know-how are termed as explicit knowledge, tacit knowledge includes, new product/service development, managerial systems and practice, process designs and new marketing expertise. Just as traditional technology transfer research explained in previous chapters, recent studies are also focused on the facilitators and barriers that affect the transfer process and knowledge acquisition and absorption processes. Modern knowledge based technology transfer studies can also be structured on the traditional framework (Figure: 3.9),i.e. study of transfer object characteristics (primarily knowledge), technology recipients attributes, technology suppliers attributes and supplier-recipient relationship characteristics (Szulanski, 1996217; Gupta & Govindarajan, 2000218 ; Minbaeva, 2007219).

Tacitness, Complexity Specificity Relatedness Desirability Availability Transfer Object Sender

Quality of Interaction • Frequency • Effectiveness Level of Mutual Trust • Nature of receiver and sender • Past experience • Presence of expatriates Transaction and Transmission Receiver

Feed back Transfer Capacity • Source transfer capacity • Disseminative capacity • Prior experience Technology Protective Characteristics • Commitment • Articulated objective • Goal clarity and motivation • Degree of transparency • Control and • Provision of assistance Absorptive Capacity • Experience • Knowledge relatedness • Openness • Learning intent or objectives • Managerial flexibility • Readiness and • Method comprehensiveness

Figure 3.9: Knowledge based view of Technology Transmission The Transfer Object Characteristics An overwhelming majority of research considers transfer object (tangible and intangible) in terms of knowledge and study its main characteristics of: • tacitness, complexity and specificity (Kogut & Zander, 1993 220 ; Inkpen & Dinur, 1998 221 , Simonin, 1999222, 2004223; Pak & Park, 2004224; Minbaeva, 2007225; Makhija & Ganesh, 1997226; Inkpen, 2000227; Parise & Handerson, 2001228),
Szulanski, G. (1996). Exploring Internal Stickiness: Impediments to the Transfer of Best Practice within the Firm, Strategic Management Journal, 17: 27–43. 218 Gupta, A. K. & Govindarajan, V. (2000). Knowledge Flows within Multinational Corporations, Strategic Management Journal, 21(4): 473-96. 219 Minbaeva, D. (2007). Knowledge Transfer in Multinationals, Management International Review, 47(4): 567-593. 220 Kogut, B. & Zander, U. (1993). Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation. Journal of International Business Studies, 24(4): 625-646. 221 Inkpen, A.C & Dinur, A. (1998). Knowledge Management Processes and International Joint Ventures. Organization Science, 9(4): 454-468 222 Simonin, B. L. (1999a). Ambiguity and the Process of Knowledge Transfer in Strategic Alliances, Strategic Management Journal, 20(7): 595623


And also points out additional characteristics: • knowledge relatedness (Inkpen, 2000229; Lyles, Krogh & Aadne, 2003230), • desirability (Pak & Park, 2004231) and • availability (Minbaeva, 2007232) Knowledge tacitness, specificity and complexity are the most significant characteristics of transfer object that also act as barriers to its transfer and imitation. • tacit knowledge derives from the accumulated experience, and is reflected in the expertise, skills and routines acquired by organizational members over time (Winter, 1987)233 • insights, intuitions and hunches, rule of thumb, gut feeling, personal and organizational skills (Nonaka, 1994) 234 • managerial and marketing expertise (Lane, Salk, & Lyles, 2001)235 Tacit knowledge is difficult to codify, it can only be observed through its application and acquired through practice. Thus, tacit knowledge transfer between individuals is slow, costly and uncertain (Kogut & Zander, 1992)236. Complexity of knowledge is another impediment to its transfer, is measured with • the amount of information required to characterize the item of knowledge in question (Winter, 1987)237 • experiences both individual and especially team based experiences, which involve interaction of large number of routines and technologies (Reed & DeFillippi, 1990)238 • Complex knowledge forms a non-integrateable system which produces higher levels of ambiguity, restrains imitation and impedes transferability (Singh, 1997)239. Specificity on the other hand is mostly related to tangible form of technology (or in Williamson’s (1985)240 words ‘transaction costs assets’) includes: • geographical location and climate of the site, dedicated physical and human assets such as purpose built plant and infrastructure or durable investments in customer relationships that are undertaken in support of particular transaction (Reed and DeFillippi, 1990)241 Not only are the tacit, complex and specific resources and competencies, difficult to imitate and transfer as they are also the firms sustainable competitive advantage (Lado & Vozikis, 1996) 242 and firm tend to strengthen these advantages over time and protect them from transfer and imitation. Thus we can conclude that technological object’s
Simonin, B. L. (2004). An Empirical Investigation of the Process of Knowledge Transfer in International Strategic Alliances, Journal of International Business Studies, 35(5): 407-27. Pak, Y. & Park, Y. (2004). A Framework of Knowledge Transfer in Cross-Border Joint Ventures: An Empirical Test of the Korean Context, Management International Review, 44(4): 435-455 225 Minbaeva, D. (2007). Knowledge Transfer in Multinationals, Management International Review, 47(4): 567-593 226 Makhija, M.V. & Ganesh, U. (1997). The Relationship between Control and Partner Learning– Related Joint Ventures. Organization Science, 8(5): 508-527. European Journal of Social Sciences – Volume 8, Number 2(2009) 308 227 Inkpen, A.C. (2000). Learning through Joint Ventures: A Framework of Knowledge Acquisition. Journal of Management Studies, 37(7): 10191043 228 Parise, S. & Handerson, J.C. (2001). Knowledge Resource Exchange in Strategic Alliances. IBM Systems Journal, 40 (4): 908-924 229 Inkpen, A.C. (2000). Learning through Joint Ventures: A Framework of Knowledge Acquisition. Journal of Management Studies, 37(7): 10191043 230 Lyles, M.A., Krogh, G. & Aadne, J.H. (2003). Knowledge Acquisition and Knowledge Enablers in International Joint Ventures and their Foreign Parents. Management International Review, 3:111-129 231 Pak, Y. & Park, Y. (2004). A Framework of Knowledge Transfer in Cross-Border Joint Ventures: An Empirical Test of the Korean Context, Management International Review, 44(4): 435-455. 232 Minbaeva, D. (2007). Knowledge Transfer in Multinationals, Management International Review, 47(4): 567-593. 233 Winter, S. (1987). Knowledge and Competence as Strategic Assets, in: Teece, D. (Eds.), The Competitive Challenge, Massachusetts, Cambridge: Ballinger Publishing Company. 234 Nonaka, I. (1994). A Dynamic Theory of Organizational Knowledge Creation. Organization Science, 5: 14–37 235 Lane, P. J., Salk, J.E. & Lyles, M.A. (2001). Absorptive Capacity, Learning, and Performance in International Joint Ventures, Strategic Management Journal, 22(12): 1139-61 236 Kogut, B. & Zander, U. (1992). Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology, Organization Science, 3(3): 83-97 237 Winter, S. (1987). Knowledge and Competence as Strategic Assets, in: Teece, D. (Eds.), The Competitive Challenge, Massachusetts, Cambridge: Ballinger Publishing Company. 238 Reed, R. & DeFillippi, R. J. (1990). Causal Ambiguity, Barriers to Imitation, and Sustainable Competitive Advantage. Academy of Management Review, 15: 88-102. 239 Singh, K. (1997). The Impact of Technological Complexity and Interfirm on Business Survival. Academy of Management Journal, 40(2): 339367 240 Williamson, O.E (1985). The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting. Free Press, New York 241 Reed, R. & DeFillippi, R. J. (1990). Causal Ambiguity, Barriers to Imitation, and Sustainable Competitive Advantage. Academy of Management Review, 15: 88-102. 242 Lado, A. & Vozikis, G. (1996). Transfer of Technology to Promote Entrepreneurship in Developing Countries: An Integration and Proposed Framework. Entrepreneurship Theory and Practice,2(3): 55-72.
224 223


tangible and intangible characteristics of tacitness, complexity, and specificity have a negative effect on possible degree of technology transfer. The Technology Recipient Characteristics The most important characteristic of a technology recipient are the • absorptive capacity and experience (Cohen & Levinthal, 1990243; Hamel, 1991244; Lyles & Salk, 1996245; Mowery et al., 1996246; Lane & Lubatkin, 1998247; Lane et al., 2001248; Gupta & Govindarajan, 2000249, Minbaeva et al., 2007250, Pak & Park, 2004251; Simonin, 1999252 Inkpen, 1998253). Other characteristics include: • knowledge relatedness, openness (Hamel, 1991; Baughn et al., 1997)254 • learning intent or objectives (Beamish & Berdrow, 2003)255 • managerial flexibility, readiness and method comprehensiveness (Yin & Bao, 2006)256 Absorptive capacity is defined as the “the firm’s ability to recognize the value of new external information, assimilate it, and apply it to commercial ends” (Cohen & Levinthal, 1990)257, which in turn is directly related to firm’s level of related knowledge prior to the technology transfer process. The accumulation of prior knowledge increases the ability to make sense of, assimilate and use new knowledge (Kim, 1998)258. Nonetheless, increased absorptive capacity can increase the possibility of opportunistic behavior by the recipient firms as well (Child & Faulkner, 1998)259. Inter-partner learning concept is developed by Hamel (1998)260, which defines the technology transfer relationship as either collaborative (honest intention to create common benefits for both the supplier and recipient) or competitive. Therefore it is concluded that a prior experience in the related technology field, technology transfer experience and general collaborative attitude would increase the possibility of inter and intra-firm technology transfer success. Technology Supplier Characteristics Similar to the recipient’s absorptive capacity, there are certain characteristics of the supplier or donor firm that would influence as barriers or proponents of international technology transfer. Traditionally this is a less studied aspect of technology transfer marred with definition, and interpretation differences (Minbaeva, 2007261).

Cohen, W. M. & Levinthal, D.A. (1990). Absorptive Capacity: A New Perspective on Learning and Innovation, Administrative Science Quarterly, 35(1): 128-52 244 Hamel G. (1991). Competition for Determinant and Interpartner Learning within International Strategic Alliances. Strategic Management Journal, 12: 83–103. 245 Lyles, M. A. & Salk, J.E. (1996). Knowledge Acquisition from Foreign Parents in International Joint Ventures: An Empirical Examination in the Hungarian. Journal of International Business Studies, 29(2): 154-74 246 Mowery, D.C., Oxley J.E. & Silverman B.S. (1996). Strategic Alliances and Interfirm Knowledge Transfer. Strategic Management Journal, 17: 77–91 247 Lane, P. J. & Lubatkin, M (1998). Relative Absorptive Capacity and Interorganizational Learning, Strategic Management Journal, 19(5):46177 248 Lane, P. J., Salk, J.E. & Lyles, M.A. (2001). Absorptive Capacity, Learning, and Performance in International Joint Ventures, Strategic Management Journal, 22(12): 1139-61. 249 Gupta, A. K. & Govindarajan, V. (2000). Knowledge Flows within Multinational Corporations, Strategic Management Journal, 21(4): 473-96. 250 Minbaeva, 2007; Minbaeva, D. (2007). Knowledge Transfer in Multinationals, Management International Review, 47(4): 567-593 251 Pak, Y. & Park, Y. (2004). A Framework of Knowledge Transfer in Cross-Border Joint Ventures: An Empirical Test of the Korean Context, Management International Review, 44(4): 435-455. 252 Simonin, B. L. (1999a). Ambiguity and the Process of Knowledge Transfer in Strategic Alliances, Strategic Management Journal, 20(7): 595623 253 Inkpen, A. C. (1998a). Learning and Knowledge Acquisition through International Strategic Alliances, The Academy of Management Executive, 12(4): 69-80 254 Baughn, C. C., Denekamp, J. G, Stevens, J.H. & Osborn, R.N. (1997). Protecting Intellectual Capital in International Alliances, Journal of World Business, 32(2): 103 –17. 255 Beamish, P.W. & Berdrow, I. (2003). Learning from International Joint Ventures-the Unintended Outcome, Long Range Planning, 36: 285– 303 256 Yin, E. & Bao, Y. (2006). The Acquisition of Tacit Knowledge in China: An Empirical Analysis of the ‘Supplier-side Individual Level’ and ‘Recipient-side’ Factors. Management International Review, 46(3):327-348 257 Cohen, W. M. & Levinthal, D.A. (1990). Absorptive Capacity: A New Perspective on Learning and Innovation, Administrative Science Quarterly, 35(1): 128-52 258 Kim, L. (1998). Crisis Construction and Organizational Learning: Capability Building in Catching-up at Hyundai Motor. Organization Science, 9(4): 506-521. 259 Child, J. & Faulkner, D. (1998). Strategies of Cooperation: Managing Alliances Networks and Joint Ventures. Oxford University, New York 260 Hamel G. (1991). Competition for Determinant and Interpartner Learning within International Strategic Alliances. Strategic Management Journal, 12: 83–103 261 Minbaeva, D. & Michailova, S. (2004). Knowledge Transfer and Expatriation Practices in MNCs: The Role of Disseminative Capacity, Employee Relations, 26(6): 663-679



Different authors have studied and interpreted this aspect and found numerous characteristics pertaining to it, we can generally group these characteristics as both • transfer capacity or ‘source transfer capacity’ (Szulanski, 1996; Martin & Solomon, 2003262) • disseminative capacity (Minbaeva & Michailova, 2004)263 • prior experience (Subramaniam and Venkataraman, 2001)264 Logically a technology transfer arrangement requires the technology-supplier (source of knowledge) to be more knowledgeable than the recipient (Szulanski, 1996265). There is a parallel between firm’s ability to create, absorb and disseminate technology and knowledge within its own bounds as a foundation for transfer of technologies to other outside firms (Devanport & Prusak, 2000)266. The other condition demarking the supplier’s capability is their willingness to support and co-operate with the local partner in transferring technological knowledge (Simonin, 1999 267 ). This would be possible if the transferor recognizes the benefits of transferring technology as: • a means of expansion in foreign countries and efficiencies created by internationalization of business, which helps to maintain the firms’ competitiveness, and safeguards the competencies from the competitors (Martin & Solomon, 2003)268 • technology transfer promotes the organizational learning process and enhance collaborative relationship (Inkpen, 1998269, Inkpen 2000270; Child & Faulkner, 1998271) The firms behavior is generally theorized as protective of its vital competitive advantages, especially valuable proprietary knowledge assets (technologies), when in a technology transfer contract firms are weary of opportunistic behavior from the recipients (Steensma & Lyles, 2000272) and may intentionally restricts knowledge flow to the recipient. On the other hand recipients view international technology transfer as a cost effective means for acquiring technological capabilities and expected to appropriate as much of the donor firms knowledge assets as possible. As a result transferor firm tends to become less transparent or open than the recipient (Hamel, 1991)273. Protective behavior is considered as a function of: • transferor’s commitment, articulated objective, goal clarity and motivation (Gupta & Govindarajan, 2000274; Szulanski, 1996275) (Lyles et al., 1999276) • a common measure of defensive behaviors is the degree of transparency, control and provision of assistance (Tsang et al., 2004)277. Thus it can be concluded that higher technological capability, awareness of benefits of transfer and degree of trust and openness is positively related to technology transfer.

Martin, X.Y.F. & Salomon, R. (2003). Knowledge Transfer Capacity and its Implications for the Theory of the Multinational Corporation. Journal of International Business Studies, 34(4):356-373 263 Minbaeva, D. & Michailova, S. (2004). Knowledge Transfer and Expatriation Practices inMNCs: The Role of Disseminative Capacity, Employee Relations, 26(6): 663-679. 264 Subramaniam, M. 2006. “Integrating knowledge across borders for transnational new product development capability” Journal of Product Innovation Management. 23: 541-555. 265 Szulanski, G. (1996). Exploring Internal Stickiness: Impediments to the Transfer of Best Practice within the Firm, Strategic Management Journal, 17: 27–4 266 Davenport, T.H. & L. Prusak, L. (2000). Working Knowledge: How Organizations Manage What They Know. Harvard Business School Press, Boston, MA 267 Simonin, B. L. (1999a). Ambiguity and the Process of Knowledge Transfer in Strategic Alliances, Strategic Management Journal, 20(7): 595623. 268 Martin, X.Y.F. & Salomon, R. (2003). Knowledge Transfer Capacity and its Implications for the Theory of the Multinational Corporation. Journal of International Business Studies, 34(4):356-373 269 Inkpen, A.C & Dinur, A. (1998). Knowledge Management Processes and International Joint Ventures. Organization Science, 9(4): 454-468. 270 Inkpen, A.C. (2000). Learning through Joint Ventures: A Framework of Knowledge Acquisition. Journal of Management Studies, 37(7): 10191043. 271 Child, J. & Faulkner, D. (1998). Strategies of Cooperation: Managing Alliances Networks and Joint Ventures. Oxford University, New York. 272 Steensma, H. K. & Lyles, M.A. (2000). Explaining IJV Survival in a Transitional Economy through Social Exchange and Knowledge-based perspectives, Strategic Management Journal, 21(8): 831-51 273 Hamel G. (1991). Competition for Determinant and Interpartner Learning within International Strategic Alliances. Strategic Management Journal, 12: 83–103 274 Gupta, A. K. & Govindarajan, V. (2000). Knowledge Flows within Multinational Corporations, Strategic Management Journal, 21(4): 473-96. 275 Szulanski, G. (1996). Exploring Internal Stickiness: Impediments to the Transfer of Best Practice within the Firm, Strategic Management Journal, 17: 27–43. 276 Lyles, M. A. & Salk, J.E. (1996). Knowledge Acquisition from Foreign Parents in International Joint Ventures: An Empirical Examination in the Hungarian. Journal of International Business Studies, 29(2): 154-74. 277 Tsang E.W.K., Tri D.N. & Erramilli M.K. (2004). Knowledge Acquisition and Performance of International Joint Ventures in the Transition Economy of Vietnam. Journal of International Marketing, 12(2): 82–103



Transaction Characteristics A truly successful technology transfer must be able to transfer tacit knowledge along with explicit knowledge. International technology transfer can be a very tricky and complicated process, however once a technology transfer agreement is reached a period of mutual interaction among the parties starts, this period must be longer than a simple purchase of equipment and merchandise transition or hiring of some service and it must involve learning by both or at least the recipient firm. Among many other factors the characteristics of the relationship itself is also a critical factor. Researchers identify two types of transaction characteristics, • quality of interaction based on, frequency and effectiveness of interactions between the supplier and recipient (Bresman, Birkinshaw & Nobel, 1999278) • level of mutual trust based on, informality, openness, involvement, spontaneity of information and idea exchange, (Gupta and Govindarajan, 2000)279 Specifically the rate of tacit knowledge transfer is associated with long term transaction process having “ease of communication and intimacy of relationship” between the source and recipient. On the other hand a problematic relationship between the source and recipient will lead to hardships in transferring knowledge. Hamel, (1991)280 points to the differences and similarities among the two firms in terms of the organizational structures, cultural backgrounds, experiences, capabilities, learning intent and technological resources, to predict the quality of their interactions. Cases of technology transfer to China have identified the adequate presence of expatriates and more importantly the quality of interaction between the expatriates and their Chinese counterpart (Wang et al. 2004)281 as an important determinant of successful technology transfers. The level of trust in a technology transfer transaction is explained as an ongoing social mechanism which derives from the existence of personal attachment, contributes to more willingness to transfer knowledge between alliance partners (Luo, 2001) 282 and that acts as a risk reduction device as it determines the extent and efficiency of knowledge exchange (Lane et al., 2001)283. As most of the issues involved in a technology transfer relationship pertain to intangible and unpredictable aspects of technology improbable to be covered even in a most comprehensive contract, trust enables the managers to go beyond the clauses of the agreement and make the process more successful (Dhanaraj et al., 2004)284. A lack of trust may also generate inter-firm conflicts, increase partners’ opportunistic behaviors and eventually erode potential mutual benefits (Tsang et al., 2004)285. Hence it can be concluded from the literature review that the quality of transactional relationship and level of trust have a direct impact on the success of technology transfer.

4.4. The innovation systems concept 4.5. Introduce Evolutionary and institutional economics 4.6. Then innovation systems concept and types 4.6.1. Then developing countries versions, evolutionary perspective, role of international regional, geographical and cultural factors besides the economic forces Classifying the economies and explaining the poverty traps, demographic trends, emerging markets, energy and environment
Bresman, H., Birkinshaw, J. & Nobel, R. (1999). Knowledge Transfer in International Acquisitions. Journal of International Business Studies, 30(3): 439–62. Gupta, A. K. & Govindarajan, V. (2000). Knowledge Flows within Multinational Corporations, Strategic Management Journal, 21(4): 473-96 280 Hamel G. (1991). Competition for Determinant and Interpartner Learning within International Strategic Alliances. Strategic Management Journal, 12: 83–103 281 Wang, P., Tong, T.W. & Koh, C.P. (2004). An Integrated Model of Knowledge Transfer from MNC Parent to China Subsidiary. Journal of World Business, 3I (2): 168-182. 282 Luo, Y. (2001). Antecedents and Consequences of Personal Attachment in Cross-Cultural Cooperative Ventures. Administrative Science Quarterly, 46(2): 177-201 283 Lane, P. J., Salk, J.E. & Lyles, M.A. (2001). Absorptive Capacity, Learning, and Performance in International Joint Ventures, Strategic Management Journal, 22(12): 1139-61. 284 Dhanaraj, C., Lyles, M.A., Steensma, H.K. & Tihanyi, L. (2004). Managing Tacit and Explicit Knowledge Transfer in IJVs: the Role of Relational Embeddedness and the Impact on Performance, Journal of International Business Studies, 35(5): 428-42 285 Tsang E.W.K., Tri D.N. & Erramilli M.K. (2004). Knowledge Acquisition and Performance of International Joint Ventures in the Transition Economy of Vietnam. Journal of International Marketing, 12(2): 82–103
279 278


4.7. the new Conceptual Framework 4.8. International technology transmission a generic model 4.8.1. Technology and economic development 4.8.2. Market driven core, the linkage, source and recipient 4.8.3. Non market forces, historical path dependence as in evolutionary economics, institutions, geography, technological distance, cultural distance, international relations, and global techno-economic paradigms 4.8.4. Preparing the ground for the case of China and Pakistan

National innovation systems place on the overall conceptual spectrum with relation to the study of technological change, technology transmission and economic development is defined with reference to the other major disciplines. The spectrum is defined by degree of rigidness or flexibility of conceptual frameworks, type of underlying assumptions, age of the discipline, the number of scholars and amount of their contribution to the subject area, familiarity of the concept among business and policy practitioners and general masses, relevance and room for creativity and uniqueness in conceptualization. Let us consider that on one extreme of the conceptual spectrum are the dominant and established subjects like the neo classical economics and slightly skewed towards to the innovation systems concepts is the endogenous growth theories followed by the institutional economics and evolutionary economics, which exhibit a mix of the two though dominated by the innovation systems concept which is on the other extreme of the conceptual spectrum sharing the room with the modern concept of knowledge economy. After reviewing the changing ideas of economists about development in the years since the Second World War, the World Bank (1991) concludes that it is intangible investment in knowledge accumulation which is decisive rather than physical capital investment, as was at one time believed (pages 33-35). The Report cites the 'New Growth Theory' (Romer, 1986; Grossman and Helpman, 1991) in support of this view but the so-called 'New* Growth Theory has in fact only belatedly incorporated into neoclassical models the realistic assumptions which had become commonplace among economic historians and neo-Schumpcterian economists.


Neo-classical Economics

Endogenous Growth Economics

Institutional Economics

Evolutionary Economics

Knowledge Economy

Innovation Systems Concepts Flexible Organic Few New Less Large Current High Inclusive

Rigid Mechanistic More Old More Little Old Low Exclusive

Conceptual Framework Underlying Assumptions Number of scholars and their contributions Age Familiarity Room for Creativity Relevance Growth Rate Disciplinary Structure

Figure… Conceptual Spectrum in Study of Technology and Economy