Technology absorption: an

overview

Sanjaya Lall
Professor of Development Economics
Oxford University, UK
What is technology absorption?
Most technology in ‘latecomers’ comes from
abroad, in mixture of two forms:
Embodied: in capital goods, patents, blueprints,
designs, models and so on
Tacit: knowledge that can be ‘transferred’ only
by close interaction and learning by new user
Using technology efficiently thus needs
conscious effort by the enterprise & also the
‘system’ in which it works (suppliers,
customers, technology support, training
institutions and so on)
Technology flows take many forms

Non-contractual: Public knowledge,

fairs, conferences, migration, export
activity and informal networks
Contractual:
FDI related: (internalized) transfers within
multinationals or joint ventures with MNCs
Arm’s length: equipment imports, turnkey
projects, licensing, subcontracting,
franchising and other contracts
Role of internalized technology
flows is growing…

Innovation is highly concentrated, by region,

country and enterprise
MNCs lead in innovation: most R&D is
performed by large firms and most
innovative firms are globalized
MNCs dominate technology flows in all
forms, but form depends on nature of
technology: newest and most valuable
technology is internalized, others licensed
Concentration of R&D by region
Regional Shares of R&D Expenditure (1997)

Eastern Europe and MENA South Asia East Asia

Central Asia
Latin America and the
Sub-Saharan Africa Caribbean

US: 41%
Japan: 24% Industrialised
EU big 3: 20%
 Concentration of R&D in US by firm
(2001)
Share of leading R&D performing US firms in number of firms and R&D Only 68
manufacturing firms
% Numbers % R&D out of 16.8 thousand
80 with R&D (0.4%)
account for 49% of
70
total enterprise R&D
60 spending in the US.
50 Only 329
40 manufacturing firms
(2%) account for 71%
30
of R&D.
20
The level of
10 concentration has
0 been stable or rising
Total Manufacturing Total Manufacturing over time – despite
the rise of
>25,000 employees >5,000 employees technology-based
SMEs
 Role of MNCs in global economy is
growing steadily

FDI is growing faster than other economic aggregates:

national investment, GDP or exports
MNCs control about 2/3 of world trade.
About 30-40% of this trade is within MNCs, and their role
is particularly large in high-tech manufacturing
MNC export activity is taking new forms: ‘global
production networks’, with very fine vertical
specialization by function/component between countries
Local companies are also involved in global production
networks, but only if they have very high levels of
technological capabilities – and form strong ties with
MNCs to access and absorb their technological know-
how and management skills
 MNCs are globalizing innovation:
Share of foreign affiliates in national R&D, 2001

Figure HHH: Shares of manufacturing R&D by foreign affiliates, 2001

80
70
60
50
40
30
20
10
0

Czech Rep
France

Japan
Hungary

Canada

Germany
Portugal

Netherlands
Spain

Finland

Turkey
UK

USA
Sweden
Ireland

Poland
Source: OECD Science, Technology and Industry Scoreboard 2003.
‘Triad’ MNCs spend large sums in
R&D in each others’ economies

Flows of R&D in the Triad, 2000 (millions of PPP

dollars)

1,433
USA Japan
BERD: BERD:
199,539 1,317 100,777

16,366 436

12,344 1,595

EU
BERD:
113,288

Source: OECD data

 US MNC R&D in developing &
transition economies (current $ million)

3000
All developing
2500 LAC
S & SE Asia
CEE
2000

1500

1000

500

0
1994 1995 1996 1997 1998 1999 2000 2001 2002
What this means for developing &
transition economies…

FDI is the most efficient way to access

foreign technology if countries want ...
New, fast-changing proprietary technologies
not available at arm’s length
Rapid access to new technology and
subsequent upgrading, without local effort
Non-core components of operation (i.e.
management, marketing, finance etc)
Access to MNC foreign markets, particularly
to global production networks
For local firms…
Licensing or joint ventures are desirable if:
Local firms are strong in base technologies but
need particular new components of technology
They specialize in activities with stable
technologies, where state-of-art technologies
are available at arm’s length
They can export through foreign buyers (low
technology products), sell undifferentiated
products directly or have established brands
They subcontract to MNCs (OEM) or supply
local components
Attracting FDI, particularly
export-oriented production
networks…
FDI location: ‘Traditional’
factors...
Some remain relevant
Stable, transparent and welcoming policies
Good macroeconomic management
Large and/or fast growing markets
Primary resources
Cheap and trainable labour
But others are becoming less important
Cheap unskilled labour
Protected markets
‘New’ factors in FDI location...

Human capital: new skills, flexible practices, training

provisions, ease of expatriate entry
Technology systems: MSTQ & R&D strongly linked to
and supportive of enterprises
Strong supplier and service network
Modern ICT infrastructure and logistics
Low ‘transaction costs’ (entry, exit, expansion, taxation,
customs, employment)
Strong legal systems and property rights
Openness to cross-border mergers & acquisitions
Effective FDI promotion, targeting and coordination with
supply side policies
Rooting MNCs locally…

Attracting FDI is not enough: globalized

production is (by definition) mobile
Retaining MNCs, esp. in export-oriented
activities, needs
Constantly rising skill levels
Tighter links to more efficient suppliers
Greater depth of technological activity, in-
house and with local knowledge institutions
How to promote supplier linkages
with MNCs?

Local content rules often inefficient –

and now forbidden by WTO rules
Fiscal incentives are costly but can
only play an initial stimulating role
What works best:
Improving supplier capabilities, directly
and with MNC assistance
‘Matchmaking’, information dissemination
Cluster development strategies
For example, in Malaysia…
The Small and Medium Industries Corporation has a Global Supplier
Programme to strengthen SMEs not only to become suppliers to MNCs,
but also to become global suppliers. This programme provides training in
critical skills and incentives to MNCs to ‘adopt’ local suppliers and to help
them upgrade skills and technology.
Eng Teknologi Holdings Berhad (ENGTEK) has benefited from both
programmes. Starting as a supplier of components to the local hard disk
drive and semiconductor MNCs, it is now a multinational, with nine
companies in four other East Asian countries. ENGTEK has entered into
partnerships with several electronics MNCs operating in Penang, which
provide it with technical and financial assistance, helping it develop
design as well as manufacturing expertise and providing it entry into their
global value chains.
MNCs also actively create linkages. Intel Malaysia uses its ‘SMART’
programme for local supplier development. SMART has five steps: select
promising suppliers on the basis of systematic analysis; provide initial
training; allocate business according to capabilities; raise capabilities by
technical assistance and training; and help suppliers diversify and
develop into global suppliers.
Government tax incentives and financial support (worth about $50m a
year) have helped this initiative.
Ireland is best practice in ‘using’
FDI to develop hi-tech industry
Targeted inward investment strategy: The Industrial Development Authority
(IDA) launched industry and company targeting strategy. Sector/industry specialists
were used to develop industry-based strategy and meet potential investors. US
electronics and pharmaceutical industries targeted in the 1970s, software and
international services in the 1980s/1990s; IT, multi-media and e-business in the
2000s. Objective shifted from job creation to promotion of linkages with local firms
and attraction of headquarters and R&D
National Linkage Programme fosters links between investors and local firms. It
covers market research, matchmaking, monitoring and troubleshooting, business
development by arm of IDA set up specifically to promote indigenous firms.
Aftercare and plant upgrading, concentrated on about 50 key companies in five
target industries. IDA targets companies that have a high potential for new
investment, or that can leverage investment from other companies. Links are
forged with the management to improve plant competitiveness by making sure that
the local management is fully informed of Ireland’s advantages.
Skills development, which involved the expansion of education so that over
40%of school leavers go on to third-level education (set to rise to 50%). IT and
science subjects have been prioritized as part of a proactive strategy anticipating
future needs. Computer provision and training in schools have increased
dramatically; IDA officers visited every school and written to every parent.
Technology policy, including 2000 Technology Foresight Fund with a $1bn plan
to boost R&D in information technology and biotechnology.
Telecommunications deregulation and a $65bn National Development Plan, with
a focus on e-business and infrastructure, also support technology activities.
Low corporate tax has been a central to Ireland’s attractiveness for FDI .
Corporate tax is currently set at 10% and many exemptions are available.
Creating a technology culture in
industry (difficult but necessary)

Raise awareness of need for in-house

technological activity and R&D
‘Technology foresight’ exercises
Benchmarking and technology audits
R&D incentives: most countries make
R&D tax-deductible expense, many
offer extra incentives. Effects mixed,
but tax credits linked to incremental
R&D seem best
Strengthening the technology
infrastructure

Metrology, standards, testing, quality

Quality standards vital (e.g. ISO 9000)
Good standards institutions can help to
diffuse technology and quality awareness
Advanced standards institutions are
withdrawing from testing into basic
standard setting and research. They are
helping create private service providers.
Metrology (measurement/calibration) is
central to quality certification; international
accreditation is vital to competitiveness
Local metrology capability reduces cost
and raises response speed
Secondary metrology can be carried out
by private laboratories, primary metrology
has to be done in public institutions
Role for government in providing the
public goods and creating private markets
Research & development
institutions
Most public R&D/universities are delinked
from enterprises: different ‘culture’, no
incentives and wrong skills
But they are an important resource for
accessing, adapting, diffusing, creating
technology – and for ‘rooting’ MNCs
Valuable for hi-tech start-ups and SMEs
Vital source of creating R&D skills for
industry and breaking ground in generic new
technologies
How can knowledge institutions be
made more relevant?
Privatization of public laboratories
Hard budgets, management change
Intensive training of staff and incentives
to reach out to industry
Funded schemes for joint R&D with
industry, exchange of R&D personnel
Matchmakers to create links with firms,
raise their awareness of capabilities
and potential
Conclusions

Technology absorption needs stable

and conducive policy framework
Technology access is increasingly
linked to FDI – but attracting, rooting
and extracting benefits from FDI needs
dynamic local firms & institutions
Building local capabilities is basic to
effective technology absorption: and
this needs strong policy support