4.3.a- Technology Transfer

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INTERNATIONAL TECHNOLOGY TRANSFER*

by

Nawaz Sharif

Basically there are two ways for acquiring new technology: develop it orpurchase it. The second way of acquiring new technology is commonly calledtechnology transfer. The important reasons for purchasing technology are(i) littleor no R&D investment needed; (ii) quick to get into use; and (iii) technical andfinancial risks are very low. There are also good reasons for selling technology,such as: (i) increasing return on R&D investments; (ii) technology has no immediateuse; and (iii) technology has already been utilized up to its limit. Therefore,technology transfer occurs because of the existence of "buyers" and "sellers". Thesellers are called "transferors" and the buyers are called transferees" of thetechnology transfer process.

Technology transfer (TT) can take place within the national boundaries andalso internationally. Inside a country TT can occur from one industry to anotherindustry (or one sector of the economy to another) and from one organization toanother. International TT can occur between two developed countries, twodeveloping countries and from a developed (or developing) country to a developing(or developed) country. But in every case we must have a transferor, a transfereeand some vehicle for transfer. In this chapter, we will discuss TT at the internationallevel, mostly from the developed to developing countries.

1. Patterns and Criticisms of TT

During the old colonial system, which came to an end by the close of thesecond quarter of this century, technology transfer occurred mainly in the primarysector of the economy such as mining and plantation agriculture. There were onlya few isolated cases of TT in the secondary sector (such as jute and textilemanufacture); they were few because of transportation costs, cheap native labourand nationalist aspirations.

However, after their independence, the newly emancipated coloniesembarked upon industrialization as a vehicle for economic development. Initially TTtook place for the establishment of "import-substituting" industriesmostly in thearea of consumer goods. The consumer goods, thus produced, had very little

demand within______________________

*REPRINTED FROM: Nawaz Sharif, Management of Technology Transfer andDevelopment (UN ESCAP Regional Centre for Technology Transfer: Banglore,India, 1983), Chapter 7, pp. 53-61.

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the developing country as these were needed only by a very small section of thepopulation which adopted modern life-styles. Therefore, the developing countriesmoved into traditional industries and wanted to export more of their new importsubstitutes of finished goods and less of their new materials. They changed theirindustrialization strategy from import substitution to "export orientation". This was aclear conflict of interest between developed and developing countries.

In order to suppress the conflict, some developed countries offered to helpex-colonies in their desire to achieve industrialization and the associatedinternational division of labour. This offer materialized in a "donor-recipient"relationship through "aid". The essence of the aid was to grant someindustrialization with the assurance of donor's increasing need of raw materials.Elements of TT to the industrial sector of developing countries were as follows:

(a) Feasibility studies and market surveys prior to investment.

(b) Determining the range of available technologies to manufacture a product, and

selecting the best one.

(c) Engineering design of new production facilities.

(d) Plant construction and installation of equipment.

(e) Production management and marketing.

Now, a major portion of manufacturing in developing countries consists ofconversion or penultimate manufacture and assembly operation. Core industries(i.e., industries producing capital goods like machine tools), heavy engineering,

chemical and basic metal industries are very rare. Even for agro-based industries(such as, sugar, cotton, jute, rubber, tea, tobacco, etc.) machinery for productmanufacture are imported. In the infrastructure sector, large dams, electric powerstations, transport and communication networks have been built in the developingcountries by privately owned transnational companies or public sector agencies ofdeveloped countries. These projects were normally financed by long-term loans.

Whatever industrialization has taken place in the current set of developingcountries, it is largely due to technology transfer. And yet, there is so muchunhappiness about it! The following are some of the criticisms against transfer oftechnology:

(1) Imported technologies are often outdated or, in some cases, even discarded inadvanced countries.

(2) The import of technology has been on disadvantageous terms for developingcountries.

(3) Most imported technologies are capital-intensive, high energy consuming andpolluting.

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(4) Imported technologies have increased national debt and dependence onforeign technology and capital.

(5) Industrialization through imported technology has resulted in the creation ofurban elite and causing socio-cultural problems.

(6) Imported technologies have pushed many indigenous and traditionaltechnologies into oblivion.

Many technologies have also been imported for rapid growth in theagricultural sector. Some of these are: farm machinery, irrigation technology,pesticides, fertilizer, etc. Here also, technology transfer is criticised for the creationof various societal imbalances, such as:

(1) Introduction of tractors led to increased urbanization as the poor were drivenfrom their fields and forced into cities to live in slums and buy expensive

cereals grown in the field where they once harvested inexpensive legumes.

(2) By using imported technologies, rich farmers got richer while poor farmers hadto sell their land.

(3) Use of mechanized fishing trawlers by rich people rendered the poor fishermenjobless.

(4) Imported storage and distribution technologies have led prime lands to bediverted to "cash crops" for export resulting in shortage of food grains.

One can list many other criticisms, but it is obvious that all of these criticismspoint out to many major failures on the part of the transferee (some were probablyinevitable, but some could have been avoided) and also some failures on the part ofthe transferor (many of which perhaps could have been avoided). There are twoparties in the technology transfer processthe transferor and the transferee. Now,let us seek the reasons for some of the avoidable and unavoidable problems of boththe parties.

There are two fundamentally unavoidable situations: (i) the transferor hascommercial advantage; and (ii) the transferee is under time pressure. Thecommercial advantage comes from the fact that: (a) a few of them own thetechnologies needed by all developing countries; and (b) in addition to a seller'smarket situation, they also know how to sell and what to sell. On the other hand,the disadvantage for developing countries is due to the fact that: (a) they have toachieve in decades what the developed countries have done in centuries; and (b) inaddition to being in a hurry, they also lack the skill to choose, adopt and adaptimported technologies. Therefore, some of the problems faced in our shortexperience with technology transfer were inevitable. For example, let us take thecase of polluting industries. There is a common belief among many developingcountries that pollution is the inevitable price that they should be prepared to pay for

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industrial and economic development. Moreover, pollution is a future problem andhunger is immediate. Because of this, some pollution-generating and hazardousindustries have been accepted by developing countries, which are attracted bypotential exports and product-buy-back arrangements offered by the transferors.Neither the transferor nor the transferee can be blamed for the outcome!

Technology transfer, as it is, has been beneficial for both the transferor andthe transferee. However, as far as the negative effects are concerned,unfortunately, the transferee got more than his fair share. Many of these can beavoided in the future if we pay attention to what has been learned so far. It is quiteclear now that the most unhappy transferee embarked upon a wrong technologyacquisition strategy without properly understanding its consequences. Perhaps it isalso true that some transferors took undue advantage of this ignorance on the partof the developing countries! Therefore, for the benefit of both parties, it is essentialthat developing countries fully understand the process and characteristics oftechnology transfer, which will hopefully lead to its successful management.

2. The Process of Technology Transfer

Besides the transferor and the transferee, the third important element in thetechnology transfer process is the "linkages" between the two partners. Thelinkages are the ways and means of transferring technology. Many diversifiedlinkages have been used to transfer technology from the developed to developingcountries. Among them, the following are the most important:

(a) Direct Linkages

1. Operation of transnational corporations.

2. Licensing arrangements.

3. Hiring experts and contractors.

4. Training of technical staff abroad.

(b) Indirect Linkages

1. Purchase of machinery, equipment and components.

2. Exchange of information at international meetings

3. Flow of books, journals and other publications.

4. Exhibition and trade fairs.

Developing countries use many or all of these linkages simultaneously. Theactual choice of one or several of these ways is usually dictated by the nature of thetechnology desired and the existing technological capability of the developing

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country. In general, in most developing countries there is a paucity of localtechnical skills, particularly in the production sector. As a consequence, the processof industrialization has been less through indirect linkages and more through directlinkages. Moreover, it is mostly old and less productive technologies that arenormally available through the indirect linkages.

Traditionally, the most frequent direct linkage in the past has been the so-called "investment package" together with management, marketing services, andequity and debt capital provided by the transnational corporations (TNCs). But, asdeveloping countries became aware of the difference between mere geographical orinterfirm transfer and genuine indigenous assimilation of technology with mastery,control and improved ability to gain future autonomy, they have been striving to findways and means to "unbundle" package deals. Several levels of "unpackaging"have evolved over the years. At one end of the spectrum, it takes the form of "joint-venture" between a national and a foreign enterprise tied with contractual licensingarrangements. The licensing allows access to the total technological system ofproduction to the buyer in the developing country. At the other end is the new

comer on the stage, the public enterprise in developing countries attempting topurchase various components of a production process from several independentsuppliers.

Purchasing technology in the most unpackaged form requires indigenousskills to design and put together a production process from its individualcomponents, to operate the overall production system profitably, and to handletechnical maintenance, repair and improvement functions. This skill is frequentlyabsent in developing countries, particularly for large-scale and complex productionsystems. Hence, developing countries have to purchase these skills from foreigncontractors (or hired experts).

A close link exists between licensing and training of local staff. Manylicensees are more interested in the technology transfer clauses related to trainingthan with those of products and processes. Especially in process technologies,training at developed country factories and laboratories is vital for TT. Besidesenhancing a country's capacity for fruitful assimilation of imported technology,training is also a valuable step towards eventually acquiring the ability to produceone's own technology.

Of all the linkages available for TT the most important ones are all people-embodied. Looking back into history, we find that the earliest means of TT was byindividuals who moved from place to place, bringing their technology with them.This was so in the case of crafts technology, and when industrialization occurred,transfer of knowledge through individuals still remained important. However,unfortunately for developing countries, technologically skilled prople are not movingfrom developed to developing countries but from developing to developed countries.

Until developing countries can build up their technical manpower, TNCsprovide the most powerful vehicle for TT through either direct investment or variouslicensing arrangements. This is because they are the real owners of modern

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technologies. We have discussed previously that technology embodies specializedknowledge, and as such is the subject of appropriation and control by those whoown it. The international distribution of ownership of patented knowledge indicatethat the overwhelming majority (over 80%) is held by six developed countriestheUnited States, the Federal Republic of Germany, Japan, France, the UnitedKingdom and Switzerland. And in these countries, virtually all patents related toindustrial activities are owned by large national and multinational corporations of theprivate sector. The patent right is used by TNCs as a means to achieve monopolyprivilege.

3. TNCs and Developing Countries

Transnational corporations from developed countries are increasingly movinginto developing countries. Their main objective is increasing their profits. Thissearch for profit, particularly using the resources of appropriated technicalknowledge, guides their decisions. Basically, there are tow ways in which TNGsoperate in developing countries (i) direct investment package and (ii) licensing.

In many circumstances the direct investment package method is the mostpractical way for TT. It is specially well suited to either the first stage of industrialdevelopment or for fast moving technologies. Its main advantages for developingcountries are the minimization of risks and direct access to all supportive resourcesof TNCs. The disadvantages primarily stem from the poor bargaining position ofdeveloping countries. It has been observed that advanced technologies are kept asclosely guarded secrets in the early stages of the technology life cycle. Normallymatured or obsolete technologies are transferred to developing countries. Criticsalso argue that this formula costs too much in the long-run and the technologytransferred may be accompanied by restrictive conditions on its use.

The direct investment package is almost certainly associated with little or notransfer of technical skills. This is the most serious drawback of this method of TTfor future national technological self-reliance. Therefore, alternative arrangementshave to be made for indigenous skill development. And once some technical skillshave been acquired, it may be beneficial to purchase good second-hand machinesfor TT. In developed countries, because of rapid technological obsolescence,installed machinery becomes no longer profitable to operate even though it may bephysically in good condition. Such machinery could be bought cheap, and becauseof the relatively low wages and the attractive tariff protection given, they could beprofitably operated in developing countries.

Many TNCs, which have favoured only direct investment with sole ownershipfor maximum control, are now entering into joint-ventures and licensingarrangements. There are various reasons for their decisions to license indeveloping countries. Some of these are:

(i) To obtain additional earnings from technologies whose period ofcompetitive advantage in primary home market is over.

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(ii) To lower production cost by capitalizing on the new inernational divisionof labour, and thereby maintain competitiveness in world markets.

(iii) To gain access to markets with protectionist barriers.

(vi) To take advantage of existing surroundings for testing and improvingcertain technologies

(v) To improve the corporate image.

A firm in the developing country (licensee) has various motives in enteringsuch contracts. They buy because:

(i) they lack capability to produce technology locally due to both skill andresource constraints.

(ii) local market size does not justify minimum required investment.

(iii) they can capitalize on the new international division of labour.

The basic terms of licensing agreement depend on the nature of technologyand also the host country environment. The terms are negotiable. The classicalformula provides for a down payment upon the signing of the contract and royaltypayments computed as percentage of net sales and a yearly minimum payment.Straight licensing has excellent possibilities when the licensee has achieved acertain level of industrial experience and sophistication, when the local infrastructureis adequate, and when the available markets are large enough to enable thelicensor to recoup his cost and make an honest profit within a reasonable period of

time without being obliged to charge excessive rates.

There are a number of ways by which developing countries defray the cost oftechnology transfer. Some of these are:

(i) Direct payments for the purchase of technologies.

(ii) Royalty payments under license and contractual agreement.

(iii) Payment for technology by supplying the raw materials needed by theowner of the technology.

(iv) Payments by supplying the products manufactured by the licensee.

(v) Payment of profits on capitalization of know-how and profit repatriation.

(vi) Over-pricing of imports of intermediate products and equipment.

(vii) Inflated valuation (over-invoicing) of imported capital and other technicalequipment.

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(viii) Transfer of technology tied-in with export sales of the licensor (indirectpayment).

Although TNCs have played a major role in technology transfer to thedeveloping countries, there have been criticisms. Some of the common criticismsare:

(1) Grossly unfair contractual arrangements

(a) Tied purchases of imports;(b) Restrictions on exports;(c) Guarantees for profits, royalties, tax rates and rates of exchange;(d) Controls on competitive imports and on local resources;(e) Excessive reliance on expatriate personnel.

(2) Colonial approach to global division of labour

(a) Utilizing the cheap labour of developing countries to enhance theircompetitiveness;

(b) Confining developing countries to low-cost, labour-intensivetechnologies, while retaining the monopoly of high technology industries.

(3) Leading to deceptive industrialization

(a) Impart technologies to suit their needs and not the needs of thedeveloping countries;

(b) Generate economic dependence at a new level instead of economic

independence;(c) Draining the country of its resources in exchange for few and temporary

high employment opportunities and production of consumer goods.

(4) Guarding superiority through complementation schemes

(a) Setting up enterprises with incomplete production cycles in differentcountries to retain their (TNCs) technical superiority;

(b) Spreading out operations to safeguard themselves (TNCs) againstpolitical crises.

(c) Gain advantages by introducing competition among developingcountries.

(5) Perpetuating technological subordination

(a) Keeping developing countries as a market for their obsolete andsecondhand machinery;

(b) Influencing life-styles and cultivating demand for non-essential imports.

(6) Exerting undue influence

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(a) With sophisticated management skills and technological know-how, theyare able to exert considerable influence on policy makers in developingcountries;

(b) Financial resources are made available to influence public opinionthrough mass media.

On the other hand, the problems frequently encountered by TNCs in theirinvolvement with developing countries are also many. Some of these are:

(1) Basic commercial problems

(a) Inadequate protection of property rights, both patented and unpatented,in many developing countries;

(b) Difficulties in securing an adequate return on foreign investment due tounstable economic condition in many developing countries;

(c) There is a structural problem in most developing countries due to the

scale of production and market size;(d) High commercial risks are common in developing countries.

(2) Skill transfer problems

(a) Lack of adequate R&D infrastructure in developing countries;(b) In many developing countries R&D activities are concentrated in

national institutions, which are engaged in non-relevant activities;(c) Lack of qualified manpower for training;

(3) Political pressures

(a) In their home countries the TNCs are accused of "exporting jobs","giving away valuable assets", and "opening up" the country to foreigncompetition;

(b) In the host countries the subsidiaries of the TNCs and their expatriatestaff become hostages.

Many conflicts in technology transfer arise from a discrepancy betweenbenefits anticipated by the two parties. Nevertheless, licensing contracts continueto be signed in large numbers because developing countries need technology andTNCs seek business opportunities.

4. Management of TT

Technology transfer represents the expression of a choice of developingcountries to import technology rather than to develop it within the country. It can beeffective only through proper management. We have already mentioned a lot ofissues and problems with TT. Let us now present a few strategies for developingcountries.

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In developing countries industrialization is necessary even though it does notprovide unlimited opportunities for absorbing surplus labour. To facilitateindustrialization they will have to depend heavily on technology transfer. In earliersections of this chapter, we have discussed that this strategy of industrializationthrough foreign technology import has, in the past, encountered many failures, suchas (i) increased foreign control over the productive infrastructure of nationaleconomy; (ii) increases in energy, capital goods, spare parts, and raw materialsimport costs; (iii) increases in national external debt; and (iv) no progress towardstechnological self-reliance. There are two basic reasons for these failures: (i)developing countries, which purchase modern technology often do not have adetailed idea of what kind of technology is being bought and what will be theconsequences of its application in primitive environment with, nonetheless, highaspirations, and (ii) developing countries have often failed to develop localtechnological infrastructure for the assimilation of imported technology.

Therefore, what is necessary is a combined strategy of technology transfer

and development of indigenous technical skill. Moreover, transfer of technology cannever be a wholly adequate substitute for independent R&D activities. The two canmost fruitfully complement each other. Development of appropriate technology andTT ought to be regarded as part and parcel of the innovative activities.

Learning from the experience of the Japanese, a few principles for effectivetechnology transfer are:

(1) Selection of technologies to be imported from foreign countries should bedetermined by a correlation between national needs and usable resourcesavailable in the country.

(2) Imported technologies need to be applied after adapting them in such a waythat they fit local surroundings.

(3) Repair, limitation and improvements in introduced technology should be doneby local trained manpower.

(4) Hired foreigners (not foreign experts associated with aid or assistanceprogrammes) can give effective training for manpower development.

Technology advancement is a continuing process, and change must beaccomplished by constant improvement, diversification, and specialization. Tofacilitate this advancement process, it appears inevitable that, in certain areas,sophisticated technology has to be introduced, despite the prohibitive costsinvolved. For this purpose, TT through TNCs is very important. However, there aretwo essential prerequisites:

(1) Incentives to the flow of technology depend upon the extent to which benefitscan be appropriated.

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(2) The host country policies are critical in inducing foreign collaboration.

An orderly transfer process can result in faster improvement in productivityand greater spill-over effect. When technology transfer occurs between twocountries starting from the industry in which the technological gap is smallest andthen moves to other industries where the gap is larger, the process is called the"orderly transfer of technology". In this way it becomes easier to absorb thetransferred technology. If the technological gap is very wide, assimilation oftransferred technology becomes difficult. Therefore, the time has come to ensureclose cooperation among developing countries (which has come to be known asTCDCtechnical cooperation among developing countries). Developing countriesshould also exchange information on TT experience. United action by a group ofdeveloping countries can effectively counterbalance the power of TNCs.

National technology transfer centres can provide valuable guidance to localenterprises in acquiring foreign technologies. The centre can also monitor therange of means of TT, build-up a data base, and help conduct technology

evaluation before transfer.

Many diversified means are available for transferring technology fromdeveloped to developing countries. As the indigenous technological capabilityincreases, the technology transfer potential also increases. The importance ofvarious linkages also changes with the change in local technological infrastructure.

Contractors are important actors in the technology transfer process,irrespective of whether the transfer is by direct investment or by licensing to anindependent enterprise. Although the role of the contractors will change fromindustry to industry and from one situation to another, they are generally responsible

for the engineering of production system, plant construction, and sometimes theyare also involved in the buying and selling of technology. There are various reasonswhy these engineering and construction contractors are engaged by the parties tothe transfer. An obvious reason is specialization. A second reason is simply thatfew enterprises are large enough to support-in-house teams to engineer andconstruct their own plants. in many developing countries there is a generalshortage of qualified contractors. Thus foreign contractors have to be employed atconsiderably high cost to the transferee. Developing countries need to develop theirown engineering and construction services.

Developing countries should also develop its technology transfer"gatekeepers". Gatekeepers are the technical qualified staff who "keep-up" withprofessional and scientific journals and maintain ongoing contact with thetechnological community outside the country. The most common way ofmaintaining contact is through attendance at international scientific and professionalmeetings and sustained correspondence.

A very common problem encountered with TT is the "not invented here"syndrome. Every surrounding is somewhat unique, and hence technologiesdeveloped elsewhere can be judged as not applicable. Further, even if the need for

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transfer is accepted, procedural problems arise due to suspicions and pride. Thetransferee is prone to believe that, since it will have prime responsibility for utilizingthe technology, its viewpoints should be given preminence with respect to thetransfer procedure. The transferor, on the other hand, is likely to feel that since itdeveloped the technology and probably also brought it to commercialization, it is ina far better position to guide the transfer process. This problem can be reduced ifmanagement works for an early consensus at all levels on the need for the transferand the best method of conducting it.

An interesting further dimension to the "who does what" aspect of technologytransfer is the division of the transfer functions between transferor and transferee.Initially, the transferor performs a good deal of the transfer activities, and this seemsconsistent with general notion of TT. However, the transferee can never escape thelearning activities required to understand the technology. Gradually the transfereeshould try to do everything.

5. Partnership with Understanding

For a long time to come, the industrialization process in developing countrieswill be very much dependent upon TNCs for technology transfer. It is, therefore,essential that better understanding be reached between the transferor and thetransferee. This is what is meant by partnership with understanding. We need tounderstand the basic facts and realities of technology transfer. In this section we listsome of those important characteristics:

(1) Technology transfer process is guided by a "need-resource" relation. Whennew national needs appear, there is a strong incentive for innovation. If thecountry does not have the capacity to innovate, the required technology has to

be introduced from outside. In order to make such a transfer the country mustprovide transfer resources, such as skilled manpower, funds, and transferlinkages. For the transfer to be successful, the country must be able to supplyor augment the necessary transfer resources when the need arises.

(2) The opportunity cost of the technology is to be paid for eventually in one wayor another, even when the transfer is published as being a generous gift.

(3) To a great extent the transfer is a "people-oriented" phenomenon, and itssuccess, in no small measure, depends upon the existence of close inter-relationships between the transferor and the transferee.

(4) Technological knowledge is cumulative in growth, transnational in origin,transmissible across national boundaries and irreducible in supply upontransfer. But transferred technological knowledge can generate businesscompetition.

(5) Technology in most industrialized countries of the Western world has beendeveloped and is owned by the private sector, in all but very special cases.

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(6) Technology has a certain recognized value in the international marketplace. Itis a commodity with life-cycle. It is very expensive to develop, and hencecannot be given away without cost recovery.

(7) Technology transfer is a multifaceted, amazingly diverse and constantlychanging process with much variations.

(8) Buying technology can either be the most useless outlay or the best of possiblebargains depending not only upon the ability of the transferor to relay it but,above all, upon the receptivity of the transferee and its ability to make gooduse of it. The existence of a sound infrastructure is generally an essentialingredient for accomplishment.

(9) TNCs can be very efficient transferors of technology, provided they can rely ona certain continuity and can earn a reasonable return on their most valuableassettechnology.

(10) TNCs are likely to have little real interest in developing host country R&Dcapabilities. But they have to learn to be as sensitive and responsive aspossible to the needs of the transferee.

(11) TNCs must stop trying to export their own corporate dogma and demonstratesome flexibility.

(12) Using less qualified people (under the "foreign expert" components) foractivities in developing countries generally results in disasters.

(13) No country, and certainly no corporation, can have a monopoly of all

technologies.

(14) Restrictive conditions on the transfer of technology imposed by the licensorcan be as unhealthy as those imposed by the governments of transferee.

Perhaps most important point to be remembered by both parties is thatinternational technology transfer is the result of an agreement between a transferor(who has technologies for sale) and a transferee (who wants to buy technology),where the agreement is reached on the basis of prevailing market situation andmutual understanding. Expecting anything more than what has been agreed uponis wishful thinking!

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4.3.a- Technology Transfer

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