What Is Technology Absorption

What is technology absorption? • Most technology in ‘latecomers’ comes from abroad, in mixture of two forms: o Embodied: in capital goods, patents, blueprints, designs, models and so on o 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 forms: Non-contractual: Public knowledge, fairs, conferences, migration, export activity and informal networks • Contractual: o FDI related: (internalized) transfers within multinationals or joint ventures with MNCs o Arm’s length: equipment imports, turnkey projects, licensing, subcontracting, franchising and other contracts o •

Role of internalized technology flows • 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 • 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 knowhow and management skills

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:

o Local firms are strong in base technologies but need particular new components of technology o They specialize in activities with stable technologies, where state-of-art technologies are available at arm’s length o They can export through foreign buyers (low technology products), sell undifferentiated products directly or have established brands o They subcontract to MNCs (OEM) or supply local components • 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 taxdeductible 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 o Quality standards vital (e.g. ISO 9000) o Good standards institutions can help to diffuse technology and quality awareness o Advanced standards institutions are withdrawing from testing into basic standard setting and

o o o o

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? • Privatisation 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