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
Arms 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

US: 41%
Japan: 24%
EU big 3: 20%

Concentration of R&D in US by firm

(2001)
Only 68
manufacturing firms
out of 16.8 thousand
with R&D (0.4%)
account for 49% of
total enterprise R&D
spending in the US.
Only 329
manufacturing firms
(2%) account for 71%
of R&D.
The level of
concentration has
been stable or rising
over time despite
the rise of
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 knowhow 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

Source: OECD Science, Technology and Industry Scoreboard 2003.

Japan

Turkey

Czech Rep

Finland

USA

Poland

France

Germany

UK

Netherlands

Canada

Sweden

Spain

Portugal

Ireland

Hungary

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
BERD:
199,539

Japan
BERD:
100,777

1,317
16,366

436

12,344

1,595

EU
BERD:
113,288

Source: OECD data

US MNC R&D in developing &

transition economies (current $ million)

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 arms 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 arms
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, inhouse 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 Irelands 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 Irelands 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