Role of MNCs in Technology Transfer - Coursework Example

ROLE OF MNC’S IN TECHNOLOGY TRANSFER Role of MNCs in Technology Transfer Introduction All companies whether they are domestic or multinational corporations require technological as well as innovation capabilities to dominate the global market. The contributions of these multinational corporations are key strengths that fight against economic and poverty issues within the host countries. In this regard, it important to understand the roles of multinational corporations with respect to technology advances and transfers1. The basic aim of this report is to examine these underlying roles of multinational corporations ineffective transference of technology. The report shall provide theoretical frameworks and shall generate the results through empirical evidences. Multi-national Corporations in the emerging market Global minded companies and multinational corporations are seen expanding their businesses rapidly in the international market in order to stay competitive in this emerging age of technology advance. At this time, it is feasible for companies to manufacture and carry out their operations considering the requirements of the local market and taking care of the needs of the local people. In order to preserve themselves in this competitive environment, they also require minimizing costs and contributing in economic development. Moreover, they have the role to facilitate access of new technologies for sustainable development. With respect to underdeveloped and developed countries, it is important to state that technology transfer from the first world to the second world provides successful implementation of this concept of sustainable development. There was a United Nations Conference on Environment and Development (UNCED) organized in Rio de Janeiro and according to agenda 21 it was recommended that multinational companies need to focus on technological transfer for a sustainable development2. Technology Transfer Technology transfer can take place vertically or in the horizontal way. Vertical transfer of technology is taken place when any issues related to technology are specific to any county or any industry whether it is in home or host country. Horizontal transfer of technology takes place through three main elements, which are home, host and the transaction. Whether it is vertical or horizontal technology transfer, it helps underdeveloped countries to overcome the barriers of development. Theoretically, it has been defined by Schmidheiny that technology transfer is basically the movement of technology that takes place from one industry to another which may be in the same country or the outside in order to contribute toward economic development3. The transfer of technology can either be for commercial or non-commercial purposes for instance there can be transactions relating to the management or technical operations. While speaking of technology transfer it can be said that the role of educational institutions as well as research institutions is tremendous, making this transfer successful. Moreover, it is important to understand inter-disciplinary nature of the transfer and involvement of stakeholders to make the technology transfer a successful one. Majority of the stakeholders in technology include multinational corporations, government and educational institutions4. Though, technology transfer provides social, environment and economic revival but there is an ongoing debate carried out by many economists and politician about the level of transfer, which could either “appropriate technology” or “advanced technology.” Some individuals have the view that most countries do not need advanced technologies as they would increase further problems in poor countries rather than to solve them. It is also argued that the advanced technology is more expensive for the local population with respect to their incomes so it should not mandatory. Moreover, the technology requires educational and industrial infrastructure that works on it for its development. There are proponents of “advanced technology” who have the opposite view. They base their argument on the fact that that transfer of advance technology is essential it provide an economic upturn and modern science is directly related to technology. Moreover, it is also argued that if technology is transferred to poor countries then it shall give rise for industrial growth and further development in different sectors. Advanced technology also gives rise to better social and healthier environment. However, at the same time it is important to manage the risks associated with advance technologies5. Technology transfer Implementation procedure There are many channels through which transfer of technology is taken place. They include trade in products or services, migration, international licensing, joint ventures knowledge transfer, foreign direct investments (FDI) and other contractual agreements carried out by multinational companies. It also includes intra-national and international movement of individuals. At this point it is noted that besides the efforts of individual workers, the role of host countries about their national system of innovation plays an important role in making technology transfer easier. National system of host countries contains their public as well as private companies working within the national borders that have the means to assimilate, modify, rectify and produce diffusion of knowledge through interaction. The interaction is taken place between the six systems that include production, management, scientific and technological system, training and development, finance and administration. Though, in most of the underdeveloped countries, these systems are weak due to poor infrastructure but multinational corporations can play a vital role technology transfer if there increase their absorbing capacity in the country where they are supposed to receive technology and that they acquire technology and build their capacity to absorb technology at the same time6. There are market-mediated channels as well as non-market mediated channels to carry out technology transfer. Market mediated include processes where there is a formal market transaction and non-market mediated is where there the technology flows without having any institutionalized transaction. Market Mediated Exporting Direct Exporting Direct exporting of technology transfer is referred to work as an externalized mechanism that transfers product or capital equipment out of organizational boundary. It offers cost effective technology supply with low-risk as compared to licensing, joint venture or owning a subsidiary. However, there is a limited supply of resources and MNCs cannot monitor effectively with respect to its marketing or distribution in the host country. Direct exporting makes MNCs learn about the market. There are few disadvantages like host country may have certain strict policies so it more feasible for MNCs to invest within the host country, take control of the technology through a subsidiary rather than export their products. Moreover, when exporting the goods, export management firm can also set up a sales office to carry out sales of the technology7. Foreign direct investment Foreign direct investment is a channel that is used by most of the firms and the MNCs. Technology can easily be transferred through this channel by internalized mechanism, which has access to technological, marketing, knowledge of assets that are being utilized within the firms. MNC’s has the means to form subsidiaries to monitor all the activities relating to technology and use them in productive areas. Using subsidiaries is appropriate especially when technology is new, complex to diffuse and when the skills requirement to utilize the technology is not present in the host countries. FDI is also used by MNCs when the technology is difficult to codify, transaction cost is high during its transference. At this point in time, MNCs need to have complete control over their subsidiaries that are operating in host countries. However, while trying to exercise complete control over subsidiaries MNCs would face many legal barriers that consist of policies that may prohibit the subsidiary to execute technology transfer. MNC’s can used control measures and internalize technology transfer but at times technology spill over can also take place. Technology spillover is a phenomenon that occurs when MNC’s fail to retain technologies within their companies to get its benefits and other local firms are able shows more efficiency and innovation in the market. The local firms may cause technology spillovers in MNCs when they observe their new technology improve their production, when there is more labor turnover that diffuses information through backward and forward linkages8. Licensing MNCs can transfer technology through licensing which is giving permission to sell, design, and make any product or service through joint venture or any other agreement. Technology transfer through licensing is carried out through two packages through patent, trademark or any other right to make use of the product or the service and having provisions of technical assistance to licensee covering codified knowledge of technology and other properties rights etc. Licensee pays the licensor fees, and share in profits for the technology he gets9. MNCs opt for licensing agreements for technology transfer because it helps them fill the gaps if there is any in their product range or when they want to commercialize their product or want to carry out a new business area having any commercial potential. MNC’s opts for licensing specially because of low risk factor associated with it, getting a stable income out of it. It is feasible for technologies that can be easily diffused, are less complex and can be learned by the subsidiaries. However, if the technology is complex the knowledge transfer of knowledge is difficult as there are mostly bounded by certain policies10. International Joint Ventures Joint ventures refer to a collaborative effort of MNCs with the local companies, to share their skills and profits, processes and creating opportunities for growth and development. With respect to technology transfer joint ventures of MNCs with local companies provide learning opportunities for them reduce their investment risks and also help local people develop skills to use technology to make businesses successful. In other words, it can be said that in joint ventures while local firm provides support in terms of politics, business customs and customers preferences the MNCs can in return provide technological information. However, transference of technology through strategic alliances and joint ventures are dependent on some factors such as organizational structure as well as the level of attachment between the partners and ownership structure, absorbing capacity, rigidity and learning intentions etc. It is believed by many scholars that transfer of technology through this channel builds an innovation link, which is higher than other forms of channels11. Technology Transfer through non-market channels Imitation Imitation occurs when the local firms use their abilities to observe the technological development or product/ service innovation and in return imitate their form. Imitation mostly occurs when people from these local firms interact with formal market channels and diffusion of information takes place. In a competitive environment a rival firm may imitate the technological design, or formula of any product or service when they inspect the product, there is reverse engineering or through DE compilation of software12. Movement of personnel As mentioned before transference of technology takes place when employees move in the market independently whether it is through FDI, licensing or joint venture. It occurs when expatriate managers are shifted or there are short-term visits of people from MNC’s parent country to other subsidiaries. The movement of personnel affects the MNCs spillover of technology13. Data in the patent application A rival firm can transfer technology by getting the information from patent applications, which were registered in the country. The information received through patent application is free and firms have accessibility to the technology directly. They can inspect as well understand if the technology is simple or complex in order develop processes that do not trespass the rights of the patents’ owner14. Media Media have also played a vital role in technology transfer that includes communication channels such conversations through telephone, newsletters, faxes, emails and other notices from laboratories and research universities15. Migration During temporary migration, technology can be transferred when there is migration of students, scientists or even when certain technical personnel from organizations migrate to other countries16. Capacity building As stated before, technology transfer requires capacity building. Thus, in this regard multinational corporations need to interact with community developers and institutions. The basic requirement is to stay focused to construct and develop capability skills using modern technology and innovative systems. However, there can be certain barriers faced by multinational corporations when building capacity. These barriers can be related to lack of appropriate resources and lack of management skills. If there are no laboratories and well-equipped research centers then technology transfer becomes difficult. There can be barriers of technology transfer when there is more bureaucratic control and lack of scientific culture within the work environment17. Host Countries Reaction to Technology Transfer While MNCs facilitate technology transfer, many home countries feel apprehensive as they feel that forming subsidiaries in other countries has a considerable amount of negative impact on their export potential and may reduce the competitive advantage of the home country. Many labors oppose this idea as jobs are seen generated because of the new technology, which would be beneficial for the host country18. Theoretical Framework There are few theories that can be taken into account when understanding technology transfer through MNCs. Many organizations adopt the mentioned theories while transferring technologies in the host countries. Some theories have a positive implication on their business while some theories cannot be successfully applied in expanding business practices using technology transfer as a base. Transaction Cost theory Technology transfer requires an international market entry, which can be through internal or external solution. Internal solutions are like FDI, joint ventures and direct export. Externally, it comprises of licensing or sub-contracting. The transaction cost theory deals with market entry of any resources dealing with the aspect why companies tend to exist, why they need to expand. It explains that companies are trying to reduce the costs associated with exchange of resources. In other words, according to the theory every organization tends to expand itself provided their activities are executed in cost effective way. With respect to technology transfer it is seen that the nature and characteristics of technology whether it is simple or complex and how it is being transferred would consist of costs. Thus, the transaction costs are affected by the nature of technology whether it is simple or complex that is transferred to any country19. Eclectic Paradigm Eclectic paradigm by Dunning is called as eclectic due to three factors associated with it namely ownership, location and internalized advantages. It talks about location based advantages that if and transaction is taken place in foreign target country what would it be advantages or disadvantages. Internalized advantages drive firm to carry out their practices within their boundaries. With respect to technology transfer it seeks to understand any organization choice of entry. However, choice of entry during technology transfer is affected by legal restrictions20. Endogenous Growth Theory Romer formulated Endogenous growth theory in which he stated that human capital was essentially required when acquiring foreign technologies so that they would benefit from FDI. In this regard, it was suggested by the scholar that if there were more human capital it would give rise to better economic growth and production techniques as well21. Neoclassical theory The theory suggests that the technology is present across different countries. It is free, does give rise to any rivalry amongst firms when people are willing to a price for it for the ongoing benefit. In short, this theory affirms that there is free international flow of capital and technology and developing countries can get the technology transferred without adaption and assimilating these technologies as every firm is operating and producing with their relative factor prices. Even though neoclassical theory suggests that there are no spillovers in FDI but empirical findings from research show that there are negative spillovers occurring from multinationals22. Evolutionary Theory Evolutionary theory ove rides neoclassical theory as according to this theory, firms that are operating in developing countries have the opportunity to adapt, learn and improve technologies but they have role of determining if the markets are efficient enough to diffuse the technology. This theory was developed by Nelson and Winter that shows that technology is not free and is unavailable which makes R&D activities costly. Moreover, the theory also suggests that the owner also protects technology transfer so that it is not disseminated easily in their rival firms. The theory also suggests that the transference of technology requires skilled and experienced manpower, capacity and investment. Thus, it can be said this theory is more realistic as compared to neoclassical theory23. Hermalin Theory Hermalin’s theory provides implications of MNC’s subsidiaries that have a role in technology transfer. The theory is based on information with respect to leaders who follow a voluntary path to get information. Moreover, through technology the expatriate of the MNC working in another country would be able to take in information for further practice. The model shows how multinational firms engage expatriates to take this transmitted information into the subsidiary and to use it as a signal. It is a cost effective way to communicate information and many MNC’s in technological industries hire expatriates who can lead by example and can adopt technology transfer. Hermalin’s theory can be applied for those sectors as well where the transfer stage is important than the execution stage so export-oriented firms are more likely to use expatriates. However, it is important to state that the areas where there is uncertainty of local conditions then inclination towards FDI will be reduced as there would be lack of supply of local people24. Role of MNC’s in technology transfer Multinational Corporations are key players that can control lack of resources and build capacity for technology transfer. They also have the means to manage systems through foreign direct investments (FDI), bringing in technology and have access to the markets of the host countries. FDI contributes to create employment opportunities, environment and community and human resource development. At times, it is seen that their contribution is not noticed with respect to technology transfer reason being that people misinterpret the meaning of technology transfer and there is no appropriate use of resources for knowledge transfer. Thus, in this regard it can be said that corporations need to engage in active contribution towards technology transfer25. Moreover, government can use the following steps so that there is easier technology transfer through MNC’s in host countries: Step 1: It is important to have stability is economic, social as well as political set-ups in the countries with respect to their systems through which they work with. It shall persuade MNC’s to carry out investments in their fields of interests. Few countries like Chile carry out stable legal framework, which makes the work environment conducive. Moreover, their economic and political setups are such that they encourage MNC’s to invest. Bolivia on the other hand is opposite as it is seen that there is political and economic stability which makes it difficult for multinational companies to carry out FDI’s in an effective manner26. Step 2 In order to increase the capacity of technology transfer effective it is important to strengthen the abilities of the government bodies to carry out negotiations with the MNCs. It can only be carried out if the salaries of the government officials are good and there are well-educated professionals27. Step 3 National system of Innovation (NSI) can improve the capabilities that are required for technology transfer. NSI consists of educational institutions as well as private firms, NGOs and other communities, which have the same goal. These key players can help in improving and using innovative means to create technology transfer effective28. Step 3 While technology is being transferred it is important to make such strategies work that absorb, assimilate as well as modify imported technologies that could be beneficial for the country. In order to survive in a competitive environment, MNCs need to active participation in host countries besides considering their national interests. In this regard, they require support from engineering communities working in host countries. In other words, it can be said that MNCs require strategic alliances in business developmental areas like engineering departments in order to take a step forward towards technological transfer29. Impact of Technology Transfer on Host countries Research indicates that the structure of the host country is affected at three levels market, production and R&D. At the market level, there three areas identified which have an impact. Firstly, MNCs makes the suppliers at the host country work through innovation in order to compete with local firms. Secondly, it makes the supplier work independently through technology with some local ownership. Thirdly, MNCs determine how resources are utilized, helps suppliers make changes in technology as per their requirement. Resource entry and utilizations have an effect on distribution, internationalization and diversification of local suppliers. However, the users would have a benefit as initially the impact of the new technology would be slow then with time, competitive forces may emerge to imitate the innovation. As far as impact at production level is concerned, it is seen during technology transfer through MNCs three areas of production are affected. Firstly, it is possible that the production at host countries lack efficiency due to changes in required for production. Secondly, transnational marketing may in some way become beneficial for local firms that are working in host country. Thirdly, there are changes in the sources of inputs which give rise to distinct and differentiated products. When an innovation or new technology reaches host countries it is important that the company’s makes changes in the production, which would form a base for the innovation. However, it is seen that with the passage of that many firms tend to imitate production methods of the foreign product. MNCs that are involved in rapid technology advancement need to instill a program that is focused in long-term R&D programs. In this regard, companies need to secure R & D personnel by making research program as a fixed cost in their firm. However, many MNCs have the primary objective to reduce the cost so normally they cut R & D functions. At the same time when competition arises between the firms then there is pressure on MNCs to make variations in their technology and differentiate their product from rival firms. When there is pressure on the firms then they put on emphasis on the support rather than on research, which makes an impact severe so host country may need to carry out research locally30. Empirical Findings Technology Transfer is a part of international trade. Branstetter, Fisman, and Foley to find the relationship of IPR and Technology transfer conducted a study. With respect to technology transfer and International Property Rights it was seen that when there are changes in IPR then most of the US multinational firms are seen responding differently. After analyzing data of over 16 countries it was seen that royalty payments for technology transfer rises, there is an increase of R & D expenditures as well as in foreign patent applications during the times of reforms. The increase in these areas is seen concentrated in parent firms that make use of U.S patents thus as a result they are also required to make use of IPR reforms. Findings from the research indicate that as a result of changes in IPR, many multinationals increase technology transfers in the country that are reforming31. Dechezleprêtre, Glachant and Ménière to find out the level of diffusion of climate-friendly technologies conducted a study on international trade of technology. Data was taken from 16 countries using regression analysis and it was seen that countries that are receiving the technologies consists of technology-specific capabilities, which are determinant factors. Surprisingly, it was seen that general education was not important. However, international trade, increase in tariff rates as well as ignoring intellectual property regimes (IPR) has a negative reaction to effective diffusion of technology or patented knowledge. In conclusion it is also suggested that if there are strict FDI policies then it may make technology owners to use patents systematically. In order to reach a satisfying conclusion, further research work is needed to be carried out on the subject32. There are many other empirical studies carried out by researchers that show that technology transfer through joint venture or even sole venture can be successfully carried out. It depends on the type of entry form adopted by any MNC to start the process of technology transfer. It is noted that international joint ventures host advanced kind of technological knowhow so wholly owned subsidiary is preferred but this kind of entry is still forbidden in host countries33. Conclusion The basic purpose of the report was to examine the role on MNCs in technological transfer. Thus, after examining the channels of technological transfer along with theoretical framework and empirical findings it is concluded that due to global competitiveness MNCs are striving to internalized technology and knowledge through different means like FDI, joint ventures etc. Even though, there are few barriers faced by MNCs during technology transfer in host countries but collaborative efforts by government agencies and communities can enable MNCs to implement technology transfer in an effective way. However, further researches are needed to be carried out on the subject. Bibliography Branstetter, Lee, Raymond Fisman, and Foley, C. Fritz. Do Stronger Intellectual Property Rights Increase International Technology Transfer? Empirical Evidence from U.S. Firm-Level Data. Cambridge: National Bureau of Economic Research, 2005. Cohen, Goel. Technology Transfer: Strategic Management in Developing Countries. New Delhi: SAGE Publications India, 2004. Dechezleprêtre, Antoine, Matthieu Glachant, and Yann Ménière. What Drives the International Transfer of Climate Change Mitigation Technologies? Empirical Evidence from Patent Data . London: Grantham Research Institute on Climate Change and the Environment, 2009. Hermalin, Benjamin. "Toward an Economic Theory of Leadership: Leading by Example." American Economic Review 88, no. 5 (1998): 1188-1206. Hoeck, Michael. Cooperation and Technological Endowment in International Joint Ventures: German Industrial Firms in China. Koln: Kölner Wissenschaftsverlag, 2008. Schmidheiny, S. Changing Course: A Global Business Perspective on Development and the Environment. 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