Appropriate technology and foreign direct investment
- Adaptation and Technology Transfer
- Multinationals from Developing Countries
- Appropriate Technology, Efficiency, and Spillovers
The discussion of appropriate technology in the context of foreign direct investment (FDI) arose fromconcerns that technologies developed under the economic conditions of developed countries could have harmful effects in developing countries in particular, that multinational enterprises (MNEs) would not create enough jobs. This possibility is particularly likely if innovations are ‘‘induced’’ by cost-saving possibilities in the markets where they are first used (Kennedy 1964). Because developed countries are capital-abundant, the technologies developed there tend to be capital-intensive, laborsaving technologies, and thus tend to generate less employment in a developing country than do technologies tailored to the conditions of abundant, cheap labor present there. Similar arguments apply to other features of technology: for example, technologies requiring a steady supply of electric powermay be inappropriate for countries that experience frequent power outages. Thus there has been a general concern whether MNEs bring in the right type of technologies whether the technologies that are in the best interest ofMNEs to transfer are those that are in the best interest of the local economy.
Adaptation and Technology Transfer
In simple models of the behavior of MNEs, the technology developed in the homemarket is often assumed to be reproduced identically in other countries, which is how the firm exploits its advantage of technological ownership. In fact, reproducing technology abroad is not easy; technology often must be adapted to local conditions for it towork. If the existing technology is not appropriate for local conditions in the host country, the MNE may have an incentive to adapt the technology.
Actual technology transfer is not simply a matter of shipping blueprints to another country, but involves a costly process of experimentation and trial and error (Teece 1977), during which the specifications of the technology adapt somewhat to local conditions. Some technologies may be more easily adaptable than others, such as ones where different techniques using different mixes of capital and labor are feasible. In some cases the costs of adaptationmay be large enough that adaptation is not worthwhile to the MNE. The practical questions thus become a matter of how adaptableMNEs’ technologies are to local conditions, how much adapting MNEs in fact decide to do, andwhether localfirmswould in fact do a better job of adaptation (Lall 1978).
The degree to which MNEs adapt their technologies to local conditions has been widely studied. Since adapting technology is costly, and since the competitive advantage ofMNEs lies in large part in their ability to replicate technologies they own in different countries, there can be a strong incentive to minimize adaptations to local conditions. For example, the basic type ofmachinery is likely to stay the same from country to country. Thus technologies initially created for local conditions may well be better suited for the local conditions than technologies created elsewhere and then adapted. However, the situations where technologies are ill adapted are apt tobe thosewhereadaptationisdifficult,andhence local firms may be unable to do better than MNEs.
Empirical results on the observed degree of technological adaptation often defy easy generalization. Large statistical studies often include firms in different industries, and therefore the differences in capital intensity may be due to the industry rather than to individual firm choice. The effect of foreign firms’ technological choices on domestic firms in developing countries depends in part on whether the local firms are suppliers, are competitors, or have some other relationship to foreign firms. It has been reported thatMNEs impose particular technologies on their suppliers in developing countries, at least partially in an attempt to maintain quality control. There are many possibilities for developing country firms to learn and imitate the technology of MNEs, through reverse engineering, social networking among employees, or employees who leave to become entrepreneurs or are hired away by competitors. Sometimes, domestic imitators have been more successful adaptors than MNEs and have been rewarded by rising market shares. At the same time, one can observe cases in which managers in developing-country subsidiaries of MNEs from developed countries adapt technologies in the laborintensive direction (Pack 1976; Lecraw 1977).
Multinationals from Developing Countries
In the 1960s and 1970s, an increasing number of firms based in countries such as India, Hong Kong,Korea, Brazil, and Argentina became direct investors. These ‘‘third-world multinationals’’ tended to place the bulk of their investments in other developing countries. Since economists were accustomed to think of MNEs transferring capital and technology from the North to the South, new explanations seemed necessary for the phenomenon of South-South FDI. A widely offered idea was that developing-country firms had acquired ‘‘appropriate’’ technologies in their home markets, which gave their affiliates in other countries a competitive advantage.
The types of intangible firm advantages that could arise from operating in a developing-country environment are widespread. These could include managerial skills in dealing with severe bottlenecks in acquisition of materials and power, local labor conditions, and developing-country bureaucracies, and superior information about local product and factor markets in certain trading partners. Also, in some countries such as Korea and India, the largest domestic firms were organized as multiproduct conglomerates, and the managerial skills needed for such organization readily adapt to the multinational form.
The motivations for South-South FDI need not be limited to intangible appropriate-technology advantages. Informational advantages gained from a past history of exporting or migration suggest a transactions cost explanation rather than a technological one. Even in developing countries, firm-level efforts to promote efficiency might encourage capital intensity rather than labor intensity (Ferrantino1992). By the early 21st century, some investors from developing countries were seeking to acquire developed-country technologies through mergers and acquisitions (e.g., Chinese investors in the United States), showing that home-country production experience need not be the only determinant of technological development in developing-country MNEs.
Appropriate Technology, Efficiency, and Spillovers
From a policy standpoint, part of the idea of appropriate technology is that the technology chosen bymarketsmight not be optimal for either economic growth or employment generation. This imperfection suggests a role for government either in technology choice or at least in undoing distortions such as those thatmight make labor artificially expensive. In the 1980s the skepticismabout the benefits ofFDI for developing countries began to wane, and the promarket ideas collectively called the Washington consensus tended to see FDI as enhancing productivity and growth rather than being an original source of distortions. Under this view, the most important feature of technologies bundled with FDI is their potential for enhancement of overall productivity, rather than their bias toward either capital or labor.
Nonetheless, the question of the conditions under which the activities of developed-country MNEs influence technological conditions in developing countries, and whether and under what conditions adaptation takes place, remains open. Much of the current research on technological spillovers from FDI is informed by the issues raised in the analysis of appropriate technology. See also foreign direct investment and innovation, imitation; foreign direct investment and international technology transfer; location theory; technology spillovers