News and Analysis • Volume 11 • Number 3 • May 2007
New Trends in Technology Transfer
The character of technology transfer has changed profoundly over the last couple of decades. This has broad implications for defining policies that might benefit developing nations and, therefore, for international negotiations.
In the technology transfer debate of the 1970s, the paradigm involved technology licensing from a multinational firm to a host-nation subsidiary, or licensee manufacturing for the local market. The concerns were that the costs of the technology (many of which were hidden through transfer prices or management fees) were too high; that host nation use of the technology was often hindered by restrictive clauses, and; that the licensees often failed to receive the best technology.
The Underlying Changes
Today, the world is quite different. A number of developing nations have become much more technologically sophisticated. The comparison from 1976, say, to 2006 is incredible in terms of the numbers of trained scientists and technologists, the level of science-based industry, and the magnitude of national scientific research and financing programmes. This change is, of course, greater for the middle income and largest nations such as Brazil, China and India, and much weaker for the poorest nations, such as many of those of Africa. The change is demonstrated dramatically by the emergence of multinational research facilities located in developing nations such as China.
Further, the world is now globalised in the sense that free trade has spread and that, in many industries, economies of scale now favour production facilities that serve more than one nation. The result has been increasing specialisation and trade, both in components and in finished products that may have origins in a number of nations. Production chains are now often spread over a number of nations. Computer chips may be designed in one nation, manufactured in a second, diced and tested in a third, assembled into computers in a fourth, with software written in a fifth. Automobile component suppliers are becoming independent of automobile firms and doing a greater share of the overall R&D going into a car. Multinationals, in general, now invest in a developing nation in order to obtain a basis for export to a global market or production process. China is in part an exception because its domestic market is so large, but much of the investment and production in that nation is for export as well.
These developments have changed the incentives and barriers for indigenous developing world firms, i.e. those that are organised with primarily domestic ownership and management (although they may enter into alliances and joint ventures with global firms). Such indigenous firms face global, as well as local, competition and they may have to find a place in an already elaborate international production structure.
As a result of free trade and globalisation, the international regulatory structure is also different. Today, an indigenous firm in the developing world may be less able to begin through a protected market, as did the US industrial firms of the early 19th century. And because of intellectual property (IP) protections in TRIPS, the firm may be less able to begin by imitating existing technologies, as did Japanese firms in the middle of the 20th century.
Moreover, technological flow has become strongly political, not only because of the global move towards IP but also because of technological protectionism. The fact that free trade provides mutual benefit is widely recognised, even if politically difficult to implement. Less recognised, at least among politicians, is the parallel point that exchange of knowledge leads to an equally – if not more – beneficial cross-fertilisation and acceleration of the benefits of free trade.
National Programmes to Support Technological Development
In this new world, nations are seeking to encourage their own high-technology industry. Any such national technology policy must be based on a rational subsidy criterion. In the developed world, the economic analysis of a research subsidy is based on the fact that many of the benefits of new technology development are unlikely to be recouped by the investor in the new technology. Hence subsidies should be given to those industries in which the social benefits of the technology are significantly greater than the profits that will return to the entrepreneur.
For a developing nation, an additional circumstance is appropriate. This is analogous to the traditional infant-industry subsidy or tariff – if there is a market imperfection making it hard for an industry to get started, and the industry can be expected to be efficient and to survive without protection after a start-up period, the subsidy or protection is justified. It is clear that many developed and developing nations have successfully used various forms of subsidy to jumpstart a particular technology – examples abound from semiconductors to aircraft to medical and agricultural technologies. Economically, a developing nation can reasonably subsidise an industry under similar circumstances. All the standard economic objections to government intervention apply to warn that such an approach is often unwise: governments are generally less good than the market at ‘choosing winners’ as political pressures often push in uneconomic directions, and it is politically hard to terminate the subsidy or protection. But the point remains: specific subsidies, as well as general subsidies (i.e. education or broad tax incentives), are sometimes economically rational.
Human Resources
The transfer of technology is fundamentally a matter of the flow of human knowledge from one human being to another. This can be through education, scientific literature, or direct human contact. While at the legal level, one thinks about licenses dealing with legal rights to use particular technologies in a particular context – it is the human level that dominates the managerial and economic reality.
Although some inventions have been made by individuals with little education, but today the majority of inventions are made by those with substantial education in science or technology. The reduction of inventions to commercial application usually also requires skilled entrepreneurs and, depending on the particular field, skilled mechanics, lab technicians, or software writers. Many of the same skills are needed for the thoughtful adaptation and application of a technology developed elsewhere. Hence, a broad range of scientific and technological skills is absolutely crucial for a nation to participate effectively in the international technological economy.
There are a number of international approaches to improve developing world access to human technological resources, and those should be considered as topics for negotiation. These include improved support for technical education, international clinical programmes to assist developing country science and technology graduates to obtain experience in business, and improved access to visas for students and scientists.
Public Sector Technologies
In volume, developing world public sector research far outweighs developing world private sector research. Nevertheless, the developing world public sector probably supplies far less technology to the developing world economy than does the international private sector. Thus the role of public sector support is generally more one of building a capable infrastructure than of creating new developing world industries. There is an obvious exception in areas such as agriculture, where much of the research is carried out in the global and national public sectors. And, as noted above, public sector support may sometimes be useful in ‘jump-starting’ a new industry.
There are many other issues in the public sector area that might be usefully discussed in further negotiations. These include improving mechanisms for access to technology held by global agricultural biotechnology firms; as well as increasing developed and developing nations’ government support for medical research of importance to developing countries and for covering the costs of distributing the products of that research in the developing world. It will also be important to recognise the possible need for major public sector involvement in recipient nations in areas such as energy and environmental technologies; to organise a global sector-based research inventory to assist in defining those areas where increased public-sector research investment might best be focused; to clarify patent law to expand research exemptions and to minimise the negative impact of patents on research, and; to negotiate arrangements to minimise the impact of national security restrictions on the freedom of science and of international technological development.
The Role of the Private Sector
The majority of technology important to the developing world is probably derived from the developed-world private sector, through licensing or foreign direct investment ( FDI). Participation in this private sector network is the normal way for an indigenous developing nation firm to gain its first technology. Depending on the sector and the nation, the firm may go on to gain a substantial role in the international production chain, sometimes with its own technology, and may ultimately produce its own product for the domestic market for export.
The most important topics here to be considered for further international negotiations include principles for trade secret law; designing the purchasing policies of global health (and other) procurement entities to ensure that these entities are adequately open to developing nation supply tenders; developing mechanisms to discourage bilateral agreements that modify the balance struck in TRIPS; renegotiating of the technology-related provisions of the WTO antidumping and subsidy codes to ensure that the use of reasonable subsidies is not penalised, and; developing antitrust measures to ensure that the international flow of technology is conducted competitively. Overall Implications
Clearly, many areas require multilateral attention, and the above analysis provides an agenda. This is a somewhat different agenda than that traditionally posed for technology transfer. Hence, it is wise to test the ideas here by further studies. One group of such studies would be case studies examining specific industries and the relative success or failure of developing nation entrants. The role of subsidies deserves analysis, in light of their historical success and the current orthodoxy rejecting nearly all such efforts. What is the experience on the ground? And there should be studies of the effectiveness of technological education, basic research, and tax benefits as mechanisms of encouraging developing world technology. It is also important to analyse whether the relevant areas of trade and WTO law are actually discriminatory or not. This would include the principles on the treatment of R&D subsidies, as well as the provisions of bilateral investment treaties, which may go further than the WTO’s TRIMS Agreement, just as bilateral agreements often go further than TRIPS.
Most of all, any negotiations must be in a context of movement towards a seamless global scientific and technological community, such that each scientist or engineer, anywhere in the world, has an opportunity to make his or her optimal contribution to the science and technology needed by the planet. It is important that the firms and research institutions in the developing nations are able to participate in this global technological process. A treaty on access to knowledge and technology – governing issues such as subsidies, visas and access to scientific information – would provide benefits to both developed and developing nations. As the world moves further toward a global technology community, it will be essential to remove restrictions on technology licenses and on investment in technology-based firms, as well as to remove the barriers implicit in the current WTO patterns of anti subsidy and antidumping principles. There are certainly appropriate exceptions to protect national security, but these should be against a background of a free flow of scientific and technical ideas and persons. In light of the current status of the Doha Round, it is not clear whether this vision is best sought in the context of a modified or expanded round or in one of detailed revisions and understandings within existing WTO bodies. But it is important to seek it.
John H. Barton is George E. Osborne Professor of Law, Emeritus, at Stanford Law School. The author based this article on a longer ICTSD-commissioned study entitled New Trends in Technology Transfer: Implications for National and International Policy.