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How Transfer of technology through FDI has a significant contribution to least developed countries.

How Transfer of technology through FDI has a significant contribution to least developed countries.

Course: M.Com

1 Answer

FDI is considered to be a vehicle of technology transfer. It is contended, therefore, that the FDI flows provide their host countries access to sophisticated and complex technologies. But the theoretical propositions and empirical findings suggest that FDI by itself does not necessarily improve the access of the host countries to more complex technologies.


Over the past four decades, arm’s length licensing has emerged to be a viable and increasingly significant alternative to FDI for technology acquisition. Internalization theory is presently used to explain the FDI, flow and foreign operations of firms. According to this theory, FDI is likely to be preferred as a mode of foreign production, if goodwill assets like brand names are included in the transfer (because of the need of maintaining quality) or where knowledge is idiosyncratic and, hence, its transfer requires movement of the personnel. New proprietary process technology, or process technologies that are standardized, and which cad be written down and transmitted objectively, can be transferred easily through licensing.

The recent empirical studies confirm that it is not the more complex or sophisticated technologies that are transferred most through FDI. It is the technology for production of differentiated goods, sold under brand names with high advertising and marketing outlays, that is most likely to be transferred through FDI. It is because of these tendencies that most developing country governments have evolved entry regulations to screen proposals of FDI and licensing collaborations, according to the national priorities and technological gaps.

In any case, FDIs or licensing agreements envisage transfer of production know-how. The know-how, or design capability is rarely provided by the foreign collaborators to the recipient enterprises, and that is the most important component of building local technological capability. The know-how is to be absorbed through learning by doing, reverse engineering, or during the process or product adoptions and R&D activities. In the case of FDI, the foreign collaborator is also participating in the management, controlling the technical functions. In these cases, therefore, the chances of the- importing enterprises learning through processes are very much limited. Several surveys have confirmed the TNCs tendency to concentrate research and development activity near headquarters or in the developed countries.

A recent study found the foreign controlled firms in India to have lesser propensity to undertake in house R&D than their local counterparts, who obtained technology on a licensing basis. This tendency has been explained in terms of three factors. Firstly, through the foreign collaborators often restrict any changes in the original specifications/ designs supplied through restrictive clauses inserted in the collaboration agreements, the propensity to adhere to these restrictions may be less in case of a locally controlled firm than in the case of a firm controlled by the foreign collaborator itself. Secondly, unlike the MNE affiliates, the unaffiliated licensees do not enjoy continued and captive access to the research laboratories of the technology supplier.

Hence, they have to set up their own laboratory. Finally, the technical collaboration agreements are of a finite duration (up to 5-10 years), while FDI entails a life-long relationship. Due to restrictions placed on the renewals of technical collaborations by the government, the local licensees may be anxious to absorb the technology before their expiry. Besides, independence of decision-making in the case of licensing collaborations or outright purchases allows the local firm to selectively delink and diversify the sources of technology resulting in cost-effectiveness and greater technological competence.

Thus FDI makes only a limited contribution to local technological capability building in the host countries. They appear to be inferior to licensing or outright purchases of technology (purely technical collaborations) as a channel of technology acquisition in terms of contribution to local technological capability.

February 28, 2019