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Dewey
AUG 14 1981
WORKING PAPER
ALFRED P. SLOAN SCHOOL OF MANAGEMENT
U.S. Governmental Policies Toward Technology
Transfer by U.S. Business to Developing Nations:
Should the U.S. Government Do More?
by
Susan Swannack-Nunn
WP 1226-81
June 1981
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
U.S. Governmental Policies Toward Technology
Transfer by U.S. Business to Developing Nations:
Should the U.S. Government Do More?
by
Susan Swannack-Nunn
WP 1226-81 June 1981
M.I.T. LIu.iARlES
AUGl 41381
Swannack,-Ni:nn
International technology transfer, "the process of trans-
ferring a product and/or the know-how and capability needed to use
a body of existing technical knowledge," has become an increasingly
important topic in recent years. Although the subject has been a
concern since World War II, it was usually discussed with different
terminology and within a military strategic context. However, as
the U. S. became more involved in international economic relations,
the term assumed broader implications. Today, the subject is dis-
cussed within the context of (1) national security or the East-West
aspect of technology transfer to American adversaries, (2) U. S.
economic competitiveness, sometimes entitled the North-North aspect
of technology transfer among the industrialized nations, and (3)
assistance to developing nations or the North-South aspects of tech-
nology transfer from the industrialized nations to the Third World.
The technology transfer process is embedded in trade, investment,
and foreign assistance programs.
The national security focus dominated most U. S. government
discussions of technology transfer until recent years when the
emerging Third World and the North-South dialogue forced the third
perspective to the forefront of much international public debate.
Although detente may have diminished military-strategic concerns.
the get-tough stance of the Reagan Adminiistjlr^^tion' vis-a-vis the -,^^,i.i>if' .,
Soviet Union, may reemphasize this aspect: ^ the same time that
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economic-social concerns have become more important in the discussion
of technology transfer.
Technology Transfer in the North-South Debate
This study focusses on an aspect of the third context of tech-
nology transfer - that of North-South relations. Specifically, it
is focussed on the role of U.S. business in the international trans-
fer of technology, and the policies of U.S. government agencies
toward the commercial transfer of technology.
As the economic and technological gaps widen between the
richest developed countries and the poorest developing nations,
developing nations are mounting pressures to close the gaps and
create a New International Economic Order. They desire a transfer
of technology, both public and private, which is greater in volume,
appropriate to their positions, and fairly priced. At the same time,
foreign aid, a major source of technology transfer from the developed
nations, is declining. As noted in the third World Development
Report published by the World Bank in 1980, Official Development
Assistance (ODA) from the OECD countries, although increasing in con-
stant 1978 dollars from U.S. 13.1 billion dollars in 1960 to U.S.
20.2 billion dollars in 1980, has declined as a percentage of GNP
from ,51% in 1960 to ,34% in 1980, '^
It has been recognized that private business enterprise, multi-
national corporations (MNCs) being the most conspicuous form, has
been responsible for the greatest proportion of technology transferred
S wanna c k-Nunii
to LDCs in the past. And if trends in overall foreign aid continue,
private enterprise will continue in that role of major technology
supplier in the foreseeable future.
How Business Transfers Technology
Machine-embodied and man-embodied technologies are transferred
to LDCs via private enterprise by various contractual modes, ranging
from Foreign Direct Investment (FDI) in wholly owned subsidiaries
or by assuming majority or minority equity positions in joint ven-
tures, to various nonequity modes, including contractual joint ven-
tures, licensing, technical assistance or management contracts,
coproduction or compensation agreements, and exporting. There are
also philanthropic or voluntary actions by U.S. business which trans-
fer technology to developing nations, such as offering managerial and
technical assistance through participation in such private voluntary
organizations as the International Executive Service Corps (lESC)
and the Industry Council for Development (ICD) .
Those concerned with development of the scientific and techno-
logical infrastructure of developing nations, are concerned that the
transfer process involve more than the mere export of product or
service from developed to developing nations. An effective transfer
requires building of institutional and procedural capabilities in the
recipient country to absorb, adapt, sustain or improve the body of
transferred knowledge. The previously mentioned transfer mechanisms
vary in effectiveness, when considered in terms of an expanded defi-
Swanna c k-N V nn
nition of technology transfer. The critical factors are the nature
of the technology, capabilities and incentives of suppliers and
recipients, the socioeconomic infrastructure of the receiving nation,
and transfer terms. For example, a poor developing country with
minimal managerial and technical manpower, may find FDI or manage-
ment contracts the most effective transfer mode. A higher income
developing country with more experience and capable manpower may
be able to most effectively utilize licensing or importation of
2
technology. Direct investment has been the preferred mechanism for
U.S. private technology transfer in the past. But as the bargaining
power and sophistication of LDCs have increased and the number of
competing technology suppliers worldwide from the U.S., Europe,
Japan, and the most developed of the developing nations has multi-
plied, new transfer modes have proliferated, foreshadowing a possible
trend toward joint equity and nonequity type transfers.
The Effects of Commercial Technology Transfer
In recent years, following the surge of FDI in LDCs during the
1960s, the contributions of MNCs have been questioned in both developed
and developing nations. Various models of international relations,
such as the neoimperialist , neomercantilist, sovereignty-at-bay, and
global-reach schools, have been used to describe the dominance of
3
multinational corporations in the world today. The developing na-
tions cite their negative balance of payments effects, transfer of
inappropriate capital intensive production, unfair pricing of techno-
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logies, promotion of unequal income distribution and inappropriate
consumption patterns, and lack of input to local R&D. Some elements
in developed nations say that MNCs export jobs, export capital which
reduces domestic R&D, adversely affect the balance of payments, and
export American technological advantages which reduces American
competitiveness and harms the trade balance. The methodological
problems of general studies assessing multinational corporations are
many. While specific negative effects have been noted in particular
industries and countries, there is great variability within country
and industrial sectors, and the emphasis upon monetary statistics
(national income and balance of payment data) excludes externalities
which may benefit countries in the longer term.
Overall, economic theory and empirical work to date suggest
that the aggregate effects of technology transfer via FDI in LDCs
are usually positive in both developing and developed nations in
4
relation to national income, jobs, and government revenue. Even
the socialist countries have accommodated theory and moved to attract
FDI in their quest to close the technological gap. Further, many
of the negative studies and statements neglect to note the dynamics
of the situation, the changing modes of technology transfer which
are working to alleviate the negative aspects and redefine the pro-
cess itself.
Developing nations have shifted in their attitudes toward
technology transfer modes, reflected in the varying strategies adopted
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by governments toward foreign investment and imports. Countries
such as the Andean Pact nations have softened in their receptivity
since the early 1960s, while others have evolved toward a more
strict negotiated entry of foreign technology (exemplified by Indo-
nesia, Mexico, Philippines, Venezuela, Brazil, and others). Public
posturing in international fora, such as UNCTAD, often significantly
contrasts to actual governmental policies.
United States Development Policy and Commercial Technology Transfer
Since the post World War II era, official U.S. government
policy has espoused development within the LDCs as a foreign policy
goal. Foreign assistance legislation evolved specific objectives
as more was learned about the subtleties and problems of the develop-
ment process. One example is the "New Directions" development stra-
tegy adopted by Congress in 1973, which shifted the emphasis in U.S.
bilateral economic assistance from capital intensive development
projects to programs designed to provide assistance directly to the
c
poorer majority in food production, health, and education. The U.S.
foreign assistance programs have traditionally focussed on agricul-
tural, health, and energy technologies rather than industrial tech-
nology.
The U.S., reflecting traditional economic theory which posits
that FDI contributes positively to development, officially promoted
FDI by U.S. business as a major aspect of its foreign assistance
program. Beginning in the late 1940s, business was "induced" to
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participate in development through FDI.
There is probably no other area of foreign economic policy
in which there has been more consultation of business by
the U.S. government. Beginning with the Gordon Gray report
in 1950 and ending in 1969 with the report of the Interna-
tional Private Investment Advisory Council urging an Over-
seas Private Investment Corporation, there have been at
least twelve thorough reviews, with policy recommendations
made by businessmen.'
Other forms of technology transfer were also encouraged through tied
aid; the largest portion of aid assistance has been commodity and
capital assistance and some 90% or more of the products in commodity
aid were purchased in the United States during the 1962-73 period.
During the 1971-77 period, approximately 75% of the funds channeled
into development assistance and the Economic Support Fund were used
g
for procurement of U.S. commodities and services.
It must be noted that the context for encouragement of U.S.
business participation in technology transfer to developing nations
has shifted from the immediate post World War II period to reflect
changes in international political and economic conditions. During
the 1945-60 period, American foreign policy concerns and those of
U.S. business overseas were synonjnnous. Open economic borders con-
tributed to world welfare and national welfare. The U.S. maintained
a healthy balance of payments and trade account. After 1960, and
the expansion of U.S. -based multinational corporations became more
evident, there was a new questioning of the effects of MNCs on U.S.
national welfare and the welfare of other nations. American interests
were not necessarily equated with those of U.S. business. In the
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1960s, the U.S. balance of trade deteriorated and the U.S. balance
of payments remained in deficit, a situation sometimes attributed to
the expansion of U.S. MNCs. The resurgence of national economies
throughout the world also provided more geographical and functional
options to recipient countries, contributing more competition among
and alternatives to U.S. -based MNCs.
The most recent articulation of U.S. policy concerning tech-
nology transfer to developing nations was the U.S. national paper
and preparatory documents presented at the United Nations Conference
on Science and Technology for Development in 1979. In those docu-
ments, U.S. policy encouraged direct and indirect linkages between
U.S. business and technology transfer to LDCs.
Although concern is sometimes raised that the transfer of
technology can have adverse effects on domestic emplo)nnent
in the United States, as well as other negative short-term
economic impact, in the long run such transfer provides im-
portant opportunities and benefits to the U.S. economy, its
businesses, and overall emplojnnent. ...President Carter has
expressed the policy objective of making scientific and tech-
nological cooperation with developing countries a key element
in our relationships. ...Although the U.S. Government has
generally been neutral toward commercial transactions of
U.S. private firms, it has taken steps to facilitate foreign
investment and technology transfer to developing countries...
[The proposed Foundation for International Technological
Cooperation] would work with the private business community
to promote cooperative arrangements for management training
and other programs which will improve the environment and
process of technology transfer. ... Other direct collabora-
tive arrangements between U.S. business and industry and
developing nations will continue to be encouraged. . .9
While the policies of the Reagan Administration are not yet
formulated in this area, statements by various apointees as well as
proposed budget cuts indicate a possible retrenchment in time and
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resources devoted to the problems of technology transfer to develop-
ing nations. Reliance will be placed on pure market forces, rather
than offering government incentives.
Trends in U.S. Technology Transfer to LDCs
There is no comprehensive data base which identifies and
measures public and private technology flows. Principal indirect
and highly aggregated indicators are statistics on private and
public resource flows to the developing countries. But trade and
investment statistics only give a rough indication of the parameters
of U.S. business involvement in the LDCs. Looking at international
pajnnents for royalties and management assistance neglects payments
for technology which are included within profit remittances to
parent firms, while looking at export statistics for technology-
intensive goods obscures the relationship between trade and invest-
ment. For example, trade in particular goods may decrease when
manufacturing operations are established abroad; thus, a decline
in export statistics may not necessarily mean a decline in technology
transfer. In fact, this may result in an overall increase of
technology transfer.
U.S. FDI abroad totalled $192.6 billion in 1979, $47.8 billion
or approximately 25% in the developing nations. During the 1966-
1979 period, average annual growth in U.S. FDI in LDCs was 8.2%, com-
pared to 11.1% in developed countries. Despite an expansion of the
growth rate during the 1975-1979 period, proportional FDI in the LDCs
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10
as contrasted to that in developed areas, has decreased from 27% in
1966 to the current level of 25%. However, the overall rate of
return is higher in the developing areas, due primarily to large
12
returns in the petroleum sector. Our trade with developing nations
has increased at a faster rate than with developed nations, in 1979
accounting for 34.7% or more than $51 billion of our exports and
44.6% or $74 billion of our imports (excluding communist areas in
13
Europe and Asia). However, excluding those developing countries
which are capital-surplus oil exporters, our share of merchandise
trade with the developing countries has declined over the past two
decades. Developing countries in 1979 accounted for 18% of payments
for U.S. technology worldwide, calculated as fees and royalties,
14
compared to 24% in 1966.
Government Incentives for Commercial Technology Transfer to LDCs
Direct incentives provided by the government for technology
transfer to LDCs via various modes include: government insurance
and guarantees, specific tax, trade, and monetary policies, contract
opportunities in the foreign assistance program, and intelligence
gathering and protection services. Indirect incentives encompass
the overall foreign assistance program, including participation
within multilateral development organizations and funding of private
voluntary organizations (PVOs) and development corporations, which
have bolstered inf rastructural development within LDCs.
Some would argue that these incentives, in aggregate, have
Swannack-Nunn
11
created a neutral position with regard to U.S. business and techno-
logy transfer to LDCs, and that there is no overall policy regarding
technology transfer to these countries. Rather, it should be argued,
there is a situation akin to the "governance of complexity" in which
some ten to twenty government agencies (State, AID, Commerce, OPIC,
Treasury, Justice, Export-Import Bank, ITC, etc.) hold varying posi-
tions, reflecting the conflicting interests of business, labor,
bureaucrat, development specialist, and statesman.
Organized labor generally favors export promotion over FDI,
while management and government interests often promote both. Some
academic and development groups oppose both FDI and exports, due to
the alleged inappropriateness of U.S. technology. The political
sensitivity of the issue of technology transfer is particularly
acute in FDI and has been increasingly felt in the various govern-
ment programs. As FDI in LDCs has increased, government policy in
some areas has indeed tended to retreat from more positive incen-
15
tives to neutrality. Political forces tug in opposite directions:
industrial management, facing international competition, requests
greater incentives and a policy of "competitive neutrality" from
the international perspective; organized labor and inefficient or
noncompetitive domestic industries fight for protection and fewer
incentives for investment abroad. An AID or State Department
bureaucrat may feel the government or nonprofit voluntary organi-
zation is more capable to transfer appropriate technology than
private enterprise, and may oppose incentives. Commerce or OPIC
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12
can visualize business contributions to development, while Treasury
suspects business motives and may resist calls for incentives.
The situation raises two important questions about U.S. pol-
icy. First, while the U.S. government has consistently advocated a
policy of technology transfer to developing countries, via public
and private means since the late 1940s, is the policy of advocacy
in fact neutralized in operation? Second, assuming that the U.S.
continues its positive policy position toward the transfer of tech-
nology, what alternative policies would further improve the utili-
zation of U.S. business in technology transfer to LDCs? The
following sections describe and analyze various U.S. government
mechanisms which act as incentives or disincentives to technology
transfer by U.S. business to LDCs. And, alternative incentives to
improve technology transfer are examined.
Insurance and Guarantees
The Overseas Private Investment Corporation (OPIC) was created
by the U.S. government in 1969 "to mobilize and facilitate the par-
ticipation of United States private capital and skills in the
economic and social development of less developed friendly countries
and areas, thereby complementing the development assistance objectives
of the United States." It is the most direct manifestation of
U.S. policy toward the involvement of U.S. business in technology
transfer to LDCs. Its legislative history reflects the underlying
forces shaping that policy. Modifications and restrictions in OPIC's
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13
basic authority reflect domestic political concerns and residual
doubts about the proper relationship between the U.S. government
18
and international operations of large U.S. corporations.
OPIC provides political risk insurance and financing for
projects in manufacturing, agribusiness, banking and finance, ser-
vices, construction, minerals and energy, and tourism in some eighty
developing nations. Recent developments reflect a preoccupation
with domestic economic concerns, rather than concern for U.S. aid
policy. In response to business. Executive, and Congressional
pressures regarding the transfer of technology via modes other than
FDI, OPIC services have been expanded to distributorship projects
19
and service contracts in addition to overseas production. Con-
gressional fears that OPIC favors large MNCs, and Executive concern
over the erosion of the international competitive position of U.S.
producers, culminated in special programs to promote small U.S.
20
business. Labor concerns have required procedures to detect and
reject projects deemed to have negative effects on U.S. employment
or balance of pajmients. New directives have emphasized the poorest
LDCs and energy projects, yet the proportion of insurance directed
21
to the poorest nations has declined.
It is difficult to assess the overall impact of OPIC in the
rate of technology transfer to LDCs; aggregate statistics concern-
ing private direct U.S. investment in LDCs are not comprehensive
nor collected in suitable form either in the U.S. or OECD. Thus,
we cannot determine the percentage of investment eligible for insur-
Swannack-Nunn
14
ance that was actually insured. A GAO study and Congressional
testimony by business and academia indicate that perhaps 2/3 of
22
OPIC insured investments would not have been made without insurance.
Total outstanding coverage through fiscal year 1978 totalled over $6
billion, representing over 1000 investments by over 450 investors in
79 countries (largely by Fortune 500 firms, reflecting the overall
23
pattern of U.S. FDI) . Another study reported that during the
1965-1978 period, U.S. companies "having investment potential" in-
24
sured 35-50% of their projects through OPIC. OPIC's impact can be
more visibly seen in particular countries, in Korea where 89% of
total eligible U.S. investment was insured by OPIC during the 1962-
1972 period, in Indonesia where 86% of total eligible nonpetroleum
25
investment was OPIC- insured, and in Afghanistan and Rwanda.
Business interests have advocated greater incentives, in
26
response to more competitive programs abroad. Belgium, Italy,
and the Netherlands provide insurance for certain commercial and
currency fluctuations, while West Germany, Ireland, and Japan insure
production risks, forcing U.S. firms to factor self-insurance into
their contractual bidding, sharply increasing U.S. prices. Addi-
tional incentives that have been recommended include: extended
royalty coverage beyond currency inconvertibility to blockage, ad-
justing coverage for inflation in the case of expropriation and war
risk, availability of insurance loans advanced to meet local fade-
out requirements, and further definition of "what constitutes expro-
priation" (i.e. limitations on remittances causing loss of control.
Swannack-Nunn
15
or certain taxes causing an expropriationary act). C. Fred Bergsten,
Assistant Secretary of the Treasury for International Affairs in the
Carter Administration, has advocated a policy of aiding only nonequity
modes of technology transfer in the natural resource sector, by
restricting OPIC guarantees and services to U.S. firms willing to
forego direct investment and opt for service contracting. He feels
this would reduce tensions between the U.S. and the developing world,
and would benefit American consumers. Another consideration might
involve the U.S. taking an equity position along with U.S. firms in
a developing country venture, a policy which has been enacted by
eight OECD countries to promote technology transfer via FDI in some
27
of the poorer LDCs.
Tax Policy
Currently, there do not appear to be tax incentives offered
by the U.S. government for technology transfer to LDCs. In fact,
business may encounter disincentives which apply to general invest-
ment abroad, and extra burdens when calculating the uncertainty of
changing tax laws in LDCs. According to a knowledgeable Treasury
official and tax specialist, tax policy is probably the slowest
28
government mechanism in responding to general changing conditions.