COUNTRY: AN ASSESSMENT OF THE BRAZILIAN SYSTEM by SH I NG KWONG FUNG / B.S., UNIVERSITY OF MANITOBA ( I 969)
M.B.A., COLUMBIA UNIVERSITY ( 1571)
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF
DOCTOR 0~ PHILOSOPHY
at the
MASSACHUSETTS INSTITuTE OF TECHNOLOGY
(FEBRUARY 1979)
Signature redacted
Signature of Author . . . ( ; . ; / · / · . . . .
(C.~~~~{
j
S:.
O~~~b~~.
j
i:.
j
978 :
Signature redacted
Cert i f i ed by . . . w. ·. ~ "":" . :" ':""": .... \J/.•. . . . r . . -; ; . : . : .- . . -. . . --;-;-'. . . . /l A ~ / / ~ Thesis Supervisor
Signature redacted
Accepted by . . . • . • . . . . • . 1• ~ - v ~ . -•••••• • .•••••••••••••••••.••.••• Chairman, Department Committee
TO MY PARENTS,
WITHOUT WHOSE ENCOURAGEMENT AND SUPPORT THIS PROJECT WOULD NOT HAVE BEEN POSSIBLE
ACKNOWLEDGEMENTS
The author wishes to acknowledge the support of the Center for Policy Alternatives of the Massachusetts Institute of Technology and the Fundacao Carlos Alberto Vanzolini of the University of Sao Paulo for the field research in Brazil. The author is indebted to the ideas and assistance of many people at both institutions. Special mention must be made of Professor Richard D. Robinson of the Alfred P. Sloan School of Management in guiding the research as the chairman of my thesis committee, and of Jose E. Cassiolato who assisted me in many ways as colleague and friend. I also wish to thank Professor Kenneth Mericle and Professor Stephen Kobrin, both of the Alfred P. Sloan School of Management, for their advice as members of my thesis committee. Naturally, any shortcomings in the study are entirely my responsibility.
Shing K. Fung
Cambridge, Massachusetts, September 30, 1978.
THE CONTROL OF INTERNATIONAL TECHNOLOGY TRANSFER BY A DEVELOPING COUNTRY: AN ASSESSMENT OF THE BRAZIL!AN SYSTEM
by
SHING KWONG FUNG
Submitted to the Department of Alfred P. Sloan School of Management on October 12, !978 in partial fulfillment of the requirements
for the Degree of Doctor of Philosophy
ABSTRACT
In recent years, the transfer of technology from developed countries has beccme an important policy concern for many LDC governments. Not only is technology transfer increasingly perceived as a vital factor in the
industrialization and development cf their countries, but nost governments
are also becoming concerned about controlling and regulating these transac-tions as a result of such issues as market imperfectransac-tions for technology, relative bargaining strengths, the appropriateness of imported technology, technological dependence, and the costs associated with technology transfer. Consequently, many LDC's have adopted control measures unilaterally, and
there are also current discussions of international codes of conduct. This thesis uses Brazil as a case study to examine how its control system is implemented, what impacts it has, and what determines its effec-tiveness. The analysis focuses on the administrative structure of the con-trol system, the technology agreements it processed, and the behavior of recipient firms under the system. It was found that not only were there major deficiencies in the implementation such that the effects of control diverge from the objectives pursued, but that the system is biased against
locally-controlled enterprises obtainir.g technology from unrelated suppliers, as the measures are less effective in controlling foreign subsidiaries
obtaining technology from their parent companies. These deficiencies can be traced to some internal inconsistencies in the objectives pursued, the
lack of involvement in the pre-registration phase of negotiation and
bar-gaining, the lack of post-registration audit and enforcement, technical difficulties in preventing extra-market activities and transfer pricing,
insufficient allocation of manpower, dispersion of control authority, and a relatively open and encouraging policy towards foreign direct investment. The last three factors appear to be the consequence of political-economic
priorities in Brazil dictated by the overall development strategy pursued
by the government and the ensuing relationship between the State and
It is clear that any control system will not be effective unless it
is closely linked to a set of national priorities and with which it works
in tandem. In planning a policy towards technology transfer, it is insuf-ficient to focus only on the screening of contractual conditions of
trans-fer agreements. A policy towards technology transtrans-fer cannot operate inde-pendently of the policy towards foreign direct investment and the policy
of national technological development. The national technology policy must
in turn be an integral part of the overall economic development pol icy
that reflects such national goals as GNP growth, income distribution, and sectoral, regional and social development. !t must be determined what
goods and services are conducive to national welfare; what technologies
are available and appropriate to produce them; whether the technologies should be developed locally or obtained from abroad; and if the latter,
whether they should be obtained through foreign direct investment or through contractual agreements; then finally, if the latter, what
con-tractual terms and conditions are most favorable. Controlling the terms of technology transfer is but the last step in a process in which political decisions may be far more important than economic and technological ones.
Thesis Supervisor: Richard D. Robinson,
Professor of International Management, Alfred P. Sloan School of Management, Massachusetts Institute of Technology.
CHAPTER 1. INTERNATIONAL TRANSFER OF TECHNOLOGY
ro
DEVELOPING COUNTRIESAND HOST COUNTRY INTERVENTION
1.1 Introduction
1.2 The Process of International Technology Transfer 1.2.1 Some Definitions and Concepts
1.2.2 Delimitation of the Scope of Study
1.3 International Technology Transfer to LDC's - Major Problems
and Issues for Host Government Policies 1.3.1 Potential Benefits for LDC's
1.3.2 Problems of Market Imperfections
1.3.3 Problems of Bargaining in Technoloqy Transfer 1.3.4 Problems of Inappropriate Technologies
1.3.5 Problems of Technological Dependence
1.3.6 Problems of Costs and Controls in Technology Transfer 1.4 The Research Problem
1.4.1 The Objectives of the Study
1.4.2 Identifyin Policy Goals and Instruments
1.4.3 Assessing Policy Impacts - the Hypotheses
1.4.4 Analysing the Divergence of Impacts from Policy Goals 1.4.5 Qualifications Concerning the Study
CHAPTER 2. CHARACTERISTICS OF THE GOVERNMEIT CONTROL SYSTEM
2.1 Policies for Foreign Direct Investment
2.2 Policies for Foreign Technology Transfer
2.3 Control Mechanism for Entry of Foreign Investment Capital
2.4 Control Mechanism for Entry of Foreign Technoloqy CHAPTER 3. THE TECHNOLOGY AGREEMENTS, THE SURVEY SAMPLE, AND THE
QUESTIONNAIRE
3.1 Characteristics of the Technology Agreements Processed by INPI 3.2 The Survey Sample
CHAPTER 4. BEHAVIOR OF THE RECIPIENT FIRM IN TECHNOLOGY TRANSFER
4.1 Internal R&D and Training Activities
4.2 Receiving Technology Wothout Explicit Corresponding Payments
4.3 Cases of Technology Transfer
4.4 Search, Evaluation and Decision Process
4.5 Transfer Process
4.6 Experience With the Government Control System
CHAPTER 5. ASSESSMENT OF THE CONTROL SYSTEM AND ITS IMPLEMENTATION
5.1 Control of Channels of Technology Transfer
5.2 Elimination of Restrictive Business Practices
5.3 Evaluation of Technology
5.4 Promotion of Bargaining Strength
5.5 Reduction of Technological Dependence
5.6 Reduction of Cost of Technology
5.7 Control of Terms and Method of Payment
5.8 Maintenance of National Interest
CHAPTER 6. DETERMINANTS OF AN EFFECTIVE CONTROL SYSTEM FOR TECHNOLOGY
TRANSFER - SOME HYPOTHESES AND CONCLUSIONS
6.1 The Technical Feasibility of Control
6.1.1 The Feasibility of Objectives
6.1.2 The Internal Consistency of Objectives
6.1.3 The Weighting and Tradeoffs Between Multiple Evaluation Criteria
6.1.4 The Enforceability of Control
6.2 The Administrative Apparatus of the Implementing Agency
6.2.1 Adminiatrative Honesty of Officials 6.2.2 Administrative Competence of Officials
6.3 Determining Factors External to the Implementing Agency
6.3.1 The Local Technological Alternative to Imported Technology 6.3.2 Bureaucratic Politics and Coordination
6.3.3 Alignment of Political-Economic Priorities
6.4 Suggestions for Further Research
Chapter 1. INTERNATIONAL TRANSFER OF TECHNOLOGY TO DEVELOPING COUNTRIES
AND HOST GOVERNMENT INTERVENTION
1.1 Introduction
1.2 The Process of International Technology Transfer
1.2.1 Some Definitions and Concepts 1.2.2 Delimitation of the Scope of Study
1.3 International Technology Transfer to LDC's - Major Problems
and Issues for Host Government Policies
1.3.1 Potential Benefits for LDC's
1.3.2 Problems of Market Imperfections
1.3.3 Problems of Bargaining in Technology Transfer
1.3.4 Problems of Inappropriate Technologies
1.3.5 Problems of Technological Dependence
1.3.6 Problems of Costs and Controls in Technology Transfer
1.4 The Research Problem
1.4.1 The Objectives of the Study
1.4.2 Identifying Policy Goals and Instruments
1.4.3 Assessing Policy Impacts - the Hypotheses
1.4.4 Analysing The Divergence of Impacts from Policy Goals 1.4.5 Qualifications Concerning the Study
Chapter 1: International Transfer of Technology to Developing Countries and Host Government Intervention
1.1 Introduction
In the last decade or so, issues related to the transfer of
technology to the less developed countries (LDC's) have received increasing attention at both the national and international levels. 1 Much of the discussion may be broadly sumnarized as follows:
- Technological progress is a major determinant of economic
development in terms of increasing per capita income and changing economic and social structure.
- Technological progress presently occurs in LDC's primarily through transfers from the developed countries, as indigenous production of technology is relatively insignificant due to local supply and demand conditions.
- Technology is transferred to LDC's commercially through trade, contractual arrangements (licensing and technical assistance
1 For international discussions, see for example United Nations, World Plan of Action for the Application of Science and Technology to Development, New York: U.N. Department of Economic and Social
Affairs, 1971; and UNCTAD, Major Issues Arising From the Transfer of Technology to Developing Countries, New York: U.N., 1972. For the national level, see for example the UNCTAD series of country studies (the TD/B/AC.11 series) in 1974. For Mexico, see Miguel S.
Wionczek, "Mexican Nationalism, Foreign Private Investment and Problems of Technology Transfer" in P. Ady (ed.), Private Foreign
Investment and the Developing World, New York: Praeger, 1971. For
the Andean Pact, see Constantine Vaitsos, Transfer of Resources and Preservation of Monopoly Rents, Harvard University, Economic
agreements) and foreign direct investment, with multinational
corporations (MNC's) playing predominant roles.
- Such transfers take place by and large under highly imperfect
market conditions and uneven bargaining positions between suppliers and recipients. Consequently, there are many
'undesirable' effects from the LDC perspective, including excessive payments for technology, unfair restrictive controls
by suppliers, adoption of technologies inappropriate to local
factor use and consumption needs, inhibition of local
entrepreneurial and R&D activities, continued dependence on the developed countries, and persistent economic disparities both
domestically and internationally.
While many of these issues and assertions are controversial and not yet fully researchcd, there has been nonetheless great perceived need on the part of most LDC governments and some international agencies to
control and regulate the international transfer of technology. Since the early 1970's, codes of conduct for regulating such transactions have been adopted by quite a few LDC's at the national level (e.g. in India,
Brazil, Mexico and Argentina) as well as the regional level (the
Cartagena Agreement of the Andean countries). Multilateral forms of such regulations are also currently under active debate as part of the
'North-South dialogue' and in several international organizations, among them the United Nations Conference on Trade and Development (UNCTAD), the United Nations Commission on Transnational Corporations, the Organization of American States (OAS), the Organization for Economic Cooperation and
Development (OECD), and the World Industrial Property Organization (WIPO). Generally speaking, these codes are aimed at improving the terms under which LDC's acquire their technologies from abroad by reducing the
costs, unbundling technology packages, and eliminating restrictive
conditions that hinder diffusion, production or distribution. When viewed in a larger context, and indeed as often proclaimed, these codes represent an important part of the LDC's effort to further their
technological and economic development, and to strengthen their control over the behavior of MNC's entering or operating within their boundaries.
While debates are still going on concerning the substance and
desirability of such regulations of technology transfer,2 the results of their actual application in some LDC's are not yet well documented.
Perhaps steming largely from their very recent implementation (mostly in the early and mid 1970's) and difficulties in obtaining empirical data, there are few studies based on the analyses of actual behavior of firms under these codes and the characteristics of the technology transfer
agreements so processed. 3 As a result, there are many unanswered questions as to how these codes are in fact admiristered by the host governments, whether their implementation has been successful, and what
2 See, for example, Susan Holland (ed.) Codes of Conduct For the Transfer of Technology: A Critique, Council of the Americas and Fund for Multinational Management Education, New York, 1976; and C. Fred Bergsten, et al. (eds.), World Politics and International
Economics, Washington, D.C.: Brookings Institutions, 1975.
3 One such study was made by Richard 0. Robinson, National Efforts to Control Foreign Business Entry, New York: Praeger, 1976.
might account for their success or failure.
This study will address these questions in the context of the control system for technology transfer in Brazil. This will be done by documenting the content of the regulations and the institutional
mechanisms for implementing and enforcing them, evaluating the
implementation experience by analyzing technology transfer transactions and surveying recipient firms, and then exploring various explanations for the observed results.
1.2 The Process of International Technology Transfer
1.2.1 Some Definitions and Concepts
As a factor of production, technology is usually defined by both economists and engineers in terms of the types and amounts of inputs needed to produce a particular output. Economists generally measure inputs in aggregated and global terms as land, labor and capital, and engineers measure and describe the inputs and the steps of combining them
in greater detail and specificity. In the context of this study, technology may be defined as an ordered set of skills and knowledge
applied to the production and distribution of goods and services. 4
This would include marketing and management as well as production skills,
4 For discussions of various definitions of technology and
technological progress, see Edwin Mansfield, The Economics of
Technological Change, New York: W.W. Norton, 1968, pp. 10-71; and Jacob Schmookler, Invention and Economic Growth, Cambridge, Mass.: Harvard U. Press, 1966, pp. 1-10.
product as well as process know-how.
Typically, the elements of technology required for industrial projects include some or all of the following: 5
(a) . Feasibility studies, market surveys and other pre-investment
services
(b) . Evaluation and selection of production techniques
(c) . Product designs
(d) . Engineering design of industrial processes and machineries
(e) . Plant construction and installation
(f) . Training of technical and managerial personnel
(g) . Management a,.d operation of production facilities
(h) . Marketing and distribution
(i) Improvements in process and product designs. Technology may be transferred in several forms:
(a) . Embodied in capital goods (machinery and equipment)
(b) . Embodied in skilled human labor (technicians, scientists, engineers, managers and experts)
(c) . Disembodied as information
- patents and trademarks
- unpatented know-how and trade secrets.
The international transfer of technology on an enterprise-to-enterprise basis occurs through three major channels:
5 Adapted from UNCTAD, Guidelines For the Study of the Transfer of Technology to Developing Countries, New York, 1972, p. 5.
(a) . Trade in capital goods
(b) . Contractual arrangements (agreements to license the use of industrial property, agreements to provide technical
assistance or services, management contracts, turnkey projects) 6
(c) . Foreign direct investment (investment of equity capital and
exercise of management functions, ranging from minority joint ventures to wholly-owned subsidiaries).
International technology transfer can thus involve a combination of elements, forms and channels, with varying degrees of relationship
between supplier and recipient firms. At one end of the spectrum, the foreign supplier may simply sell a piece of machinery to the local firm
at armslength and there is little or no on-going relationship between the two. At the other end of the spectrum is foreign direct investment,
where the parent firm typically supplies the local subsidiary with
various elements of technology as a package, plus equity capital and management control, leaving very little room for local participation. This has given rise to the concept of 'unbundling' or 'unpackaging' through which host governments hope to separate technology transfer from foreign capital investment, and to break up the technology package so
6 For a thorough discussion of contractual transfers of technology, see UNCTAD, 1972, oD. cit., pp. 92-147; Peter Gabriel, The
International Transfer of Corporate Skills: Management Contracts in Less Developed Countries, Boston: Harvard Business School, 1967;
and David Zenoff, "Licensing as a Means of Penetrating Foreign Markets," Idea, Vol. 14, No. 2, Summer 1970, pp. 292-308.
that different elements, i.e. machinery, know-how, etc., can be obtained from different sources at better terms and with more local participation.
1.2.2 Delimitation of the Scope of Study
While the foregoing discussion offers a basic framework for
categorizing technology transfer transactions, some delimitation of the scope of this study is necessary at this point.
This study is concerned with international transfer of commercial technology, and excludes military, governmental and academic exchanges. The focus is on transfers of proprietary technology from enterprise to enterprise rather than transfers of non-proprietary technology, which usually occur through journals, publications, conferences and other public channels.
Using Mansfield's terminology, 7 the emphasis is on horizontal
technology transfer across national boundaries and not on vertical
technology transfer. Vertical transfer occurs when information is
transmitted from basic research to applied research, from applied
research to development, and from development to production. Horizontal
transfer occurs when technology used in one place, organization or
context is transferred and used in another place, organization or context. There are several major potential actors involved in international technology transfer, among then the home and host governments, supplier
7 Edwin Mansfield, "International Technology Transfer: Forms,
Resource Requirements, and Policies," American Economic Review, Papers and Proceedings, Vol. LXV, No. 2, May 1975, pp. 372-6.
and recipient firms, and international agencies. This study will focus primarily on the relationships between the host government, the supplier
and recipient firms.
Many studies on international technology transfer single out MNC's as the focus. While authors differ on the definition of MNC's, 8
references to MNC's in this study are used rather loosely and
interchangeably with foreign direct investors unless otherwise noted. While not denying that international technology transfer to LDC's may be carried out mostly by MNC's, the study covers technology transfer
transactions regardless of whether the supplier qualifies as an MNC or not.
Finally, as a result of reality more than by choice, the study deals with transfers in the industrial sectors rather than agricultural sectors.
1.3 International Technology Transfer to LDC's - Major Problems and Issues For Host Government Policies
International technology transfer presents a mixture of potential benefits and problems for LDC's. The following will outline the major issues, the prevailing views on their underlying causes, and the policy
implications for host governments.
8 Definitions of MNC's are discussed in Richard D. Robinson,
International Business Management - P Guide to Decision Making, New York: Holt, Rhinehart & Winston,
1973,
Chap. 8.1.3.1 Potential Benefits for LDC's
The significance of technological innovation has gained recognition
in economic literature only within the last two decades or so. By now,
economists generally agree that technological progress is a major
determinant of economic growth, 9 productivity improvement,10 and
competition in international trade. 11
In parallel, the economic significance of technological progress for the development of LDC's is also increasingly recognized.1 2 While
Hagen1 3 suggested that the only two important determinants of economic
development are technological progress and capital formation, Schmookler 14 went even further to stress that technological progress is more important.
9 See Robert Solow, "Technical Change and the Aggregate Production Function," Review of Economics and Statistics, Vol. 39, August 1957; and Simon Kuznets, Toward a Theory of Economic Growth, New York:
W.W. Norton, 1968.
10 See Edward Denison, The Sources of Economic Growth in the United States, New York: Conrnittee for Economic Development, 1962; and John Kendrick, Productivity Trends in the United States, Princeton,
N.J.: Princeton U. Press, 1961.
11 See Raymond Vernon (ed.), The Technology Factor in International Trade, New York: National Buree2 of Economic Research, 1970; and Harry Johnson, Comparative Costs and Connercial Policy Theory for a Developing World Economy, Stockholm: Almqvist andlWiksell, 1968. 12 See Richard Eckhaus, "Technological Change in the Less Developed
Areas," in the Brookings Institution, Development of the Emerging Countries: An Agenda For Research, Washington, D.C., 1962.
13 Everett Hagen, The Economics of Development, Homewood, Ill.: Irwin,
1968, pp. 29-31.
14 Jacob Schmookler, "Technological Change and Economic Theory," American Economic Review, Vol. 55, No. 2, May 1965, pp. 333-41.
Such technological progress now occurs in LDC's, and will for the foreseeable future, primarily through technology transfer from the
developed countries. This is largely a result of the asymmietries between the two groups of countries in both the accumulation of industrial
technologies and the capacity to generate them.
Given the important potential benefits, it is not surprising that
most LDC governments are concerned with mobilizing the transfer of foreign technology for the economic development of their countries. However, in so doing, they are also confronted with problems associated with the transfer process. These problems are broadly categorized as
follows.
1.3.2 Problems of Market Imperfections
Streeten1 5 and Vaitsos,1 6 among others, have cogently argued that gross imperfections exist in the international market for technology.
First of all, technology is not a scarce resource in the economic sense that the more it is used in one place, the less is left for use in another. It thus differs from other factors of production in that it is not consumed through use. It represents an indivisible investment whose average cost diverges sharply from its marginal cost. This implies that
15 Paul Streeten, "The Theory of Development Policy," in John Dunning (ed.), Economic Analysis and the Multinational Enterprise, London: Unwin, 1974, pp. 272-5.
16 Constantine Vaitsos, "Bargaining and the Distribution of Return in
the Purchase of Technology by Developing Countries," Bulletin of the Institute of Development Studies, Sussex, October 1970..
it is usually much cheaper to transfer and use existing technology than to generate a new one more adapted to LDC conditions, at least from
private considerations. This should hold for both MNC subsidiaries and
local firms in LDC's. Furthermore, since producers and purchasers of
technology face very different marginal cost structures, this also implies that there is a range of price within which bargaining between the two can take place.
Secondly, it is difficult for an individual unit to appropriate fully the returns from the efforts devoted to producing knowledge, hence the need to treat knowledge as a public good or to offer legal protection
(like patent laws) to maintain incentives for research and invention.
This leads to the divergence of social from private costs and benefits, and poses quandaries for LDC policies on industrial property.
Thirdly, technology is frequently held as a monopoly asset whose owner
can exercise great control over the right to its use. This may take the
legal form of a patent or trademark, or it may simply be held as a trade
secret. Vaitsos1 7 has reported that most patents in LDC's are owned by
foreign MNC's and that most of these patents are never worked, but merely
held to preserve import markets or to exclude competitors. He then
advocates revision of LDC as well as international patent policies to redress this problem.
Fourth, the generation of technology is only tenuously related to
17 Constantine Vaitsos, "The Revision of the International Patent
System: Legal Considerations for a Third World Position,"
R&D expenditures. Huge amounts of resources can be devoted to research
without any productive results. A common way of reducing the uncertainty
of invention is to diversify research activities. Hence large
corporations like the MNC's have a big advantage in reducing the risks related to research and in accumulating technology as there are economies of scale from diversification. This scale factor contributes to the oligopolistic structure of the technology market.
Fifth, the market for technology lacks the usual economic assumption
of the 'informed' buyer. What is often needed is knowledge about
knowledge itself. The famous Arrow paradoxl 8 asserts that there is a
fundamental paradox in the determination of demand for information: its
value for the purchaser is not known until he has the information, but then he has in effect obtained it without cost. In other words, bidding for information is irrational unless it is based on the information wanted.
1.3.3 Problems of Bargaining in Technology Transfer
The use of neo-classical economic analysis in terms of smooth and continuous marginal productivity and demand functions to determine the 'proper' price for technology has severe limitations due to the market imperfections described above. The problem, a policy concern for host governments, is more correctly posed in terms of bargaining and
18 Kenneth Arrow, "Economic Welfare and the Allocation of Resources te Invention," in National Bureau of Economic Research, The Rate and Direction of Inventive Activity: Economic and Social Factors, Princeton, N.J., Princeton U. Press, 1962, pp. 609-25.
negotiation between suppliers and recipients. As such, the theory of
oligopolistic expansion in international corporate behavior1 9 offers some useful insights.
Hymer20 postulated that corporations made foreign direct investment not because of higher marginal rates of return, but to defend and enlarge their ability to extract oligopoly rents from exploiting special skills and techniques not available to local entrepreneurs. Penrose2 1 offered an empirical standard for determining how much of the oligopoly rent the host government should allow the foreign investor for its services. She argued that the government should permit only the amount necessary to
induce the foreign investor (and others) to invest and/or to prevent it
from withdrawing. Anything beyond that would be 'exploitation' by the
foreigner. Challenging this formulation, Kindleberger2 2 argued that the problem was one of 'bilateral monopoly' where the foreign company and the host government each controlled certain monopolistic advantages, and thus the solution would depend upon the relative bargaining strength of the
two. According to his argument, the lower limit of the price would
19 Many authors are generally associated with the theory, among them are Stephen Hymer, Charles Kindleberger, Raymond Vernon, Louis Wells and Richard Caves.
20 Stephen Hymer, The International Operations of National Firms: A Study of Direct Investment, Ph.D. Thesis, MIT, Cambridge, Mass.,
1960.
21 Edith Penrose, "Profit Sharing Between Producing Countries and Oil
Companies in the Middle East," Economic Journal, June 1959, pp.
238-54.
22 Charles Kindleberger, Economic Development, New York: McGraw-Hill,
indeed be what Penrose suggested, but that the upper limit would be the
scarcity value of the foreigner's services, i.e. the domestic alternative
to the foreign investor. The outcome is strictly a function of relative
bargaining strength and cannot be criticized objectively. Johnson 23
further argued that a discriminating monopolist will extract the highest possible price from each individual buyer. Since the demand from a low-income buyer will be more elastic than that of a high-income buyer, he argued that poor nations will acquire their technology imports at lower prices, albeit 'monopolistic' ones, than those paid by others.
In bargaining for foreign technology, the position of LDC's is often weak due to a number of factors. These include: characteristics of the technology market, lack of information, lack of local alternatives to foreign firms. oligopolistic strategies (such as product differentiation and advertising) pursued by MNC's, size of local markets, competition among LDC's themselves, and unskilled government bureaucracies. On the other hand, Moran24 argued that relative bargaining strength not only differs for extractive and manufacturing industries, but shifts over time when investments are committed (usually in discrete lumps) by the foreign firm, and when host countries improve their technological as well as bargaining skills. The policy prescriptions for LDC's would thus
include: increasing and sharing information about technology
23 Harry Johnson, "The Efficiency and Welfare Implications of the International Corporation," in Charles Kindleberger (ed.), The International Corporation, Cambridge: MIT Press, 1970, p. 41. 24 Theodore Moran, Multinational Corporations and the Politics of
alternatives and the conditions for their acquisition, diversifying
technology sources, unbundling technology packages, limiting the time period of licensing agreements and renegotiating renewal conditions, improving local absorptive capacities, and increasing intercountry solidarity and cooperation among the LDC's. 2 5
1.3.4 Problems of Inappropriate Technologies
Two types of 'inappropriateness' are often attributed to
technologies transferred to LDC's, One relates to factor proportions and the other to consumption needs.26 Alternately stated, one concerns
production or process technology, and the other concerns consumption or product technology.
The first type of inappropriateness refers to the situation where methods of production from the developed countries, which are
capital-intensive, are transferred with little or no adaptation to the LDC's, where labor-intensive technologies are needed because of relative factor endowments. This contributes to problems of unemployment and
maldistribution of income between labor and capital in the LDC's. There
is a variety of views as to why such inappropriate technologies are
25 See, for example, OAS, "An Experiment in International Transfer of
Technology: A Pilot Project for Latin America," Washington, D.C.,
1974, (mimeo); and UNCTAD, 1972, op. cit.
26 See, for example, Charles Cooper, "Science, Technology and
Production in the Underdeveloped Countries: An Introduction," The
Jounral of Development Studies, Vol. 9, No. 1, October 1972, pp.
12-18; and G.K. Helleiner, "The Role of Multinational Corporations
in the Less Developed Countries' Trade in Technology," World Development, Vol. 3, No. 4, April 1975, pp. 172-82.
transferred in the first place, and what the correct policy prescription
should be. Eckhaus2 7 and Stewart2 8 advanced the 'technical rigidities' argument that technologies appropriate to LDC factor portions do not exist in the developed countries, as technologies developed there have an economically rational labor-saving bias. The policy implication is that appropriate technologies, if wanted, must be developed anew either for or
by the LDC's. Another view offered by Mason2 9 and Pack3 0 laid the blame on distortions in relative factor prices in LDC's, which are frequently the results of host government policies of subsidizing capital and foreign exchange rates, offering investment incentives, and imposing minimum wages. The prescription is for the LDC government to correct such distortions. Representing still another view, Strassman3 1 and
Yeoman3 2 suggested that the choice of capital-intensive technologies is
27 Richard Eckhaus, "The Factor Proportions Problem in Underdeveloped Countries," American Economic Review, September 1955.
28 Frances Stewart, "Choice of Techniques in Developing Countries," Journal of Development Studies, Vol. 9, No. 1, October 1972, pp.
99-121.
29 Hal Mason, "Some Observations on the Choice of Technology by Multinational Firms in Developing Countries," Review of Economics
and Statistics, Vol. 55, No. 3, August 1973, pp. 349-55.
30 Howard Pack, "Employment and Productivity in Kenyan Manufacturing," Yale University, Economic Growth Center, Discussion Paper No. 196, 1974.
31 Paul Strassman, Technological Choice and Economic Development: The Manufacturing Experience of Mexico and Puerto Rico, Ithaca: Cornell
U. Press, 1968.
32 Wayne Yeoman, Selection of Production Processes for the
Manufacturing Subsidiaries of US-Based Multinational Corporations, DBA Thesis, Harvard Business School, 1968.
dominated by considerations of scale economies rather than factor prices. This was later verified by Morley and Smith33 in the case of
Brazil. Host government policies should then consider trade-offs between
industrial efficiency and factor utilization. Meanwhile, Wells34 found
that engineering rather than economic criteria dominate decision-making, thus producing a management preference for 'modern' capital-intensive
technologies. This in turn is often reinforced by host government
insistence on getting the latest, most modern technologies.
The second type of inappropriateness refers to the situation where products produced in developed countries are replicated in LDC's
relatively unchanged and consumed as 'luxury' products by local elites. Stewart35 argued that such products are generally inappropriate for LDC's because they embody characteristics that are excessive relative to
income levels of most LDC consumers, and the methods for producing them are capital-intensive. These are in turn results of biases in the technological innovation process in the developed countries, where
products are designed to suit the taste of high-income consumers and the manufacturing processes for making them change over time in a
labor-saving direction due to relative labor scarcity.
33 Samuel Morley and Gordon Smith, "The Choice of Technology:
Multinational Firms in Brazil," Economic Development and Cultural
Change, Vol. 25, No. 2, January 1977, pp. 239-2f4.
34 Louis Wells. "Economic Man and Engineering Man: Choice of Technology in a Low Wage Country," Harvard University, Economic
Development Report No. 226, 1972.
The transfer of inappropriate products and inappropriate
technologies to produce them in the LDC's has often been criticized as
contributing to the highly unequal income distribution locally and the
allocation of resources as well as the social class structure in keeping with that distribution. 36 The policy prescription is for host
governments to encourage and support the development of more appropriate products and manufacturing processes through local R&D efforts or through
the MNC's. However, many authors associated with the theory of
'dependence' would argue that such policies can only work if accompanied
by tough political decisions and changes in political-economic structures
domestically and internationally. This is attributed to the problems of technological and economic dependence, which are discussed next.
1.3.5 Problems of Technological Dependence
There are many authors associated with the theory of 'dependence,' with a variety of perspectives that range from the more structuralist to the more Marxist. 37 Generalizing a little, the basic theory stresses
36 See, for example, Osvaldo Sunkel, "Big Business and 'Dependence',"
Foreign Affairs,, Vol. 50, No. 3, April 1972, pp. 517-531; Celso
Furtado, Development and Underdevelopment, Berkeley: U. of
California Press, 1964; and Fernando Cardoso, "Dependency and
Development in Latin America," New Left Review, No. 74, July-August
1972, pp. 83-95.
37 For discussions of these authors and their views, see Albert
Hirschman, "Ideologies of Economic Development in Latin America," in Alberi Hirschman (ed.) Latin American Issues - Essays and Comments, New York: Twentieth Century Fund, 1961; and Philip O'Brien, "A Critique of Latin American Theories of Dependency," in Ivar Oxaal, et al. (eds.), Beyond the Sociology of Development, London:
that development and underdevelopment are part of the interdependent
structures of one global system. The underdeveloped countries lack an
autonomous capacity to change and grow, and are dependent for these on
the developed countries. Thus the objectives, instruments and
effectiveness of development policies of the underdeveloped countries are limited within certain margins of flexibility.
Within this larger framework of economic dependence is the concept of technological dependence, which runs roughly as follows. Income in LDC's is concentrated among the local elites and through demonstration effects they essentially demand the same goods as consumed in the
developed countries. Thus, industrialization via import substitution
primarily led to domestic production of these goods. Since the
technologies used to manufacture these goods already exist and are in the hands of foreign enterprises, this in turn led to the import of these technologies via subsidiaries set up by the foreign firms or via
licensing agreements with local firms. Local research and technological capacities become underutilized and underdeveloped, as it is cheaper and faster to use foreign technology (see earlier arguments in section 1.3.2 concerning differences in marginal and average costs as well as between
marginal costs). The divorce of local scientific and technological
efforts from production activities is further aggravated by local social
forces. 3 8This perpetuates technological dependence on external sources.
38 Amilcar Herrera, "Social Determinants of Science in Latin America:
Explicit Science Policy and Implicit Science Policy," The Journal of Development Studies, Vol. 9, No. 1, October 1972, pp. 19-38.1.3.6
The production of transferred products using transferred technologies, both of which are inappropriate for local conditions, reinforces
concentration of income among local elites, thus forming a vicious circle. Finally, perpetual technological dependence implies long-run social costs for the host country. Conversely, reducing technological dependnece through more local R&D activities can bring social benefits by reducing foreign exchange costs of technology transfer, improving the bargaining position of recipient country, and creating positive
externalities from skill spinoffs in 'learning by doing.' However, once
again, most dependence theorists would argue that such policies will not be very effective without more fundamental structural changes in domestic and external relations. Some of the theorists would argue that socialism is the pre-condition for such changes.
1.3.6 Problems of Costs and Controls in Technology Transfer
The problems of costs and controls associated with technology transfer are related to all the problems discussed in this section. There is a very substantial and direct financial cost in paying for
foreign technology through royalties and fees, regardless of whether such payments can be judged 'excessive' objectively or not (see Section
1.3.3). Since these payments represent large outflows of foreign
exchange, typically a scarce resource in LDC's, they often pose balance of payments problems for host governments.
In addition, there are many indirect and hidden costs associated
with technology transfer. These may take the form of dividends and
parts and components, sales of capital goods, sales of other goods and
services, and interest payments on loans. When the technology supplier
and recipient are related, these transactions are complicated by
intrafinn transfer pricing practices.3 9 Even when the two are not
related, there may still be hidden costs as a result of market
imperfections and bargaining positions. These frequently take the form
of various restrictive conditions imposed by the foreign licensor. Such
conditions may include: restrictions on production, sale or export of
the licensee, tied-in purchasing or sales agreements, use of trademarks, quality control provisions, confidentiality requirmeents, improvement grant-back provisions, renewal obligations and foreign arbitration (for a more comprehensive lost of some forty restrictive conditions, see
Appendix 1). Although hard to measure, such restrictive controls by the
technology supplier often carry hidden or opportunity costs for the recipient.4 0 Policy measures are thus advocated to control and exercise discretion in the use of foreign technology and to obtain better
conditions for its transfer.4 1
At a more macro level, foreign penetration and control could also involve social costs and externalities for the host country. LDC
mistrust of foreign dominance, perhaps especially of the MNC's because of
39 See Paul Streeten, 1973, op. cit.; Constantine Vaitsos, 1972,
sp.
cit.; and Sanjaya Lall, "Transfer Pricing by MultinationalManufacturing Firms," Oxford Bulletin of Economic Statistics, Vol.
35, August 1973, pp. 173-95.
40 See UNCTAD, 1972, op. cit., p. 24.
their concentration of power, may be justified by the possibility that
national welfare might be affected by decisions in a small number of
foreign hands. This may call for controlling foreign penetration, diversifying sources of technology, promoting alternative channels and mechanisms of transfer, improving local capacities to adapt, absorb, improve and produce technology. These measures will require proper alignment and coordination with economic and development policies at a higher level.
1.4 The Research Problem
The last section surveyed the major issues associated with the
transfer of technology to LDC's and their policy implications for the host governments. It provides the general setting for the analytical framework and the hypotheses of this study. This section will now describe the research problem in detail.
1.4.1 The Objectives of the Study
In December 1970, the Brazilian government created the National Institute of Industrial Property (INPI) by executive decree and charged it with the responsibility of "executing norms that regulate industrial property and adopting measures that accelerate and regulate the transfer of technology for economic development."4 21n December 1971, a new
industrial property code was passed which stipulated that all acts and contracts of technology transfer are subject to INPI's approval.
However, the mere announcement of a policy and the setting up of an agency will not guarantee the successful implementation of the policy. The purpose of this study is to document the implementation experience of the controls, and assess whether it has been effective relative to the stated goals, and how the effectivness of control varies with the
ownership pattern of the recipient firms. Major observations will then
be explored further with respect to possible explanations and implications.
The study can be divided into three major research components:
a. Identifying policy goals and instruments
b. Assessing the policy impacts
c. Analyzing the divergence of impacts from policy goals.
Each of these topics is treated in subsections below.
1.4.2 Identifying Policy Goals and Instruments
The basic question in policy impact analysis is: does a public
policy achieve the desired objectives for which it was designed? A
prerequisite to evaluating policy impact is therefore an explicit
determination of what the policy is designed to accomplish.4 3
43 See Thomas Cook and Frank Scioli, Jr., "A Research Strategy for
Analyzing the Impacts cf Public Policy," Administrative Science Quarterly, Vol. 17, No. 3, September 1972, pp.333.
nebulous and ambiguous terms. This may be deliberately so as to gain broader support, to minimize restrictions on the implementation, or because knowledge about effective measures is lacking.4 4 There is also the complication of implicit policies and 'hidden' agenda, which are by
nature difficult to establish and ascertain. Then there is the symbolic
use of policy that derives from what the government says rather than what
it does. 45
Despite these difficulties, this study will attempt to document both what the Brazilian government says and what it does with respect to
controlling foreign technology transfer. Later in this chapter it will
be hypothesized that there are substantial gaps between intentions and
implementation. Then, in the last chapter, the discussion is devoted to
exploring what might have caused the divergence between the two and what
implicit or hidden agenda there might be. In fact, it can be argued that
in analyzing a complex, multifaceted policy, the gaps between policy intentions and policy implementation cannot be properly understood
without careful documentation of what those gaps are. This is one of the
underlying rationales for the study.
In addition to the policy goals and instruments employed by INPI to control technology transfer, Section 1.3 covered a variety of issues which suggests that several other important related policies must also be
44 Gerald Gordon and Edward Morse, "Evaluation Research,"Annual Review
of Sociology, Vol. 1, 1975, pp. 339-40.
45 Thomas Dye, Policy Analysis, The University of Alabama Press, 1976,
exami ned:
- Policies and measures regulating foreign direct investment
- Policies and measures promoting local R&D
- Policies and measures regulating industrial property
- Policies and measures regulating import of foreign goods
- Policies and measures regulating foreign exchange transactions.
The objectives and instruments of these policies as they relate to
INPI's control of technology transfer are documented in Chapter 2. The
following questions will be examined:
- What are the rules and regulations of Brazil's control of technology transfer?
- How do the rules differ according to the ownership of the
recipient firm?
- Who is responsible for implementing and enforcing them, and how?
The sources of data include policy statements, development plans, laws and regulations, and interviews with government officials from various agencies involved.
1.4.3 Assessing Policy Impacts - The Hypotheses
Initiating a public policy to solve a problem is only the beginning
of the solution process. In the implementation of the policy a myriad of
factors and events can produce divergences of impact from intention.4 6
46 See, for example, the well-documented case study of the failure of the federal EDA aid program in Oakland, U.S. by Jeffrey Pressman and Aaron Wildavsky, in Implementation, Berkeley: U. Of California
It is not hard to surmise from the discussions in Section 1.3 that controlling the transfer of technology is a difficult and complex
problem, to say the least. Part of the very reason for having such
policies is to alter the decisions and behavior of actors involved in the transfer process. The success of accomplishing this will depend not only on the political will of the government to challenge the established interests of at least two powerful groups, the MNC's and the local elites, but also on the establishment of a competent and honest
administrative apparatus that can coordinate and execute a set of related
but diverse policies and instruments as identified in Section 1.4.2. Based on two rather different theories of the political economy of
LJC-MNC relationships and some preliminary evidence, the following two
hypotheses are offered in assessing the impacts of INPI's control over
technology transfer:
I. The implentation effects of the control system will differ from
its stated objectives.
II. The control system will be less effective in dealing with local subsidiaries of foreign firms than Brazilian-controlled national firms.
The two theories used in suggesting these hypotheses shall be labeled as the 'sovereignty at bay' theory and the 'dependency' theory for convenience sake. First of all, it should be emphasized that many authors are associated with each theory as used here, so there are bound to be over-simplifications. Secondly, the theories deal with policital economic relationships at very macro levels and are merely used here to
extrapolate some predictions concerning the ability and likelihood that
the government will exercise political will to control foreign technology suppliers.
The 'sovereignty at bay' theory is usually associated with authors
such as Vernon, Johnson and Kindleberger.4 7 Under this view, national
economies derive great benefits from economic interdependence and cannot easily escape from it. The MNC's are seen as effective agents for
promoting world welfare as they optimize production efficiency globally. They represent a transmission belt for capital, technology, management
skills and .arkets to LDC's. In LDC government attempts to intervene in
the process, bargaining advantages will rest on the side of the MNC's and national sovereignty will give way to the economic benefits of growth, industrialization and employment they provide. Such authors are
generally pessimistic about LDC ability to assert sovereignty. Some authors even suggest that some form of global control is the only
rational method for dealing with global corporations. 48 LDC demands in international forums for international codes of conduct appear to lend some superficial support for such an idea. Extrapolating from this theory, national attempts at controlling technology transfer will not be
See, for example, Raymond Vernon, Sovereignty at Bay, New York: Basic Books, 1971; Harry Johnson, Technology and Economic
Interdependence, New York: St. Martin's Press, 1975; and Charles inTeberger, American Business Abroad, New Haven: Yale University Press, 1969.
Harry Johnson, International Economic Questions Facing Britain, the United States, and Canada in the '70s, British-North American
very successful.
The theory of 'dependence' is already explained in Section 1.3.5. Under this general view, national policies aimed at controlling
technology transfer must be accompanied by some basic social and economic reforms which are in many ways against the interests of the local elites, who tend to form alliances with MNC's because of shared interests. Many authors are rather pessimistic that this would occur because the
government either represents the interests of the elite or is only able to reform structures within limits and often only when compelled to do so in periods of impending crisis.4 9 This may be worsened by the influence of the MNC's themselves in the formation and management of economic policy. 50 Most would suggest that short of a reordering of social classes, nothing very significant could happen.
To the extent that LDC governments cannot or will not exercise political will to implement vigorously controls for technology transfer,
such controls will not be very effective in achieving their objectives,
hence the first hypothesis.
At the administrative level of implementing the controls, the relative success of MNC subsidiaries and Brazilian-controlled national firms at bypassing or subverting the control will depend largely on their extra-market activities. But MNC subsidiaries have more flexibility and
49 Charles Cooper, "Choice of Techniques and Technological Change as Problems in Political Economy," International Social Science Journal, Vol. 25, No. 3, 1973, pp. 293-304.
channels of such activities, primarily through intrafirm transfer pricing mehcanisms, 51 hence the second hypothesis.
The second hypothesis is also suggested by recent work done by
Lessard 52 who has found that in general government measures aimed at
controlling financial transfers tend to favor MNC subsidiaries relative to national firms unless such measures can be perfectly enforced.
These hypotheses will be tested with empirical data on the actual
implementation experience of INPI's control. The data will concentrate
on the following questions:
- What are the characteristics of the technology agreements
processed under the control system?
- How do recipient firms of different ownership behave under the
control system?
- What changes as a result of the implementation?
The data based on about 4,500 contracts processed by INPI will be
presented in Chapter 3. The data based on interviews with forty-nine
firms (25 national and 24 foreign subsidiaries) will be presented in Chapter 4.
51 See Paul Streeten, 1973, op. cit.; Constantine Vaitsos, 1972, op,
cit., and Sanjaya Lall, 1973, op.2git.
52 Donald Lessard, "Transfer Prices, Taxes, and Financial Markets: Implications of Internatal Financial Transfer Within the
Multinational Firm," Sloan School Working Paper WP 919-77, MIT, April 1977; and "Specific Incentives for Direct Foreign Investment," paper prepared for International Finance Corp., 1978.
1.4.4 Analyzing the Divergence of Impacts from Policy Goals There are potentially many reasons why impacts fall short of
intended goals. It could be that policy aspirations are too high to be fully achievable. It could be that not enough resources are given for implementing the policy, or that the administering agency is corrupt or incompetent. It could be due to bureaucratic delays in implementation or bureaucratic politics between agencies. There may also simply be a lack of political will and muscle to implement the policy vigorously. These are neither exhaustive nor mutually exclusive.
Nonetheless, the last chapter of this study will be devoted to analyzing the possible and probable causes for the gaps between the policy goals and impacts in controlling technology transfer in Brazil. Some of the speculations will be left as hypotheses to be tested by further research.
It is hoped that this study will lead to some useful general insights about the design and execution of regulations for technology
transfer as well as the dynamics of LDC-MNC relationships.
1.4.5 Qualifications Concerning the Study
There are several important qualifications that must be made concerning the study.
a. The period covered - The data essentially cover the first four years of INPI's operations from the beginning of 1972 to mid-1975. So at
least some allowances should be made for the learning period that could account for part of the gap between goals and impacts. But more
importantly, the impacts of the oil price hike and Brazil's generally worsening balance of payments problems were just beginning to be felt
towards the end of the period. The impending crisis probably compelled
the government to change some of its strategies and policies vis-a-vis the MNC's. Thus it would be dangerous to extrapolate simply the
conclusions into post-1975 periods.
b. The sectors covered - The firms surveyed in the study belong to
manufacturing sectors. As noted before in section 1.3.3, there are good reasons to believe that extractive industries and manufacturing
industries are quite different with respect to relative bargaining
strength between the technology supplier and the host government. Thus
any extrapolations of the conclusions to apply to the extractive industries must be qualified.
c. Ownership of receipient firms - The firms surveyed included only
two state enterprises, both of which gave very incomplete responses to
the survey. Thus extrapolations from the survey data to apply to state
enterprises must be carefully qualified.
d. Generalization about other LDC's - Brazil is obviously not a
typical LDC. It has a large population and hence a potentially large
domestic market if not already presently large. It has rich natural
resources and an economy that was already quite industrialized when INPI
was founded. This makes the case study more interesting perhaps because
along most dimensions one would expect Brazil to have more bargaining
strength than most LDC's vis-a-vis the MNC's. This Brazil may serve as a
model for one extreme of the spectrum. But care must be exercised in
Chapter 2. Characteristics of the Government Control System
2.1 Policies for Foreign Direct Investment 2.2 Policies for Foreign Technology Transfer
2.3 Control Mechanism for the Entry of Foreign Investment
Chapter 2. Characteristics of the Government Control System
Since foreign direct investment and contractual agreements are alternative and often complementary channels for the international transfer of technology, a description of the control system for technology transfer must include both (see Table 2.1 for summary).
2.1 Policies for Foreign Direct Investment
Brazil has one of the most open and favorable policies towards foreign investments among developing countries. Brazil is a traditional receiver of foreign investments and there are no official restrictions on its inflow except that exploration, extraction and refining of petroleum, domestic airlines, communications, publishing and coastal shipping are restricted to 100% Brazilian-owned corporations, while partial foreign participation is permitted in mining, fishing, hydro-electric power, banking and insurance. The only requirement for foreign investment is that it must be registered with FIRCE (Department of Supervision and Registration of Foreign Capital) of the Central Bank. Profit remittance abroad is limited to 12% of registered investment (16% when not counting the 25% withholdin tax on the remittance). Beyond that limit, a supplementary income tax up to 60% will be levied on the remittance. There are no discriminatory treatments between foreign and national firms except that royalty payments are not permitted
between a foreign subsidiary (defined legally as 50% or more of whose voting capital is owned directly or indirectly by a foreign entity) and its parent company and technical assistance fees between such parties
