Technology Transfer Mechanisms

The mechanisms in technology transfer are the means of transmitting the technology available with the seller to the buyer. Considering the fact that technology in a comprehensive sense comprises of four interrelated components with varying degrees of sophistication (see section 2.2), it is hardly surprising that there are numerous mechanisms for transferring technology. As developing countries have lower levels of technological capability than developed countries, it is possible that the range of mechanisms which are used for developed and developing country transfers is greater than in the case of developed country transfers.

Many writers categorise the various mechanisms of technology transfer under different names such as direct and indirect mechanisms, contractual and non- contractual mechanisms, market oriented and development oriented mechanisms.

Ramanathan (1995) classifies the technology transfer mechanisms as market oriented and non-market oriented. Market oriented mechanisms are those initiated purely with a profit motive as a basis where market forces become critical in determining the growth, competitiveness and profitability of both seller and buyer. On the other hand, non-market oriented mechanisms are used to indicate that such mechanisms are not primarily motivated by market forces and financial considerations. Such examples are exhibitions, Expos, free materials. Some of the major mechanisms of technology transfer are as follows (Ramanathan, 1995; IPCC, 2000).

Market oriented mechanisms:

• Direct foreign investment;

• Joint ventures

• Technical collaboration

• Licensing

• Technical services agreements

• Engineering and construction agreements

• Subcontracting

• Turnkey contracts

• Product in hand contracts

• Management contracts

• Production sharing

• Joint research venture

• Expert services and

• The clean development mechanism (CDM).

Non market oriented mechanisms

• Technical information services

• Industrial fairs and exhibitions

• Participation in conferences, seminars and workshops

• Training

• Sales literature

• Books, academic journals, business magazines etc.

• Informal personal contacts.

These are discussed in the following section to explain their nature and

appropriateness for developing countries in the context of sustainable development. Also, they all have implications for the clean development mechanism.

Purchases of Plant, Equipment and Products: Direct purchases of plant and equipment from machinery suppliers can play an important role in technology transfer. In general patented machinery is freely available in capital markets if the machine producers hold the patent. If someone else such as other company holds that patent, manufacturing company which uses the machine, their availability is limited

and other transfer mechanisms might have to be used (Ramanathan, 1995). The conditions for direct transfer through machinery suppliers are probably most

favourable in manufacturing sectors which are already well established in developing countries and where there are therefore adequate indigenous technological

capabilities. These technologies are also likely to be for mature sectors with relatively slow technological advance such as textiles, garments, leather etc. The benefits of the transferee depends on the number of potential transferors (machinery suppliers), the availability of alternative machines, the extent and quality of market information available with the transferee, the extent to which the machines can be used without adaptation, and whether the choice of transferor is limited by

considerations such as tied-aid programs, bi-lateral lines of credit, political considerations etc.

It is clear to say that the purchase of technoware is not technology transfer (Sharif, 1995), the manner in which the purchased technoware is used determines whether such purchase becomes a technology transfer mechanism or not. For an example, if the purchased technoware leads to an upgrade of humanware and infoware due to “learning by doing”, then the purchase of the technoware becomes a market oriented technology transfer mechanism.

Foreign Direct Investment (FDI): The transfer of technology in equity trade is the case of direct foreign investment. It is argued that the wholly owned subsidiary is a useful mechanism for supplying technologies especially in situations where the developing country buyer cannot receive the technology due to low level of

technological capabilities. In that case investment by foreign companies are the only mechanism through which the buyer can get access to some types of technology and whereby some local resources can be exploited for economic and sustainable

development.

In this case negotiations are important between the host government and the investor and the focus is mainly on financial factors (Ramanathan, 1995). Technological factors remain silent due to investment codes and laws of developing countries. The benefits from foreign direct investment in developing countries depend on the criteria setting for the foreign direct investment, the incentives for upgrading local

technological capabilities and the manner in which prices, profits and repatriation of resources are controlled.

Joint Ventures (JV): Joint venture is another mechanism for the transfer of

technology. In a joint venture, enterprises from two or more countries commit assets such as finance, access to markets, land, plant and equipment, skills, proprietary rights etc. to a joint enterprise. Sometimes they share some degree of management responsibility, participate in the commercial risk of undertaking up to the value of their respective contributions or as defined by agreement (Johri, 1995). The share of equity in the hands of local partners and its legal effects on the decision making process have an important incidence on the technology transfer through joint venture. In most of the cases, the host country partner(s) has (have) the greater control over the matter relating to the management of technology issues. The foreign partner(s) also finds it as a costs and risks reduction tool to retain some control over the operations especially for the critical technology needed for the operation.

Basically joint ventures take two forms: the equity joint venture where assets, rights and liabilities are shared through joint ownership of an incorporated enterprise and the non equity joint venture in which the cooperation between partners is established on a contractual basis.

Technical Collaboration: Technical collaboration is an agreement used as a generic term encompassing a wide variety of contractual agreements between a foreign company and a local enterprise for effective technology transfer. In the context of international technology transfer, it is technical collaboration agreement which can be defined as a contractual agreement between two functioning entities of different nationalities for the sale and purchase of a wide variety of technical know-how. Here the main features are local ownership of the entity and payment received by the transferor is in return for technical services rendered and not for equity contributions. It can take different forms, such as licensing, franchising, technical services

agreement and engineering and construction agreements (Ramanathan, 1995). A licensing agreement relates to a specific process or product incorporating inventions by the licensor (seller) which are conferred on the licensee (buyer) in return on an agreed-upon payment. It could be a lump-sum fee, royalties, share of profits etc. In this case the seller can have some degree of control over the use by the licensee of

the knowledge leased out. Technical services agreements become a relevant mechanism, for the buyer is seeking not just the license but also other forms of assistance to set up and operate a productive activity. The assistance covers areas such as specifications, process know-how, quality control, maintenance procedures, marketing etc. In such agreement the buyer’s technical personnel are likely to be trained in the seller’s plant or facilities, and some of the seller’s experts pay personal visit to the buyer’s plant to remove the bottlenecks when and if they arise.

Franchising sometimes could be considered as a technical services agreement.

Engineering and construction agreements refer to the erection of plants and buildings by specialised contractors.

Subcontracting: In the manufacturing industry subcontracting becomes a mechanism for technology transfer when a foreign enterprise subcontracts the manufacture of a certain parts to another enterprise in another country. Technology transfer depends on the capacity of the subcontractor to produce the parts according to the detail specifications and instructions of the contracting enterprise. In this mechanism the agreement does not allow outside marketing of the product.

Turnkey Contracts: In a turnkey contract the technology supplier carries out the full range of technical and management activities needed to establish an enterprise and turns over the management of the enterprise in full operating condition to the local owner (buyer) as soon as the seller is ready to handover. The advantages of the turnkey contract are that all the skills needed to obtain and organise markets, consultants, engineering designers, machinery suppliers, contractors etc. are provided by the supplier. Disadvantages are that they do not allow for the development of all technological capabilities.

Management Contracts: A management contract is an arrangement where

operational control is vested by contract in a separate enterprise which performs the necessary management functions for a fee. It is an effective way for the transferor to control an enterprise in a developing country without committing capital resources (Ramanathan, 1995).

Production Sharing: Production sharing that is very common in the extractive sector especially mineral extraction, involves the seller from the beginning, for instance the seller carries feasibility studies in specified areas. If the project proves feasible then local enterprise joins the seller in undertaking production for a specified time period until the seller has recovered its costs and earned a profit. In this situation the seller acts as a general contractor and they both share the management responsibilities which help the technological capability enhancement of the transferee. Most of the production sharing contracts are one-sided due to low negotiations capability of the buyer specially developing countries. Examples are gas production sharing contract between Cairn Energy and the Bangladesh Government in Sangu Gas field, the gas production sharing contracts between East Timor and the Australian government.

Joint Research Ventures: Joint research with one or more foreign firms (transferor) could be an efficient means of transferring technological knowledge and stimulating technological activities in the country. Advantages of such ventures are the exchange and diffusion of technological information, practical training in such laboratories etc.

Non Market Oriented Mechanisms: The non market oriented mechanisms are mainly more or less informal and unspecific ways in which production enterprises and individuals in developing countries learn about new technologies. In general these mechanisms do not lead to transfer of commercially useful technologies and their impact on the upgrade of the humanware, infoware or orgaware components of the technology is limited. The CDM is a market-oriented mechanism. Hence, these are not discussed further as they fall outside the scope of this research.