WORLD TRADE
ORGANIZATIONWT/WGTI/W/105
26 June 2001
(01-3171)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM INDIA
The following communication, dated 13 June 2001, has been received from the Permanent
Mission of India.
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FDI FLOWS AND TECHNOLOGY TRANSFER
1. The possible role that foreign investment could play in aiding countries to achieve the goal of
increased income, employment and output is now universally recognised. Almost every country is
engaged in autonomously liberalizing their foreign investment regimes with a view to facilitating
smooth flow of investment to their respective territ ories. However, there has been a general reluctance
among countries to leave the scene completely open to foreign investors. While a large number of
countries maintain formal screening procedures to  regulate investment inflow, the reluctance to
surrender all discretionary authority as regards entr y and establishment is near universal.   This is
largely because of the strong perception that investment inflows are not unmixed blessings and thatinvestors cannot be expected to automatically fulfil their obligations diligently.  When some of the
Members of WTO discussed the issue of  a multilateral agreement on investment  outside WTO, in
OECD, this concern  came out clearly in the open with the participating Members coming out with
requests for exemptions one after another.  In fact, the nature and extent of exemptions sought by the
participants led to the very abandonment of the nego tiations.  The participants in the OECD process
were all countries that had reached a certain level of development whose economic problems and
concerns had largely transcended those of the large majority of the WTO Membership who are
developing countries and LDCs.   It would, therefore, be naïve to expect the latter group of countries
to be unconcerned about the implications of any efforts that are aimed at eventual curbs on their
ability to influence investment inflows into their territories.
2. Foreign investment inflows are not homogeneous. The economic effects of foreign direct
investment (FDI), for example, differ substantia lly from those of portfolio investment. The ripple
effects created and the imprints left behind by FDI on the host economies differ substantially from
those by portfolio investment. Low income countries with very limited technological capabilities and
complementary production factors like skilled labour and managerial skills would  be mostcomfortable with imported products that are ready for consumption.  However, imports have to be
paid for. This means these countries have to earn  foreign exchange to pay for such imports. Besides,
there is the need for building domestic capabilities in areas of their potential comparative advantage
so that these countries could eventually participate effectively in the global market place. Developing
countries, therefore, naturally seek FDI, in preference to other types of investment, which brings with
it a bundle of production factors in the form of capital, technology, skilled manpower and managerial
skills; these are expected to help ease constraints on their industrialization and development, imposedby scarcities of capital, foreign exchange, technology, organizational and entrepreneurial resources.
Technology is perhaps the most crucial of them all from the point of view of development.WT/WGTI/W/105
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3. The last decade has seen a veritable explosion in the total FDI flows,  both in the absolute
volume of the global flows and also as a share of  the global output. World FDI flows today are more
than thrice the level of what they were in 1990, and some seven/eightfold their level in 1980. Going
by the recent trends, especially manifested after the Asian crisis of 1997, the predominant channel of
transferring the FDI funds has been through the merger and acquisition (M&A) mode, rather than in
the form of greenfield investments. Data from the World Investment Report (2000) indicates that the
M&As today constitute about 85% of the total FDI flows the world over.
4. Studies have confirmed the general apprehension that FDI inflows in the form of mergers and
acquisitions (M&As) are in general of poorer quality as compared to greenfiel d FDI inflows, in terms
of their domestic capital augmenting potential, spillover benefits, competition and efficiency1. This is
because M&As do not always augment the stock of productive physical capital in the host country
which would contribute to further growth. It is to  be noted that greenfield investment, by virtue of
new entry, increases competition, while M&As most often lead to increases in economic
concentration by reducing the number of active enterprises in the market.
5. Even a successful M&A bid and its efficient implementation from the investors’ point of view
need not necessarily have a favourable impact on the economic development of the host country. The
main reason for this is that the objectives of the concerned multinational corporations (MNCs) andthose of the host economies do not necessarily coincide. The effects of the M&As, either directly or
through linkages and spillovers, also depend on whether the investment is natural-resource-seeking,
market-seeking, efficiency-seeking or created-asset-seeking. In case the initial investment decision
related to a merger or acquisition is taken on purely financial profitability considerations, without due
regard for the economic benefits likely to accrue to the host country, the effects of such M&As cannotbe expected to be beneficial for the host economy. Chia Siow Yue et al
2 note that the "driving forces
behind this M&A surge include increased corporate competition as a result of liberalisation in many
host country regimes, and the need to consolidat e international business in the face of falling
corporate profit margins. Recent declines in commodity prices and global over-capacity across a
spectrum of industries have exacerbated this business consolidation trend”. The motive-factor wouldalso have an important bearing on the type and quality of the technology transferred. It is important
for the developing countries, therefore, to not only  see "whether" technology is being transferred, but
also the "nature" of such transfer. The quality of the technology acquired cannot be ignored if one has
to keep in mind the dynamic long-term development interests of the developing countries.
6. One major reason why FDI is sought by countries, especially developing countries, is that
FDI generally brings with it the much needed stat e-of-the-art technology that developing countries
lack. However, available facts and figures do not vindicate this expectation of developing countries.An analysis of the trends in global technology tr ansfers indicates that the annual technology transfer
payments are not growing at expected levels. It is estimated that the technology transfer payments
rose from US$ 6.8 billion in 1976 to an estimated US$ 64.4 billion in 1995. Providing for the OECD
countries not reporting the technology receipts, especially Switzerland’s, and emerging newly
industrialising economies in Asia, the global magnitude of technology-related fees crossing nationalborders could well be to the tune of US$ 68 bi llion. Comparatively, annual global FDI flows rose
from US$ 22 billion to US$ 315 billion over the same period
3. However, what is significant is that the
                                                     
1 Nagesh Kumar, 2000: “Mergers and Acquisitions by MNEs: Patterns and Implications”, pp. 2851-8,
5 August , Economic and Political Weekly.
2 Chia Siow Yue et al , 1999: "East  Asia  and  Options  for  WTO  2000  Negotiations  on Investment",
pp. 1-2, Paper presented at the World Bank-PECC Trade Policy Forum Conference on East Asia and Options forWTO 2000 Negotiations, Manila, 19-20 July 1999.
3 Nagesh Kumar, 1997: “Technology Generation and Technology Transfers in the World Economy:
Recent Trends and Implications for Developing Countries”, UNU/INTECH Discussion Paper 9702, paras. 17
and 20.WT/WGTI/W/105
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growth rates recorded by FDI fl ows have been more impressive than those by technology transfer
payments over the whole or any sub-period.
7. These observations together suggest that the recent spurt in FDI inflows may not have been
accompanied by technology transfers in the same proportion. Further, and more striking, particularly
for the developing countries, is the fact that whil e their share of FDI inflows has gone up, their share
in global technology transfers has come down. Dahlman et al4 have also noted the relative slowdown
in technology transfers to developing countries. This is an alarming trend from the point of view of
developing countries. While it can be argued that the subsidiaries payments for the technology
transferred from the parent companies is expected to be lesser in the case of M&As than in the case of
greenfield investments, even then this trend definitely does not augur well for the developing
countries who are generally dependent on the technology brought in by the foreign investors to give a
boost to their economic activities.
8. In this regard, Sanjaya Lall5 makes a distinction between the "know-how" and "know-why" of
technology transfer. He first stresses that technology import is not a substitute for indigenous
capability development; the efficacy with which imported technologies are used depend on the local
efforts. However, not all modes of technology import are conducive to indigenous learning. Much
depends on how the technology is packaged with complementary factors. In general it has been
observed that technology transfers within a MNC are very efficient for transferring know-how, but
less so for transferring know-why. In this, licensing or arm’s length transactions are deemed to be
more effective for generating local know-why, though they are more expensive in the short-term for
accessing know-how.  Thus the type of investment that comes in would be of the type that supports
‘assembly-led-growth’ and skill formation among workers.  With reference to Korea it has beennoted
6 that labour intensive investment that came in te xtile, clothing and footwear sectors saw a rise in
the export and also the manufacturing value-added by the labourers. On the other hand, in the
assembly-led investment in manufacturing units like telecommunications, furniture, pottery and other
non-metallic mineral products, etc., exports and manufacturing value-added had, in fact, declined.
Therefore, as noted by Hattori, "although Korean companies accumulated a very high level oftechnology to operate new machines, they could not acquire technology and skill required for
developing new machines. Thus, while Korean engineers design new machines, the know-how
required to produce high quality parts at low prices in the domestic market is not available for the
production of these machines". It has been noticed that M&A type FDI accompanying MNCs has
transferred a high level of 'operating and organisational' technology, which is very different from a
high level of 'production technology'. In the former case, the goods produced will have weak
competitiveness except for price.
9. As underlined in the UNCTAD series Paper on issues in International Investment Agreement,
a clear distinction needs to be made between the learning of operational technology and the creation
of new technology. "FDI may be a very effectiv e way of transferring new operating know-how but
not necessarily of the innovation process that underlies the generation and upgrading of the
technology. It is widely accepted that TNCs tend to transfer the results  of the innovation but not the
innovative capabilities themselves, at least to most developing countries: the re-location of their
research functions abroad is overwhelmingly to other developed countries. This can lead to a
"truncating" of the process of technology transfer and to a relegation of developing host countries to
lower levels of technological activity (even when their industrial capabilities have reached a level at
which, as in many newly industrialised economies, they are able efficiently to undertake advanced
                                                     
4 1995: “The World Trading Environment”, pp. 155-78, in Irfan Haque et al (eds) ‘Trade, Technologies
and International Competitiveness’, Washington DC, The World Bank.
5 2000: “Technological Change and Industrialisation in the Asian Newly Industrialising Economies”,
pp. 13-68, in Kim and Nelson (eds) ‘Technology, Learning and Innovation’, Cambridge University Press.
6 Tamio Hattori, 1999: Vol 34(22), Economic and Political Weekly.WT/WGTI/W/105
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research-and-development work"7. The above, therefore, makes it very clear that transfer of
technology is not automatic. Developing countries will need to retain policy discretion to persuade
foreign investors to effectively transfer technology,  even though it might involve 'higher cost' to these
countries.
10. There is also the debate regarding whether obtaining technology through the FDI route is
preferable to licensing and other similar arrangements. As the UNCTAD paper cited above notes,
Japan and Korea relied heavily on licensing and other forms of acquisition of technology from TNCs,
while Singapore mainly relied on FDI, attracting it into specified industries. On the other hand,
Taiwan made active use of both the routes.
11. Gordon H. Hanson8 in a G-24 discussion paper notes that “multinational firms concentrate in
high–productivity sectors and that domestic plants in these sectors, while having high relative levels
of productivity, experience even or negative growth in  productivity relative to plants in other sectors.
Micro-level data, then, appears to undermine empirical support for positive net productivity spillovers
from FDI, perhaps indicating that multinationals confine domestic firms to less profitable segments of
industry”. In this connection, he quotes studies by Haddad and Harrison (1993) and Aitken and
Harrison (1999).  Haddad and Harrison, using data on Moroccan manufacturing plants for the period
1985-1989 found a weak correlation between plant total productivity growth and presence of foreignfirms in the sector. Aitken and Harrison (1999), using data on Venezuelan manufacturing for the
period 1979-1989, found that productivity growth in domestic plants is negatively correlated with
foreign presence in the sector.
12. Evidence from the newly developing South-East Asian Tigers’ experiences also indicates that
the total productivity growth in these economies ha s been low in spite of the liberalization and
significant inflows of FDI which ought to have brought in newer technologies. What this implies is
that low technological capability might coexist with the capability to successfully use new
technologies. It must therefore be remembered that the simple act of high-technology production in
any country does not ensure that efficient learning has occurred, and the latter depends on a host of
other factors other than technology transfer per se. Studies undertaken
9 also reveal that developing
countries attract only marginal shares of foreign affiliate research, and much of what they get relates
to production, adaptation and technical support (i.e. know-how) rather than relating to innovation
(know-why).
13. The extent of technology and management of know-how transfer by the MNCs depend to a
large extent on their corporate strategy; for example, firms desiring to have a longer-term relationship
with the suppliers (rather than those  simply using the host country as a marketing/export base) will be
more inclined to effect transfer technology. As pointed out in the World Investment Report, 2000,MNCs may restrict the access of particular affiliates to technology in order to minimise inter-affiliate
competition. It is noted that MNCs are more likely to licence older technologies from which they have
already derived significant rents than newer techno logies on which there are still relying for market
leadership. Further, they may hold back the upgrading of the affiliate technology or invest
insufficiently in host-country training and R&D in accordance with their global corporate strategies.Therefore, arguing that FDI inflows and economic liberalization automatically facilitates technology
transfer is being extremely naïve.
14. It is also important to underline that MNC presence through export-led FDI has mixed
implications for the local technological activity in different economies. In industrially-advanced
                                                     
7 Para. 35, UNCTAD IIA Papers Series.
8 Gordon H. Hanson, 2001: "Should Countries Promote Foreign Direct Investment?", p. 14, G-24
Discussion Paper No. 9, February 2001.
9 P. 174, "World Investment Report,  2000".WT/WGTI/W/105
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countries, MNC export activity can have significan t inputs of indigenous content and design, and
interact with and contribute to the local technological know-why base. In low-wage, less
industrialized countries, MNC exports are driven mainly by cheap labour, and have low levels of local
technological content. Between these two extremes, a number of combinations of MNC presence and
technological activity are possible. Even in cases of MNC-driven assembly activity, there may bescope for creation of local technological capabilities, but the learning tends to be concentrated in
operational capabilities rather than in the know-why. For this reason, even in the most liberalised
countries, once allowed in, investors are induced to diffuse technologies locally. Singapore
10, for
example, was also found to have used selectivity in a strong way to initially attract investors into
targeted activities,  and later to upgrade their technological content.
15. The issue of technology is at the core of development debate. Development on a self-
sustaining basis has, as its essential pre-condition, development of technological capabilities and theability to attract and absorb state-of-the-art technology. Transformation from a stage of low
technological development to this stage would not be possible except through transfer of technology.
However, the evidence as cited above, does indicate that, left to market forces, transfer and diffusion
of technology may not materialise, especially in the case of developing countries. This allows the
inevitable conclusion that developing countries should preserve their right and ability to influenceforeign direct investment flows into their territories  with a view to ensuring that it is accompanied by
appropriate technology and that there is a sincere effort on the part of the investors to effect
technology transfer so that productivity levels are enhanced and export capabilities augmented, which
alone could  assist in the increased participation of developing countries in the global market place.
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10 Para. 39, S. Lall, 2000, op. cit.