RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTI/W/73
13 April 1999
(99-1467)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM INDIA
The following communication, dated 22 March 1999, has been received from the Permanent
Mission of India with the request that it be circulated to Members.
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Investment, Development and Technology Transfers
1. In its first communication to the Working Group1, India had listed a number of aspects of the
trade and investment interface which need to be studied further in this educative process.  One of
them was the implications of FDI for technology transfer and domestic capacity building, which are
of critical importance from the point of view of developing countries.
2. In pursuing policies for opening up their economies for foreign direct investment (FDI), many
developing countries believe that FDI can be an important channel for transfers of technology and of
organizational, managerial and marketing skills.  Technological superiority of many multinational
corporations (MNCs) has led some researchers to emphasize the efficiency-enhancing characteristics
of foreign investment made by MNCs.  FDI is also  said to be associated with secondary benefits
through diffusion of technology to firms in the host country.  Competition within the domestic market
of the host country in the wake of arrival of high-tech MNCs may force local rivals to upgrade theirown technological capabilities.  These assumptions, however, have not been fully tested empirically.
Of course, one of the problems in empirical examination is the difficulty associated with the
measurement of the efficiency-enhancing affects induced by FDI.
3. Some researchers have also collected empirical evidence to suggest that new technologies are
introduced abroad through FDI rather than through exports  and that technologies transferred to MNC
subsidiaries are, in most instances, better than transfers affected through outright sales, through
licensing, or through joint ventures.  At least in the case of higher-income developing countries there
is some evidence to suggest that inflow of FDI had a positive influence of income growth rates on
variables related to technology transfer.
4. As regards the effect of FDI on managerial skills, empirical evidence has not conclusively
demonstrated the existence of  technological spillovers, although there appears to be some
circumstantial evidence for such spillovers.
5. The dependence of the developing countries on modern industrial technology cannot be over-
emphasized.  In owning critical technologies, MNCs seem to be in possession of “intangible assets”
that provide firms with superior competitive power with which they can enter into a bargain overtechnology with the recipients.  MNCs constitute al most two thirds of the total trade flows in the
                                                     
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world.   The monopoly acquired by them on account of owning critical technologies in fact allows
them to restrict effective transfer of technologies  to developing countries. The advantages that MNCs
derive through their ownership of technology aris e from several imperfections in the technologies
market, the typical imperfection being the disa dvantageous bargaining position of technology
recipients.   Empirical evidence has documented that problems are faced by FDI recipient countriesregarding transfer of skills as well as diffusion of technologies. As pointed out by UNCTC, while
technology transfer was not effective in the absence of meaningful transfer of skills by MNCs,
diffusion of technologies was barely seen.
6. Some studies have indicated that the cost of technology imported from MNCs was excessive
and could strain the balance of payments situation of the host country. The total foreign exchange cost
of technology supplied is often unjustifiably high.  Experience of several Asian developing countries
has shown that the prices they have to pay for imports of technologies has been relatively high and, inseveral cases, the length of time over which the licensing fees were to be remitted was very long and,
at times, even open ended.  The indirect costs of technology transfer have also been documented with
confidentiality clauses;  export restrictions being the predominant ones.  UNCTAD has documented
that OECD MNCs considered export limitations, exclusive tie-ups and market limitations as major
factors for entering into the licensing agreements.  Other studies have indicated territorial restrictionsalso as an important factor.
7. In more recent years, technology transfer agreements have continued to display the
asymmetry between buyer and seller of technology.  The increase in costs of technology transfer has
been noticeable particularly in the areas of biotechnology and telecommunications.  Costs of
technology imports have also been found to have risen in contractual agreements like turn-keyprojects when the buyer has insisted upon extensive guarantees in the contracts for the operation and
installation of plants from the technology supplier.  The buyers’ insistence on guarantees have often
been responded by the supplier by raising the price of technology, over-designing of the plant,
installing capital-intensive plant and reducing the use of local personnel.
8. The generation and transfer of technology, innovation capabilities and skills by MNCs within
MNC systems and their effects on other firms through linkages and spillovers has important
implications for country performances. Earlier presentations to the Working Group have documented
effective transfer of technologies within developed countries, for example, between USA, Germany,
Japan and UK.  Technology transfer at a broader level has also been documented, albeit primarily
through anecdotal evidence. At the same time, it ha s been recognized that the evidence of technology
transfer from home to host countries, particularly developing host countries has sometimes been
disappointing. There is, thus, a need to study the possible disciplines necessary for ensuring effectivetechnology transfer along with FDI from MNCs .
9. It has been mentioned that host governments have adopted various measures to augment
transfer of technology such as insisting upon joint ventures, mandatory transfer of technology,
compulsory licensing, local content requirements etc. However, such measures may in fact have the
opposite effect, i.e., reduced investment and product - and process – technology flows.  The reason forthis is that technology owners consider technology as a proprietary product to be used as a
competitive tool.  In fact, there are some companies  who refuse to invest in joint ventures and others
who keep most up-to-date technologies to themselves. At the same time, there has to be recognition of
the fact that joint ventures and investment policies involving training of local employees are more
beneficial for the effective transfer of technology to host economies resulting in increasing theircompetitive strength and in assisting in the development of these economies to higher levels.  Studies
may perhaps be needed for suggesting ways in which domestic capacities can be built through FDI.
10. In another Committee of the WTO, India has already raised certain linked issues relating to
transfer of technology.  The first issue is the need for transfer of technology on non-commercial andWT/WGTI/W/73
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preferential terms for achieving the global objective of sustainable development.   At least in cases
where high-tech products or technologies are specifically mandated under national, international or
multilateral régimes, transfer of technology at fair  and most favourable terms needs to be ensured.
With the gradual reduction of overseas development assistance and increased reliance on corporate
flows, it becomes all the more important that technologies are made available to developing countriesat prices which are affordable, commercially viable and effective in building domestic capacities.
Such an idea needs to be woven into the questi on of investment flows so that the development
dimension is given due importance in the examination of the relationship between investment and
transfer of technology.
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