WORLD TRADE
ORGANIZATIONWT/WGTI/W/82
30 May 2000
(00-2184)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
FOREIGN DIRECT INVESTMENT AND
TRANSFERS OF TECHNOLOGY
Communication from the Republic of Korea
The following communication, dated 29 May 2000, has been received by from the Permanent
Mission of the Republic of Korea.
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I. BENEFITS DERIVED FROM TRANSFERS OF TECHNOLOGY
1. Foreign Direct Investment (FDI) brings diverse benefits to host countries, be they steady
inflows of foreign capital, transfers of technology, job creation, promotion of competition andincreases in trade flows.  Much light has been shed on such benefits through the discussions held
within the Working Group on the Relationship betwee n Trade and Investment over the last three
years. In this short paper, we will focus on one of these benefits: transfers of technology.
2. Transfers of technology can be “internalized” or “externalized; they are internalized when a
transfer occurs within affiliates of the same firm – often a multinational corporation (MNC) –
established in different countries, while transfers are externalized when local firms purchase foreign
technologies through licenses or are exposed to foreign technologies through subcontracting and localsourcing, for example.
3. The absorption of both forms of transfer depend on the ability of the host country to “unpack”
the new technology, which often hinges on the host country’s level of economic development.  For
countries in the initial stages of economic development, lower levels of technology (e.g., simple
assembly manufacturing in light industries) will be easier to adopt.  As productivity increases andexpertise is assimilated and disseminated, the competitiveness of the domestic industry is enhanced
and higher levels of technology can be absorbed.  This, in turn, will attract more FDI and bring in
steady inflows of foreign capital, thereby helping to remedy problems related with low domestic
savings rates and depleted reserves of foreign currencies (the so-called ‘two-gap’ problem) which
slow down economic development.  Also, these new so urces of capital can be invested in education
and training.  As for emerging economies with levels of domestic R&D in their preliminary stages,
the introduction of foreign advanced technologies though FDI will be imperative in shifting their
industries to a structure adding higher value.  For advanced industrial countries, transfers of
technologies are no less important as they allow the diffusion of better techniques and approaches,
both of which increase productivity and promote innovation.WT/WGTI/W/82
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4. More concretely, transfers of technology provide access to the whole range of MNCs
technological, organizational and skill assets, including its tacit knowledge.1  These transfers are often
done through foreign affiliates (internalized transfers), which face lower learning costs and shorter
learning periods than local firms because they draw upon the resources of their parent firms for the
skills, information, experience, tacit knowledge pool and finance needed to absorb and adapt thetechnology.  Such transfers will bring positive externalities through training and the education process
of the foreign affiliate’s locally hired employees.  Also, local firms will benefit from the introduction
of new technologies through the development of long-term relationships with MNCs in the form of
subcontracting or original equipment manufacture contracts (externalized transfers).  Indeed, as
MNCs are more often than not considering local sourcing as the best option (because of advantages
such as reduced transport costs and face-to-face contact with suppliers), they have an incentive to
invest in helping local suppliers upgrade their technology.
5. Moreover, FDI through MNCs can have direct li nkages with local institutions as well as
firms.  Such linkages include local technology institutions such as standards and quality control
agencies, research institutes and university, vocational training centers, financial intermediaries, and
infrastructure providers.  For example, these interactions will diffuse better techniques of quality
control, standardization, testing and calibration, and raise expertise to international standards, all ofwhich will promote exports of local firms.
II. KOREA’S EXPERIENCE
6. Korea’s economic development of the past decades illustrates how the benefits of technology
transfers were reaped and thus fuelled economic gr owth.  Until the 1970s, FDI in Korea helped build
the foundations of the Korean economy by bringing in expertise, capital and technologies, all ofwhich were necessary to consolidate fundamentals.  Once absorbed and used by local firms, these
technologies enormously helped to create R&D capabilities required to shift production from low
value-added goods to high-end products such as semi-conductor, cars and computers.  Occurring
mainly during the 80’s, this shift was made possible by the emphasis that was put on R&D and
sufficient investment by firms in their learning process.
7. The Korean experience with technology transfers has been analyzed in a recent study by
Dr. June-Dong Kim from the Korean Institute for International Economic Policy.
2  Looking at spill-
over effects of technology transfers by multinational companies (“primary transfer of technology”) to
the host country’s economy and through various other channels (“secondary transfer of technology”),
Dr. Kim demonstrated how sectors such as electronics, chemicals, machinery, pharmaceuticals, and
retailing have been the primary beneficiaries of such spillover effects in Korea.  The study also
provides case studies that links technology diffusion to enhanced domestic productivity.  As the mainchannels and factors that helped disseminate technology, the study points out 1) labour mobility of
skilled workers, 2) technical guidance by foreign affiliates to subcontractors, 3) introduction of
advanced management know-how by foreign affiliates, 5) in-house R&D by foreign affiliates
conducted in Korea, and 6) the enhanced competition that ensued.
III. PROBLEMS WITH TECHNOLOGY TRANSFER REQUIREMENTS
8. Domestic policies designed to improve the technology-related investment environment are
important to attract FDI and enhance a country’s ab ility to absorb new technologies.  However, such
policies must fall short of imposing technology transfer requirements on foreign investors.  The main
                                                     
1  A good summary of issues related to technology transfers can be found in the UNCTAD, World
Investment Report 1999. The benefits discussed above partly draw upon this summary.
2 June-Dong Kim, Inward Foreign Direct Investment Regime  and Some Evidences of Spillover Effects
in Korea , Working Paper 99-09, 1999, Korea Institute for International Economic Policy: Seoul, Korea.WT/WGTI/W/82
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problem with mandatory requirements is that they are not conducive to transfers of the best
technologies or technologies that are needed.  Indeed, foreign investors subject to these requirements
will often prefer to transfer low-level technologies which may not be necessarily what the host
economy needs.  After a period of trial and error, Korea’s experience has proven that a free-hand
approach is better than imposing technology transfer requirements as the natural diffusion of suchtechnology through training of local staff or co-operation with local firms is a more efficient way of
absorbing new technologies.  Such free-hand approach, however, must be supplemented by the host
economy’s effort (government and local firms alike) to improve its investment environment by
investing in infrastructure and training.
IV. FUTURE WORK OF THE WTO WORKING GROUP ON THE RELATIONSHIP
BETWEEN TRADE AND INVESTMENT
9. Through the discussions held in the Working Group over the past three years, a consensus
among Members has emerged over the need for potential multilateral rules on investment to include
developmental aspects of FDI.  As this paper has shown, technology transfers related to FDI are
intimately linked with economic development.  As  such, future discussions should perhaps devote
more attention to technology transfers and how international rules should deal with them, i.e., how
international rules should deal with related incentives and requirements.  These future discussionscould feed on UNCTAD’s work on this issue in particular, and also on developmental elements on
investment rules in general.
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