WORLD TRADE
ORGANIZATIONWT/WGTI/W/136
16 August 2002
(02-4473)
Working Group on the Relationship
between Trade and Investment
KEY ISSUES CONCERNING FOREIGN DIRECT INVESTMENT AND
THE TRANSFER AND DIFFUSION OF TECHNOLOGY
TO DEVELOPING COUNTRIES1
Note by the Secretariat
I. INTRODUCTION
1. The question of the extent and nature of the contribution of foreign direct investment (FDI) to
the technological development of host countries, particularly developing countries, has been
considered by the Working Group on a number of occasions, notably in the context of the first Item of
the Checklist of Issues Suggested for Study (“The implications of the relationship between trade and
investment for development and economic growth”).2  The Working Group’s consideration of this
theme has benefited from studies that were presented in 1997 by several international organizations
and UNCTAD on the overall relationship betwee n FDI and economic growth and development3;
                                                     
1 This Note has been prepared in response to a re quest made at the meeting of the Working Group held
on 18 and 19 April 2002.  WT/WGTI/M/17, para. 14.
2 The debate on this theme is reflected in the annual reports of the Working Group to the General
Council:  WT/WGTI/2, paras. 28-44;  WT/WGTI/3, paras. 19-32;  WT/WGTI/4, paras. 9-23;  andWT/WGTI/5/Add.1, paras. 23-25.  See also Synthesis of the Information Made Available to the Working Group
on the Links between Foreign Direct Investment and Development , Note by the Secretariat, WT/WGTI/W/38,
paras. 18-27.
3 Implications of the Relationship Between Tr ade and Investment for Development and Economic
Growth-Work Undertaken in other Intergovernmental Organizations , Communication from the OECD,
WT/WGTI/W/8;  WT/WGTI/W/8/Add.1, communication from UNCTAD;  WT/WGTI/W/8/Add.2,Communication from the World Bank;  WT/WGTI/W/8/Add.3, Communication from the IMF;  and
WT/WGTI/W/8/Add.4, Communication from UNIDO.  See also Foreign Direct Investment and Economic
Development , Communication from the OECD, WT/WGTI/W/26.This document has been prepared under the Secretariat's own
responsibility and without prejudice to the positions of Members
and to their rights and obligations under the WTOWT/WGTI/W/136
Page 2
contributions by individual Members4 and two surveys of empirical research on the role of FDI in the
process of the transfer and diffusion of technology.5
2. The subject of FDI and transfer and diffusion of technology to developing countries has been
treated extensively in work conducted in other international fora, such as UNCTAD6 and UNIDO.7  A
recent Background Note prepared by the WTO Secretariat for the Working Group on Trade andTransfer of Technology also addresses this issue to some extent.
8
3. Against this background, the purpose of this Note is twofold:  first, to offer a brief synthesis
of the main themes that arise from the previous work done by the Working Group and from relevant
studies concerning the channels through which FDI may have an impact on the technological
development of host countries;  and, second, to review the treatment of technology-related policies in
current international investment agreements.
II. FDI AND THE GENERATION, TRANSFER AND DIFFUSION OF TECHNOLOGY
TO DEVELOPING COUNTRIES 9
4. Recent literature has identified a series of factors that have significantly altered the general
context in which the relationship between FDI and technological development needs to be analyzed,
chief among them being:  the increasingly important role of technology as a determinant of
competitiveness;  the global character of the competitive pressures faced by firms and countries;changes in the organization and management of enterprises, particularly the emergence of global
value chains dominated by multinational firms;  and the impact of new rules for the conduct of
international economic relations.  Another key element of this new context is that a more
sophisticated understanding of the nature of technology and of the process of technological
development has emerged.  For instance, whereas earlier approaches tended to underestimate the costsof technology absorption and the importance of the ta cit dimension of technology, the recent literature
focuses on the tacit nature of innovation and technology and its implications for the process of
technological learning.
                                                     
4 See, e.g., Effects of Foreign Direct Investment in th e United States on U.S. Technology Development ,
Communication from the United States, WT/WGTI/W/27;  Investment, Development and Technology Transfers ,
Communication from India, WT/WGTI/W/73;  Foreign Direct Investment and Transfers of Technology ,
Communication from Korea, WT/WGTI/W/82;  FDI Flows and Technology Transfer , Communication from
India, WT/WGTI/W/105.
5 The Effects of Foreign Direct Investment on Development: Technology  and other Know-how
Transfers and Spillovers , Note by the Secretariat, WT/WGTI/W/65;  Survey of Literature on Trade, Foreign
Direct Investment and the Transfer of Technology , WT/WGTI/W/88.
6 See e.g., UNCTAD, Transfer of Technology , UNCTAD Series on issues in international investment
agreements (New York and Geneva:  United Nations, 2001);  World Investment Report 1999:  Foreign Direct
Investment and the Challenge of Development (New York and Geneva:  United Nations, 1999 ) Chapter VII
(“Enhancing Technological Capabilities).  A comprehensive compilation of studies and reports prepared by
UNCTAD since the early 1970s on the issue of transfer of technology and economic development is available inthe Compendium and User Guide to UNCTAD’s Wo rk on Issues of Tec hnology for Development
(http://www.unctad.org/stdev/compendium/index.htlm).
7 See, e.g., UNIDO, Industrial Development Report 2002/2003: Competing through Innovation and
Learning (2002 ).
8 Working Group on Trade and Transfer of Technology, Trade and Transfer of Technology ,
Background Note by the Secretariat, WT/WGTI/W/1.
9 UNCTAD, World Investment Report 1999;  UNIDO, World Industrial Development Report 2002-
2003;  Roffe, P. and T. Tesfachew, “The Unfinished Agenda ,” in Patel., S.J., P. Roffe and A. Yusuf,
International Technology Transfer:  The Origins and Aftermath of the United Nations Negotiations on a draft
Code of Conduct ( The Hague, Boston, London:  Kluwer Law International, 2001), pp. 381-404.  WT/WGTI/W/136
Page 3
A. FDI AND THE GENERATION OF TECHNOLOGY
5. Conventional indicators10 reveal a strong concentration of innovation activity in a relatively
small number of developed countries.  One study reports that ten countries (United States, Japan,
Germany, France, United Kingdom, Italy, Canada, the Netherlands, Sweden and Switzerland)
accounted for 84 per cent of world R&D expenditures in 1993, 95 per cent of the number of patentstaken out in the United States during the period 1977-96, and 91 per cent of receipts of global
royalties and technology fees in 1993.
11  A recent UNIDO study reports that the share of these ten
countries in R&D expenditure financed by enterprises declined from 95 per cent in 1985 to
91.3 per cent in 1995-98 and that the share held by the top three countries- the United States, Japan
and Germany - declined from 82 per cent in 1985 to 75 per cent in 1998.12
6. The share of developing countries in global R&D expenditures is estimated to have declined
from nearly 6 per cent in 1980 to nearly 4 per cent in the early 1990s, notwithstanding substantialincreases in such expenditures in Korea and Chinese Taipei.
13  Such R&D expenditures by developing
countries are highly concentrated in a handful of countries.  A recent study reports that high – and
upper-middle-income developing countries accounted for almost 90 per cent of total enterprise-
financed R&D expenditures by developing countries in 1998.  Among these countries, Korea
accounted for 53 per cent of total enterprise-financed R&D expenditures in developing countries,while the shares of Chinese Taipei, Brazil and China were, respectively, 14 per cent, 12 per cent and
6 per cent.  No such enterprise-financed R&D expenditures occurred in the lowest ranked
30 developing countries.
14  A similar picture of concentration of technological activity among
developing countries is revealed by data on patens registered in the United States.  While developing
countries and countries in Central and Eastern Europe increased their share of patents registered in theUnited States from 1.5 per cent in 1977-82 to 3 per cent in 1990-96, the bulk of that 3 per cent share
was accounted for by Korea and Chinese Taipei.
15  Similarly, in 1998, ten developing countries
accounted for 86 per cent of the total spending on royalty and technical payments abroad by
developing countries.16
                                                     
10 Technological activity is commonly measured by R&D expenditures (as an indicator of
technological input) and patents registered in the Un ited States over a period of 20 years (as a measure of
technological output).  These indicators do not fully capture tacit knowledge.  See UNCTAD, World Investment
Report 1999 , p. 198.
11 Kumar, N., Technology Generation and Technology Trans fers in the World Economy:  Recent
Trends and Implications for Developing Countries , UNU/INTECH Discussion Paper Series (September 1997),
pp. 5-6.  See also Correa, C.M., “Emerging Trends:  New Patterns of Technology Transfer,” in Patel, S.J.,
P. Roffe and A. Yusuf, International Technology Transfer:  the Origins and Aftermath of the United Nations
Negotiations on a Draft Code of Conduct (The Hague, Boston and London:  Kluwer Law International, 2001),
p. 261 and UNCTAD, World Investment Report 1999 , p. 199.
12 UNIDO, World Industrial Development Report 2002/2003 , p. 36 and p. 156.  The report notes that
data on R&D financed by enterprises is preferred to data on total national R&D spending because enterprise-
financed R&D is more directly related to industry and because in most developing countries R&D financed by
government goes to state or university libraries, with  little impact on industrial innovation. Ibid., p. 36.
13 Kumar, N., Technology Generation and Technology Trans fers in the World Economy:  Recent
Trends and Implications for Developing Countries, pp. 10-11 .  According to UNIDO’s World Industrial
Development Report 2002/2003  (p. 36), the share of developing countries in world R&D expenditure financed
by productive enterprises was 5 per cent in 1998.
14 UNIDO, World Industrial Development Report 2002/2003 , p. 36.
15 Kumar, N., Technology Generation and Technology Trans fers in the World Economy:  Recent
Trends and Implications for Developing Countries, p. 8.
16 UNIDO, World Industrial Development Report 2002/2003 , p. 38.  The report explains that data on
royalty and technical payments abro ad capture arm’s length purchases of know-how, patents, licences and
blueprints-imports of embodied technology in non-equity form.  Although royalty payments often reflectWT/WGTI/W/136
Page 4
7. In addition to concentration at the country-level, innovation activity is marked by a high
degree of concentration at the firm level.  Thus, in the United States, 50 firms, almost all
multinational, accounted for almost half of total industry-based R&D expenditures in 1996, while in
Switzerland three firms accounted for 81 per cent of national R&D expenditures in the early 1980s
and in the Netherlands for nearly 70 per cent.17  A strong correlation exists between the extent of
innovation activity undertaken by a firm and its multinational character.18  Multinational firms are at
an advantage relative to other firms in exploiting economies of scale in the conduct of R&D, in
amortizing the costs of R&D over a larger number of markets, and in accessing foreign sources of
foreign technology.19
8. Most innovation activity by multinational ente rprises is conducted in the home country.
Although a trend is discernible toward the internationalization of innovation activities, this is much
less advanced than the globalization of other corporate functions.20  Moreover, such decentralization
of innovation activities by multinational firms as has occurred has mainly involved foreign affiliates
in other developed countries.  According to one source, developing countries represented 8 per cent of
the total overseas R&D conducted by foreign affiliates of US multinational firms in the mid-1990s
and 1 per cent of the R&D conducted by the parents of these firms.21  In addition, R&D by foreign
affiliates in developing countries are concentrated in a small group of countries such as Brazil,Mexico, Singapore and Chinese Taipei.  In the near future, the decentralization of R&D activity by
multinational firms is likely to remain confined to a relatively small number of developing countries.
22
9. The limited extent of overseas R&D by foreign affiliates in developing countries can be
explained in part as a logical consequence of economic factors, including the lack of local research
capabilities and institutions in most developing countries.23  However, host country policies towards
FDI have also played a role .  Thus, for example , the fact that Brazil, which has a much lower
percentage of R&D expenditure as a share of GNP than Korea, has a much higher share of R&D
spending by affiliates of US multinationals, can be explained by the different policies pursued by
Brazil and Korea regarding the entry of FDI and the acquisition of foreign technology in internalised
or externalised modes.24 R&D of affiliates of multinational enterprises in developing countries is
                                                                                                                                                                    
intra-firm transactions, the statistical correlation between FDI and royalty payments, while positive, is not very
high.  As a consequence, “this variable is the best av ailable proxy for technology purchases by local firms.”
17 UNCTAD, World Investment Report 1999 , p. 199.
18 Kumar, N., Technology Generation and Technology Trans fers in the World Economy:  Recent
Trends and Implications for Developing Countries, p. 15 .
19 UNCTAD, World Investment Report 1999 , p. 199; UNCTAD, Foreign Direct Investment and
Development , UNCTAD Series on issues in international investment agreements (New York and Geneva:
United Nations, 1999), p. 34.
20 Patel, P. and K. Pavitt, “Large Firms in the Production of the World’s Technology:  An Important
Case of ‘Non-Globalization,’ “ in Cantwell, J., Transnational Corporations and Innovatory Activities , United
Nations Library on Transnational Corporations, Vol. 17 (London and New York:  Routledge, 1994).  Significantdifferences have been noted in the R&D intensity of affiliates of parents of different nationalities.  Pauly, L.W.and S. Reich, “National Structures and Multinational Corporate Behavior:  Enduring Differences in the Age of
Globalization,” International Organization , Vol. 51, No. 1, pp. 1-30;  Doremus, P.N., W.W.Keller, L.W. Pauly
and S. Reich, The Myth of the Global Corporation  (Princeton:  Princeton University Press, 1998).
21 UNCTAD, World Investment Report 1999 , p. 215.  See also Kumar, N.  Technology Generation and
Technology Transfers in the World Economy:  Recent Trends and Implications  for Developing Countries , p. 11
(reporting that developing countries collectively represen ted 5 per cent of the total overseas R&D of US and
Japanese multinational enterprises.)
22 UNCTAD, World Investment Report , 1999, p. 218.
23 “It is often not economical for transnational co rporations to relocate R&D at the same pace as
production.  Agglomeration, linkages, cumulative lear ning and economies of scale make it costly to spread
R&D overseas-particularly to developing countries short on high-level skills, advanced infrastructure andsupporting research institutions.” UNIDO, World Industrial Development Report 2002-2003 , p. 36.
24 UNCTAD, World Investment Report  1999, pp. 215-216.WT/WGTI/W/136
Page 5
geared mainly towards adaptation and technical support rather than innovation, but there have
recently been cases of relocation of more strategic R&D to developing countries.25  This is often
associated with factors such as the availability of highly qualified scientists and engineers and shifts in
corporate strategy from production for the local market to production for the world market, as
exemplified by Brazil’s automotive industry.26
10. In this connection, a range of specific policy measures have been identified to promote greater
involvement of multinational enterprises in the local generation of technology in developing
countries:
• encouraging contract R&D with local research institutions and universities;
• developing human resources for R&D in specialized disciplines, such as
telecommunication software or semiconductor design;
• developing university research laboratories and research institutes;
• the granting of incentives to foreign affiliates to obtain “product mandates” from their
parent companies, i.e. mandates to handle a product from the design to the marketing
stage;
• the granting of incentives, including fiscal incentives, to stimulate the conduct of
local R&D by foreign affiliates;
• the acceleration of technology generation through the enforcement of intellectual
property rights laws;
• promoting the development of local enterprises, including clusters and networks of
high-technology firms to attract knowledge intensive FDI;
• the use of official development assistance to promote local skill development in
general and R&D related activities in particular.27
B. FDI AND THE TRANSFER OF TECHNOLOGY28
11. With respect to the role of multinational firms in the international transfer of technology, a
distinction is commonly made between internalised and externalised transfers.29  An internalised
transfer occurs between a parent of a multinational enterprise and a foreign affiliate under the
ownership and control of that enterprise.  An externalised transfer is a transfer from a multinational
enterprise to an entity that is not controlled by that enterprise and can take the form of licensing,
minority joint ventures, technical cooperation cont racts, etc.  While this distinction between
internalised and externalised transfers of technolo gy is not easy to make in the case of strategic
alliances involving cooperation between competing firms in the development of new technology, this
is of less relevance to a consideration of the role of FDI in the transfer of technology to developing
countries as such alliances predominantly involve firms from developed countries.30
                                                     
25 Id.  See also Correa, C.M., “Emerging Trends:  New Patterns of Technology Transfer,” p. 262.
26 UNCTAD, World Investment Report 1999 , pp. 216-217.
27 See UNCTAD, World Investment Report 1999 , pp. 226-227.
28 The focus of this Note is on inward FDI as a mode of transfer of technology.  It should be noted that,
as illustrated by recent FDI in the United States by firms from Korea and Chinese Taipei, outward FDI indeveloped countries can also constitute an avenue for the transfer of technology.  See e.g.WT/WGTI/W/8/Add.4, p. 7.
29 UNCTAD, World Investment Report 1999 , p. 203;  Chen E.K.Y., “Introduction: Transnational
Corporations and Technology Transfer to Developing Countries,” in Chen E.K.Y(ed.), Transnational
Corporations and Technology Tr ansfer to Developing Countries , The United Nations Library on Transnational
Corporations, Vol. 18, (London:  Routledge, 1994), p. 10.
30 The contribution by UNIDO in WT/WGTI/W/8/Add.4 (p. 6) notes that  more than 95 per cent of the
strategic technology partnerships are concentrated within  the industrialized countries.  See also Correa, C.M.,
“Emerging Trends:  New Patterns of Technology Transfer,” p. 271.WT/WGTI/W/136
Page 6
12. Two major themes in the literature on the ro le of FDI in the transfer of technology to
developing countries are first, the determinants and relative importance of each of these modalities of
transfer of technology by multinational enterprises, and, second, their relative advantages and
disadvantages from the viewpoint of the development of the host country.
13. The choice between internalised and externalised modes of transfer of technology by
multinational enterprises depends upon a broad range of factors that pertain to the rent-extracting
potential and the transaction costs of a technology transfer, on the one hand, and, host country
characteristics and policies, on the other.31
14. Nature and pace of change of the technology .  Internalised modes of transfer of technology
predominate in the case of relatively novel technologies that are subject to rapid change, whereas
externalised modes of transfer of technology are preferred in the case of more mature, standardized
technologies.32  It has also been reported that the internalised transfer of technology is preferred if the
technology pertains to a firm’s principal line of busin ess, if the transferor is more R&D intensive, and
if the firm is more experienced in the transfer of technology.33  Another relevant aspect concerning the
nature of the technology that affects the propensit y to use internalised rather than externalised
transfers is the extent to which the technology involv es tacit knowledge that is not easy to codify and
transfer in an externalised mode and whether the technology is product- rather than process-related.34
• Nature of the firm .  The nature and strategy of a firm are important in determining the mode of
transfer of technology in that larger, more multinational and more specialized firms tend to preferinternalised modes of transfer whereas smaller, less internationally experienced and more
technologically diversified firms prefer externalised modes of technology transfer.
35
• Industry .  It has also been found that the relative significance of internalised and externalised
modes of transfer of technology varies by industry.  Thus, for example, one study reports that in
1989 the proportion of technology transferred internally by multinational firms from the
United States varied from 44 per cent in the case of primary and fabricated metals to 97 per cent
for non-electrical machinery.36  An earlier study by the UNCTC of forms of technology transfer
by multinational firms to developing countries found that internalised modes of transfer
predominated in industries characterized by factors associated with product differentiation, suchas a high R&D intensity and an important role of patents, brand names and trade marks and
promotion- and marketing strategies.
37
• Host country characteristics and policies .  The capacity of firms in host countries to absorb
foreign technology is one of several host country characteristics that has a bearing on the relative
propensity to use an internal or an external mode of technology transfer.  Where the technologicalcapabilities of firms in the host country are limited, internalised modes of technology transfer will
                                                     
31 Chen, E.K.Y., “Introduction: Transnational Corporations and Technology Transfer to Developing
Countries,” pp. 10-11.
32 UNCTAD, World Investment Report 1999 , pp. 204-205.
33 Chen, E.K.Y., “Introduction:  Transnational Corporations and Technology Transfer to Developing
Countries,” p. 11.
34 Kumar, N., Technology Generation and Technology Trans fers in the World Economy:  Recent
Trends and Implications for Developing Countries, p. 25-26.
35 UNCTAD, World Investment Report 1999 , p. 204.
36 Kumar, N., Technology Generation and Technology Trans fers in the World Economy:  Recent
Trends and Implications for Developing Countries, p. 28.
37 UNCTC, “Determinants of the Form of Technology Transfer,” p. 193.  The industries in question
were: branded food and beverage processing, man-made fibres, pharmaceuticals, automobile production (but notassembly), consumer electrical produ cts, electrical power equipment and semiconductor offshore and point of
sale assembly.WT/WGTI/W/136
Page 7
be preferred.38  The relative importance of internalised and externalised modes of transfer of
technology has also been affected by deliberate host country policies.  Thus, while Singapore is
often mentioned as an example of an “internalisation-oriented” approach that relies heavily on the
acquisition of foreign technology via FDI, Korea’s past policies epitomised an “externalisation-
oriented” approach that seeks to acquire foreign technology through licensing and the import ofcapital goods so as to encourage the development of indigenous technological capabilities and
minimize foreign ownership of domestic productive assets.
39  An issue that is the subject of
divergent opinions among analysts is the extent to which host country legislation regarding the
protection of intellectual property has an impact upon the location of FDI and upon the choice
between internalised and externalised modes of transfer of technology.40
• Nationality of the firm .  The propensity of a multinational firm to use an internalised or
externalised mode of technology transfer also appears to vary by its nationality.  The proportion
of internalised transfers in the case of German firms has thus been reported to be substantially
higher than in the case of US and British firms.41
15. Although the choice between internalised and ex ternalised modes of transfers of technology is
thus influenced by a multitude of factors, analysts have noted certain general trends.  In particular, ithas been suggested that internalised transfers of technology by multinational enterprises have recently
gained in significance relative to externalised transfers.
42  Thus, for example, since the mid-1980s
royalties and technology fees received by multinati onal enterprises in the United States, Germany and
the United Kingdom from their foreign affiliates have represented an increasing share of the total
                                                     
38 UNCTAD, World Investment Report 1999 , p. 204;  Kumar, N., Technology Generation and
Technology Transfers in the World Economy:  Recent Tr ends and Implications for Developing Countries, p. 26;
Chen, E.K.Y., “Introduction: Transnational Corporations and Technology Transfer to Developing Countries,”p. 11.
39 See, e.g., UNCTAD, World Investment Report 1999 , pp. 219-221; UNIDO, World Industrial
Development Report 2002/2003 , p. 139.  UNCTAD notes that both the “internalisation-oriented” strategy
pursued in the past by Korea and the interventionist version of the “externalisation-oriented” approach as
exemplified by Singapore’s policies are difficult to repli cate in the current environment.  The former  “needs a
strong base of technological skills, en trepreneurs able and willing to undert ake risky technological effort, and an
incentive regime that shelters learning while ensuring that there is competition, for example through ant-trustregulations … or by imposing export discipline.  It also needs a government bureaucracy and other institutionsable to handle these tools efficiently and flexibly without being hijacked by particular interests;  and it needsresources to finance expensive R&D.”  On the other hand, the interventionist “externalisation-oriented”
approach “… requires very efficient targeting and massive investments in skills and institutions, difficult for
large economies with a great number of domestic firms that need incentives or support to upgrade technology.”UNCTAD, World Investment Report 1999 , p. 219.  For a detailed analysis of technology policies in South East
Asia, see Westphal, L., “Technology Strategies for Economic Development,” Economics of Innovation and New
Technology , Vol. 11, No. 4-5, August-October 2002, pp. 275-320.  The “externalisation-oriented” approach has
also been a central feature of the industrial development strategy pursued by Japan in the post-war period.  See
Safarian, E., Multinational Enterprise and Public Policy:  A Study of the Industrial Countries  (Aldershot:
Edward Elgar, 1993).
40 cf. Maskus, K., Intellectual Property Rights in the Global Economy ( Washington, DC:  Institute for
International Economics, 2000);  Lall, S., “Indicators of the Relative Importance of IPRs in DevelopingCountries”, UNCTAD/ICTSD Capacity Building Project on Intellectual Property Rights and Sustainable
Development (November 2001);  Kumar, N., “Intellectual Property Rights, Technology and Economic
Development,” New Delhi:  Research and information System for the Non-Aligned and Other DevelopingCountries, February 2002).
41 Kumar, N., Technology Generation and Technology Trans fers in the World Economy:  Recent
Trends and Implications for Developing Countries , pp. 26-27 .
42 See for example Correa, C.M., “Emerging Trends: New Patterns of Technology Transfer,”
pp. 268-270.WT/WGTI/W/136
Page 8
technology payments received by these enterprises.43  The fact that since the early 1980s FDI inflows
to developing countries have increased faster than royalty payments and technical cooperation grants
has also been mentioned as evidence of the growing relative importance of internalised transfer of
technology.44
16. A number of factors account for this change, including:  the shift in demand by firms in newly
industrializing countries from mature technologies to more sophisticated, less standardized
technologies;  the emergence of new technologies that are seen by their owners as critical elements of
their competitiveness;  the liberalization of FDI policies;  the role of information technology in
facilitating intra-firm communication and coordina tion;  the growing importance of tacit knowledge
that is not easy to codify and transfer;  and the heightened concerns of technology owners regarding
confidentiality and protection of intellectual property.45
17. Another important factor in this regard is the role of FDI in the creation of globally integrated
production systems.  Thus a recent UNIDO study reports that among several factors affecting
industrial performance in a group of 85 (developed and developing) countries, the significance of FDI
has increased in the period 1985-1998 while that of licensing of foreign technology has declined.  The
report comments that“[t]his corresponds with the evidence on the increasing role of integrated
production systems in the world economy, on the rising importance of technology transfer bytransnational corporations and on their export activity as a dynamic element in the industrial
competitiveness of developing countries”.
46
18. This growing relative importance of internalised transfers of technology by multinational
enterprises contrasts with a trend observed during the 1960s and 1970s towards greater use of
externalised transfers.  That trend has been attributed to, inter alia , the impact of intensifying
competition in diffusing technology and in reducing the relative benefits of internalised modes of
transfer of technology; the increasing bargaining  strength of host country governments;  the
introduction of restrictive FDI policies by host countries;  the perception of increased risks associated
with FDI as a result of changes in the world eco nomic environment in the 1970s;  and the expansion
of offshore financial markets and international bank lending in the 1970s which enabled developingcountries to purchase technology in “unpackaged” form from multinational firms.
47  Notwithstanding
this apparent recent increase in the significance of  internalised transfers of technology, the point has
been made that it is difficult to generalize about trends regarding the availability of technology
through arm’s length transactions.48
                                                     
43 Kumar, N., Technology Generation and Technology Trans fers in the World Economy:  Recent
Trends and Implications for Developing Countries. pp. 26-27.
44 Correa, C.M., “Emerging Trends:  New Patterns of Technology Transfer,” p. 268.
45 Kumar, N., Technology Generation and Technology Trans fers in the World Economy:  Recent
Trends and Implications for Developing Countries, p. 28, and Correa, C.M., “Emerging Trends:  New Patterns
of Technology Transfer,” pp. 268-269.
46 UNIDO, World Industrial Development Report 2002/2003 , pp. 70-71.
47 UNCTC, “Determinants of the Form of Technology Transfer,” p. 174.
48 “While the rising costs and risks of R&D in some  technologies are leading to greater concentration
…, there is more fragmentation and competition in other technology markets.  It is not clear, therefore, whetheron balance it is easier or more difficult to obtain technology at arm’s length.  Within advanced technologies,
older vintages are easily available from innovators and imitators.  In low-technology activities, new suppliers of
technology and technical services are appearing, many  from newly industrialized economies.  TNCs often spin
off independent companies to sell speci alized engineering or consultancy se rvices.  International engineering
and consulting companies set up affiliates or joint ventures in developing countries.  For developing countries,the bulk of whose needs are in mature, standardized activities, technologies may well be available from moresources and on potentially better terms than ever before.  For newly industrialized economies that need
advanced technologies, on the other hand, externalised purchases may be more difficult than before in someWT/WGTI/W/136
Page 9
19. Regarding the relative benefits of internalised  and externalised transfers of technology, the
argument has been advanced that FDI entails access to financial resources in addition to technology;
that certain technologies, especially new technologies, may be available only in internalised form;
that internalised transfers enable faster introduction of technology than externalised transfers;  that
externalised transfers are often subject to restrictive practices;  and that internalised transfers facilitateaccess to regional or global markets and production networks.  Moreover, by providing access to the
full range of a parent firm’s technology and organizational skills, including its tacit knowledge,
internalised transfers reduce the learning costs of deploying a technology efficiently in a new
environment.
49
20. At the same time, however, it has been noted that while FDI may be efficient in respect of the
transfer of operational technology, its contribution to a process of deepening of local innovative
capabilities tends to be limited.  From this perspective, the disadvantage of internalised transfers oftechnology reside in the fact that transfer of operational “know-how” often is not accompanied by a
transfer of “know-why” and that the transferred technology may be suited to a country’s static
endowments but not to its dynamic endowments.
50  Externalised transfers of technology may thus
provide greater scope for an upgrading of local technological capabilities, on the condition that the
level of domestic skills is appropriate and that firms face a competitive environment that forces themto invest in technological learning.
51  Moreover, the fact that FDI entails a package of assets may
mean that an internalised transfer of technology is unnecessarily costly for a host country if local
firms have the capability to use foreign technology efficiently and do not need the other assets owned
by a multinational firm.52  The possibility of the use of outdated technologies by multinational firms
in host developing countries has also been mentioned as a possible drawback of internalised transfersof technology.
53
21. The content of the technology transferred internally through FDI depends importantly upon
the local technological capability of a foreign affiliate and the degree of competition faced by the
affiliate.  The competitive environment facing an affiliate is particularly relevant to the process of
upgrading of local technological capabilities.  Trade policies and corporate strategies play animportant role in this regard.  With respect to trade policy, the proposition has been advanced that
export-oriented strategies are more conducive to the introduction of state-of-the art technology and
technological upgrading than import substitution policies.
54  Regarding corporate strategies, recent
analyses have highlighted the implications for the process of technology transfer of changes in the
competitive environment engendered by the integration of affiliates in global production systems.
Thus “product mandating” strategies, whereby an affiliate is assigned a global responsibility for the
development, manufacture and marketing of a particular product or model, can have a significantimpact on the level of the technology transferred.
55  A recent study argues that the quality and
                                                                                                                                                                    
product segments.  In other cases, the intensity of compe tition   among suppliers, and the fact that product cycles
are becoming even shorter, are opening up access to the latest technologies via external acquisition, albeit athigh prices.  This appears to be the case in the electronics industry.” UNCTAD, World Investment Report 1999 ,
p. 204.
49 UNCTAD, World Investment Report 1999 , pp. 207-208.
50 For an elaboration of this argument, see, e.g. UNCTAD, Foreign Direct Investment and
Development , pp. 35-36;  UNCTAD, World Investment Report  1999 , pp. 41-44 and 209;  UNIDO, World
Industrial Development Report 2002/2003,  p. 36 and pp. 103-104.
51 UNCTAD, World Investment Report 1999 , p. 210.
52 UNCTAD, World Investment Report 1999 , p. 209.
53 UNCTAD, Foreign Direct Inves tment and Development , p. 36.
54 UNCTAD, World Investment Report 1999 , p. 43;  UNCTAD, Foreign Direct Investment and
Development , p. 36.
55 UNCTAD, World Investment Report 1999 , p. 205.  The emergence of global production strategies
involving regional or global product mandates to foreign affiliates has diminished concerns regarding the
limited contribution of foreign affiliates to the technolo gical development of host countries that motivated FDIWT/WGTI/W/136
Page 10
dynamic development of the technology transferred to a foreign affiliate by its parent vary according
to the ownership relationship between a parent and its investment and the extent to which the
operations of the affiliate are integrated within the parent’s global production strategy.  Based on a
review of evidence of the emergence of global sourcing in industries such as automobiles, auto parts
computers and electronics, the study finds that operations involving wholly-owned subsidiaries thatfulfill an essential function in a parent’s global competitiveness strategy entail significantly greater
benefits for host countries, in terms of the pace and quality of the technology transferred and the
extent of backward linkages and spillover effects, than FDI that occurs in a context of joint venture,
technology-sharing and domestic content requirements.
56
22. The confluence of these factors –domestic technological capabilities and the competitive
environment- is illustrated by a comparison in the World Investment Report 1999  of affiliates
operating in different settings.  Thus the content of an internalised transfer of technology will beminimal in the case of a foreign affiliate in a least developed country that conducts assembly
operations aimed at the local market, where demand is small, the level of skill development is low,
and no significant local suppliers or technical institutes exist.  By contrast, a much higher level of
transfer of technology will be attained if a foreign affiliate is located in a developed country with a
large research tradition, produces for a regional market, conducts the full range of technological,managerial and marketing functions, while specializing in some functions as part of a parent’s global
strategy, conducts R&D activities, and interacts with local research institutes.
57
C. FDI AND THE DIFFUSION OF TECHNOLOGY
23. The nature and the extent of the contribution of  FDI to the technological development of host
developing countries depend not only upon the transfer  of technology by a multinational firm to a
foreign affiliate or to a licensee in a host developing country but also upon the diffusion of technology
as a result of various types of knowledge spillover effects on other firms in the host country.  It has
been suggested that such spillover effects ma y even be a more important channel for the
dissemination of technology than the formal transfer of technology.58  The main channels through
which such knowledge spillovers can arise are demonstration effects;  the establishment of verticallinkages between foreign investors and customers and suppliers in the host country;  the movement of
labour, and the impact of FDI on competition.
59
24. Studies previously circulated in the Working Group contain summaries of empirical analyses
of the incidence of knowledge spillovers from FDI:
                                                                                                                                                                    
policy in countries such as Canada in the 1970s.  Conklin, D. and D. Lecraw, Foreign Ownership Restrictions
and Liberalization  (Aldershot:  Ashgate, 1997),  p. 51.
56 Moran, T., Parental Supervision:  The New Paradigm for Foreign Direct Investment and
Development , (Washington, DC:  Institute for International Economics, 2001).
57 UNCTAD, World Investment Report 1999 , pp. 205-206.  See also ibid., p. 223 (“The most important
determinants of technology transfer are the level of sk ills and capabilities of an affiliate, its competitors and the
supplier network, and the competitive environment facing the affiliate.  The higher the level of local capabilitiesand the more competitive the environment, the better the quality of the initial transfer and the more rapid itsupgrading”).
58 WT/WGTI/W/65, para. 10.
59While, strictly speaking, the effects of FDI on competition and market structure are to be
distinguished from the technology-related spillover effects of FDI (as suggested in WT/WGTI/88, p. 13), it hasalso been pointed out that such a distinction is diff icult to make in empirical analysis.  See WT/WGTI/W/65,
para. 3.  The recent background Note prepared for the Working Group on Trade and Transfer of Technologyalso treats the impact of FDI on competition as one of the channels of technology diffusion.  WT/WGTTT/W/1,
paras. 67 and 73.WT/WGTI/W/136
Page 11
• A number of statistical studies conducted during the 1970s and 1980s of FDI in Australia, Canada
and Mexico found a positive correlation between the level of foreign participation in an industryand the level and/or growth rate of productivity in that industry.
60  A positive relationship between
FDI and productivity of domestic firms was also found in later studies of FDI in the
manufacturing sector in Mexico during the period 1965-1982 and of FDI from the United States
in the manufacturing sector in France, Germany, Japan and the United Kingdom during the period1968-1988.
61
• Whereas the positive correlation established in  these studies between FDI and productivity of
domestic firms was based on a cross-sector comparison, somewhat different results have beenreported in studies using data on the evolution of the performance of individual domestic firms
over time.  A study of the impact of FDI on the productivity of domestic firms in the
manufacturing sector in Morocco during the period 1985-1989 found that FDI affected the level,
but not the growth rate, of the productivity of domestic firms, and that the impact of FDI in
narrowing the average dispersion of levels of productivity between firms was more significant in
low-technology sectors than in high-technology sectors.  The authors of the study ascribed the
latter finding to a lack of capacity by domestic firms to absorb foreign high technology.
62  A
recent study of the impact of FDI on the performance of domestic firms in Venezuela found
inter alia  that the productivity of domestic firms declined in sectors with increasing levels of FDI.
The authors of the study suggest that such negative spillover effects could be explained by the fact
that the increasing market share of foreign-owned firms forced domestic firms to lower their
output and thereby forego economies of scale.63
• A study of the relationship between the share of FDI in employment in a sector and the level of
wages in that sector (as an indicator of the o ccurrence of technology spillovers through the labour
market) found that in the case of Mexico and Ve nezuela the share of FDI in employment did not
affect the level of wages of employees of domestic firms.  By contrast, in the United States, the
share of FDI in employment was positively correlat ed with higher wages both in foreign-owned
firms and domestic firms.64
• In the case of FDI in the Czech industry, a recent study found that the impact of FDI on
productivity of purely domestic firms was negative, but that, if attention was limited to the impactof majority-owned foreign affiliates on all other firms, including joint ventures, the negative
effect was not statistically significant.  A possible explanation of this finding is that joint ventures,
which invested more in research and development than purely domestic firms, were better able to
absorb foreign technology.
65
25. It thus appears that the empirical evidence regarding the existence of positive knowledge
spillover effects from FDI is somewhat mixed.66  In this regard, some analysts have challenged the
                                                     
60 WT/WGTI/65, para. 57 and WT/WGTI/W/88, pp. 14-15.  However, a methodological problem with
this type of study as evidence of positive spillover effects of FDI is that a correlation between the level of
foreign presence and local productivity could be explained by  the fact that FDI is attracted to sectors with high
productivity.  Thus, FDI may have been the effect rather than the cause of a high level of productivity in aparticular sector.  WT/WGTI/W/88, p. 15.  A study of the impact of FDI in the Venezuelan manufacturingsector between 1976 and 1989 found that domestic firms were more productive in sectors with a larger foreignpresence but cautioned that this might not constitute evidence of positive technology spillovers if sectors with
higher levels of productivity systematically attract more FDI. WT/WGTI/65, para. 60.
61 WT/WGTI/W/65, para. 58.
62 WT/WGTI/W/65, para. 59 and WT/WGTI/W/88, p. 15.
63 WT/WGTI/W/88, p. 16.
64 WT/WGTI/W/88, pp. 15-16.
65 WT/WGTI/W/88, p. 16.
66 See also WT/WGTTT/W/2, paras. 125-131.WT/WGTI/W/136
Page 12
view that FDI benefits developing countries in the form of positive knowledge spillover effects.67
Other analysts, however, have raised specific methodological questions regarding the design of the
studies in question.  Thus, for example, it has been argued that the time period covered by such
studies may not have been long enough, and that the studies have focused on possible horizontal
knowledge spillover effects of FDI on firms that compete with foreign investors rather than onvertical spillover effects of FDI on suppliers and customers of foreign investors.
68  In addition, various
economic and policy-related factors have been identified that may have a bearing on the conditions
under which positive knowledge spillover effects of FDI occur.69
26. In this connection, the view has been expressed that limited scope for spillover effects exists
where FDI is of an “enclave” character and involves products and technologies that are very different
from products and technologies of domestic firms.70  Reference has also been made to empirical
studies that suggest that the existence of positive spillover effects from FDI depends upon the extentto which FDI contributes to greater competition in a given sector.
71  The importance of a host
country’s overall level of development as a dete rminant of knowledge spillover effects has been
confirmed in cross-country studies that find that the positive impact of FDI on economic growth
depends upon the existence of a minimum stock of human capital.72  Several studies have found that
that FDI of an import-substituting character en genders more scope for spillovers from FDI than
export-oriented FDI.  One explanation that has been offered for this finding is that “import-
substituting foreign investors bring with them skills and technologies that are in short supply in the
host country and may eventually spread to local firms, whereas export-oriented foreign investors may
well employ production techniques that are not significantly different from those of local exporters”.73
Another explanation highlights the difference between the conditions of competition faced by firms
                                                     
67 For instance, Rodrik observes:  “Today’s policy lite rature is filled with extravagant claims about
positive spillovers from DFI…  Once again the evidence is sobering.  Systematic plant-level studies from
countries such as Morocco and Venezuela find little in the way of positive spillovers (…).  At the national level,the effect of DFI on economic growth tends to be we ak, and disappears as more country characteristics are
controlled for (…).  Much, if not most, of the correlation between the presence of DFI and superior performanceseems to be driven by reverse causality: multinational enterprises tend to locate in the more productive and
profitable economies (and niches thereof).”  Rodrik, D., The New Global Economy and Developing Countries:
Making Openness Work (Washington, DC:  Overseas Development Council, 1999), p. 37.  In a footnote to this
passage Rodrik further notes that the literature on spillover effects sometimes refers to cases that involveconventional input-output linkages and labour training but that do not provide evidence of the presence of non-pecuniary externalities.  Ibid., p. 41.
68 Thus, it has been argued that knowledge spillover effects of FDI may be more of a vertical than a
horizontal nature.  See WT/WGTI/W/88, p. 27.  In a r ecent paper, Hanson submits that the statistical studies
using micro-level data undermine the empirical support for the existence of knowledge spillover effects fromFDI but notes that “these results are for the direct impact of FDI on domestic enterprises in the same lines ofactivity.  It is possible that FDI raises the productivity of domestic agents through indirect, general equilibriumeffects, such as backward-forward linkages or productivity spillovers common to all industries.”Gordon H. Hanson, Should Countries Promote Foreign Direct Investment? G-24 Discussion paper series No. 9
(New York and Geneva:  United Nations, February 2001) p. 14.  A detailed analysis of the diffusion of
technology by foreign affiliates through backward linka ges with domestic suppliers  appears in the UNCTAD
World Investment Report 2001 , chapter IV.  The report notes that “[t]he extent to of technology transfer appears
to rise the more affiliates are committed to long-term relationships with suppliers, the greater the technicalcomplementarity between their activities, and the more specialized or custom-made (rather than standardized)
are the inputs supplied.  Transfers of knowledge are also likely to be positively influenced by the size of
affiliates and their export-orientation. Needless to say, the extent of technology transfer also depends on the host
economy and the level of development of local firms.” Ibid., p. 142 (footnotes omitted).
69 See also UNCTAD, World Investment Report 1999 , pp. 210-215.
70 WT/WGTI/W/65, paras. 64-65.
71 WT/WGTI/W/65, para. 66.
72 WT/WGTI/W/65, p. 19 and WT/WGTI/W/88, pp. 20-21.
73 WT/WGTI/W/65, para. 68.WT/WGTI/W/136
Page 13
that produce for export and firms that produce for the local market.  Thus, the fact that domestic firms
producing for export already face competitive pressure from the world market means that the entry of
FDI in export-oriented sectors engenders a less significant competitive stimulus than in the case of
production for the domestic market.74  However, a recent study finds that there exists greater scope for
positive externalities and vertical linkages in the case of foreign affiliates that are wholly-owned bytheir parent firms and that are integrated within these firms’ regional or global production systems
than in the case of foreign affiliates that are subject to domestic content, joint venture or technology-
sharing requirements.
75
27. The increasing recognition of the importance of technology in economic development, and
the potential beneficial role of FDI in this rega rd, along with changes in the international economic
and regulatory environment that may make it difficult to replicate certain policies that certain
countries have successfully employed in the past, raises the question of the nature of specific policymeasures that are appropriate in the current context to enhance the contribution of FDI to local
technological development.  Recent reports by UNCTAD and UNIDO identify with a considerable
degree of detail a range of options available to countries in this regard.
76
III. TREATMENT OF TECHNOLOGY-RELATED MATTERS IN INTERNATIONAL
INVESTMENT ARRANGEMENTS77
A. PERFORMANCE REQUIREMENTS
28. A number of free-trade agreements and bilateral investment treaties contain a prohibition of
certain performance requirements, including requirements concerning the transfer of technology.  This
approach is exemplified by the NAFTA, which prohibits the imposition or enforcement by a Party of
requirements “to transfer technology, a production process or other proprietary knowledge to a personin its territory” in connection with the admission or tr eatment of an investment of an investor of any
Party or non-Party.  This is subject to an exception if such a requirement “is imposed or the
commitment or undertaking is enforced by a court, administrative tribunal or competition authority to
remedy an alleged violation of competition laws or to act in a manner not inconsistent with other
provisions of this Agreement”.
78  NAFTA Article 1106(2) further provides that requirements “to use a
technology to meet generally applicable health, sa fety or environmental requirements” shall not be
construed to be inconsistent with this prohibition.  In addition, the prohibition of transfer of
technology requirements in Article 1106(1)(f) does not apply to government procurement.79
                                                     
74 WT/WGTI/W/65, para. 69.
75 Moran, T., Parental Supervision:  The New Paradigm for Foreign Direct Investment and
Development.
76 UNCTAD, World Investment Report 1999 , World Investment Report 2001  and UNIDO, World
Industrial Development Report 2002/2003.
77 The present Note does not address provisions, contained in various international instruments that do
not specifically deal with foreign investment, which aim to encourage the transfer of technology to developing
countries.  Such provisions can be found in for example, the United Nations Convention on the Law of the Sea,
the Energy Charter Treaty, various international environmental agreements and a number of WTO instruments,
including the TRIPS Agreement.  See UNCTAD, Transfer of technology , pp. 44-67 and UNCTAD,
International Arrangements for transfe r of technology:  best Practices fo r Access to and measures to Encourage
Transfer of Technology With a View to Capacity Build ing in Developing Countries , Especially in Least
Developed Countries, TD/B/COM.2/EM.9/2 (1 June 2001 ).   
78 NAFTA, Art. 1106(1)(f).
79 NAFTA, Art. 1108(8)(b).  The NAFTA provisions on performance requirements also prohibit a
Party from imposing on an investment of an investor of a party or a non-Party of a requirement “to act as the
exclusive supplier of the goods or services it provides to a specific region or world market.”  This prohibition
does not apply to government procurement.  NAFTA, Arts. 1106(1)(g) and 1108(8)(b).WT/WGTI/W/136
Page 14
29. The NAFTA provisions on performance requirements draw a distinction between mandatory
performance requirements, on the one hand, and measures that condition the receipt or continued
receipt of an advantage on compliance with specified requirements.  Transfer of technology
requirements are covered by the prohibition of mandatory performance requirements in
Article 1106(1) but are not included in the list of performance requirements that are prohibited byArticle 1106(3) as conditions for the receipt or conti nued receipt of an advantage.  Furthermore, the
prohibition of certain advantage-based performance requirements in Article 1106(3) shall not “be
construed to prevent a Party from conditioning the receipt or continued receipt of an advantage … on
compliance with a requirement to locate producti on, provide a service, train or employ workers,
construct or expand particular facilities, or carry out research and development, in its territory”.
80
30. Aside from the above-mentioned exceptions and qualifications, the prohibition of
performance requirements in Article 1106 of the NAFTA is subject to country-specific reservationswhich the Parties have been permitted to make in respect of existing and future non-conforming
measures, as set out in each Party’s schedule in an annex to the NAFTA.
81  Specifically in respect of
the prohibition of transfer of technology requirements contained in Article 1106(1)(f), Canada has
made such reservations in relation to certain existing measures.  These concern the foreign investment
review process under the Investment Canada Act82, the authorization of oil and gas development
projects pursuant to the Canada Oil and Gas Operations Act83;  and the “benefit plan” provisions of
the Hibernia Development Project Act.84
31. The above-mentioned provisions of the NAFTA concerning transfer of technology
requirements have not yet been the subject of NAFTA dispute settlement proceedings.
32. Provisions on transfer of technology requirements that are identical to the NAFTA provisions
on transfer of technology requirements are contained in several free- trade agreements that have been
concluded during the last decade between countries in the western hemisphere.85
33. The prohibition of mandatory transfer of technology requirements is also a feature of many
recent bilateral investment treaties of the United States and Canada.86  In the treaties of the
United States, the wording of the relevant provision is the same as in NAFTA Article 1106(1)(f).87
The treaties concluded by the United States make it clear that prohibition of transfer of technology
requirements does not apply to requirements that are applied as conditions for obtaining advantages.
In the bilateral investment treaties concluded by Canada, there is a difference from the wording of the
NAFTA in that the provision applies to requirements “to transfer technology, a production process or
                                                     
80 NAFTA, Art. 1106(4).
81 NAFTA, Arts. 1108(1) and (3).
82 NAFTA, Annex I-C-5, para. 11.
83 NAFTA, Annex I-C-26, para.5.
84 NAFTA, Annex I-C-28.
85 See e.g. Art. G-06 of the Free Trade Agreement between Canada and Chile (1996);  Art.15-05 of the
Free Trade Agreement between Bolivia and Mexico (1994);  Art. 9-07 of the Free Trade Agreement betweenChile and Mexico (1998);  and Art. 14-07 of the Free Trade Agreement between Mexico, El Salvador,Guatemala and Honduras (2000).  These free-trade agre ements also include a prohibition of requirements
imposed on investments to act as exclusive suppliers of goods or services to a specific region or to the world
market.
86 Bilateral investment treaties concluded by other countries generally do not contain any provisions on
performance requirements.
87 See e.g., Art. VI(e) of the bilateral investment treaty between the United States and Bolivia(1998);
Art. VI (e) of the bilateral investment treaty between the United States and Trinidad and Tobago(1994);  and
Art. VI of the bilateral investment treaty between the United States and Nicaragua (1995).WT/WGTI/W/136
Page 15
other proprietary knowledge to a person unaffiliated with the transferor …”.88  An important
difference with the NAFTA is that no provision is made in the bilateral investment treaties of the
United States and Canada for country-specific reservations regarding the prohibition of transfer of
technology requirements.
34. Unlike the NAFTA, bilateral investment treaties of the United States also often include a
prohibition of mandatory requirements “to carry out a particular type, level or percentage of research
and development” in the territory of a party.89  Such a provision does not appear in the bilateral
investment treaties of Canada.
B. INTELLECTUAL PROPERTY RIGHTS
35. Besides specific provisions on issues such as transfer of technology and the conduct of
research and development that can be found only in relatively few international investment
agreements, another manner in which technology-related issues may be affected by such agreementspertains to the treatment of intellectual property.  Specifically, intellectual property rights normally
constitute one of several categories of assets included in the provision that defines the term
investment.  As a consequence, in the absence of qualifying provisions, the rules typically contained
in investment agreements on national treatment,  MFN treatment, “fair and equitable” treatment,
transfer of funds and expropriation and compensation, etc. apply to intellectual property rights as aform of investment.
36. Provisions that qualify the application of an agreement to intellectual property can be found in
some agreements, especially with regard to rules on national and MFN treatment and on expropriation
and compensation.  The NAFTA states that the requirements to accord national and MFN treatment to
covered investments do not apply to exceptions or  derogations from the national treatment article in
the NAFTA chapter on intellectual property.  Similarly, the provision on expropriation and
compensation does not apply to the issuance of com pulsory licenses granted in relation to intellectual
property rights or to the revocation, limitation or creation of intellectual property rights, to the extent
that such issuance, revocation, limitation or creation is consistent with the NAFTA chapter on
intellectual property rights.
90  Bilateral investment treaties of Canada likewise provide that in respect
of intellectual property rights the parties may derogate from the provisions on national and MFN
treatment “in a manner that is consistent with the Final Act Embodying the Results of the Uruguay
Round of Multilateral Trade Negotiations....”.  They also preclude the application of the provisions on
expropriation and compensation to the issuance of compulsory licenses that are consistent with the
Uruguay Round Final Act.91  The Energy Charter Treaty (art. 10(10)) exempts intellectual property
from the application of its national and MFN treatment provisions and states that in this respect the
“corresponding provisions of the applicable international agreements for the protection of IntellectualProperty rights to which the respective Contracting Parties are parties” shall apply.
__________
                                                     
88 See e.g. Art. V.2(e) of the bilateral investment treaty between Canada and the Philippines (1995) and
Art. V.2(b) of the bilateral investment treaty between Canada and Thailand (1997).
89 See e.g. Art. VI(f) of the bilateral investment treaty between the United States and Bolivia (1998).
90 NAFTA, Arts. 1108(5) and 1110(7).
91 Art. VI(1) of the bilateral investment treaty between Canada and the Philippines (1995) and
Annex I(IV) of the bilateral investment treaty between Canada and Uruguay (1997).