FDI-linked Technology Transfer
A Search for a Model Most Suitable for Ethiopia
Kenichi Ohno (GRIPS)
Addis Ababa, July 2013

India

Vietnam

Malaysia

AMATA Nakorn Industrial
Park, Thailand

Topics
Technology transfer: types and modes
 The Ethiopian way< Asking projects to train engineers & procure locally > The Thailand model< FDI attraction + SME support + linkage promotion > The Malaysia model< Create innovative & competitive local SMEs > A suggested model for Ethiopia
Dual Economic Structure of Typical Latecomer
Country in East Asia
The Need to Link Domestic Sector with Globally Integrated Sector

Export Sector（Under-developed,
often protected)(Integrated & competitive
under free trade)

Missing link
Thailand

Local firms

Exportoriented FDI(located mainly inindustrial estates)

Malaysia

Materials& parts

Products

Global and Regional Markets

Domestic Sector

Types of Technology Transfer
Frontline technology—providing technology in exchange forother business advantages
Japan’s Sharp & Korea’s Samsung
Sharp providing LCD technology & Samsung providing capital Steel makers & emerging economies
Nippon Steel & JFE providing energy saving technology to India& Philippines for carbon offset
For latecomers—improving partner firms with non-proprietaryknowledge for mutual benefits of foreign firms & locals
Toyota, Denso, Honda & Nissan training Thai auto parts makers
 Colgate & Sanyo coaching Vietnamese plastic injection firms for
QCD (quality, cost, delivery) Japanese fishery company teaching how to produce high quality
frozen shrimp products
Improved outputs of local firms are procured by foreign
partners that taught technologyModes of Technology Absorption
Local capability & ownership (Meiji Japan proceeded from Low to High)A. 100% foreign owned factory (headquartered abroad)B. Factory operated by foreign immigrants
C. Joint venture
D. Management contract
E. Turnkey contract (factory construction + training for
operation & maintenance)
F. Locally owned factory assisted by hired foreign
engineers
G. Purchase of foreign machinery and know-how
H. Technology learning through operating, analyzing &adjusting imported machinery
I. Patent licensing
J. Copy production of latest machine through local effort
HIGH K. Local development of new technology
LOW

Source: Hoshimi Uchida, “Technology Transfer,” Economic History of Japan vol.4, Iwanami
Shoten, 1990 (a study on Meiji Japan (1868-1912)’s absorption of Western technology).

1. Ethiopia’s Way
PM Meles (May 19, 2011):“Skills & technology are crucial; I use four ways to upgrade
them: (i) kaizen & benchmarking; (ii) enhancing engineering
universities & twinning them with foreign institutes; (iii) soft
& hard infrastructure; (iv) using FDI-local linkage to enhance
local producers.”
PM Meles (Jan.19, 2011)“New sugar, fertilizer & cement plants shall be built in two
ways: (i) management contract through competitive bidding[D]; and (ii) Indian, Cuban & Filipino engineers teaching
technology to Ethiopians through OJT [F]. We want to shift
from (i) to (ii) over time. In both plant construction andoperation & maintenance, Ethiopians should undertake asmuch as possible except the most difficult areas.”PM Meles (cont.)
PM Meles (Jan.19, 2011)“I hear that in Meiji Japan, engineers learned Western
technology very quickly under foreigners’ supervision. I wantto know more about this process. In Ethiopia, Germans havebeen teaching us for long but good practical results were notobtained. Germans are taking too long to teach. Hundreds ofFilipinos & Indians also help us. In addition, can Japan alsoteach our factories? We want to learn the Japanese andAsian way.”
Note: Mr. Meles’ suggestions were (i) courses on Meiji Japan’s
industrialization for civil servants; and (ii) mobilizing retired
Japanese engineers for OJT in local factories (broader than kaizen).
Source: the minutes of Ethiopia-Japan Policy Dialogue compiled by the GRIPS
Development Forum.

Requiring FDI & ODA Projects to
Conduct Technology Transfer
PM Meles (Jun.4 & Sep.3, 2009): “I ask individual foreign
investors and donors to do the following”- Train Ethiopian workers (but this is not enough).
- Teach Ethiopian engineers so they acquire skills to build,
operate and maintain the factory & equipment.
- Use local inputs & works as much as reasonably possible
in building plants & infrastructure (build railroad
carriages & stations locally, if not locomotives).
In sum, the Ethiopian way has been: Top sales + Business & Economic Diplomacy
 Using new & existing factories and infrastructure
projects as learning vehicles
 Requiring foreigners to teach local engineers & use local
works as much as possible--through technical assistanceor as conditions for investment

2. The Thailand Model
This model is common in Southeast Asia (but not Malaysia
today). For this model to work, large absorption of
manufacturing FDI is required (esp. cars & electronics).
 We call this “supporting industry” (local parts) development.
 The strategy consists of three policy components:


FDI attraction

Inviting large amountsof targeted FDI to form
an industrial cluster

SME support

Upgrading selected local
supplier firms to global(Toyota etc.) standard

Linkage policy

Matching FDI buyers& local part suppliers

For each policy component, international cooperation is often
mobilized (expert dispatch, training, kaizen & shindan…)

Creating Business Linkages: A Policy
Perspective (UNCTAD Report 2010, p.14)
Systematic policy approach to linkage building consists of:
Improving investment climate
 Strategic FDI attraction
 Strengthening absorptive capacity of local firms
 Linkage policies


Note: middle-income economies in East Asia have largely
achieved the first two and now work on the latter two(Thailand, Indonesia, Vietnam…)

The Automotive Pyramid in Thailand
Final carassemblers

First-tiersuppliers

2nd&3rd-tiersuppliers

17 firms

648 firms
Parts &
components

1,641 firms,
all local

Total automotive firms: 2,306

Source: Thai Ministry of Industry, Oct. 2009.

Foreign MNCs: Toyota, Honda,
Isuzu, Mitsubishi, Mazda…
Pure FDI & foreign majority JV 47%
Thai majority JV 30%
Pure Thai 23%

Supporting Industry
Development- Strong local parts industry is crucial
for cost reduction & competitiveness(parts are largest cost component).
- Attract foreign parts suppliers &strengthen local suppliers.

-Spillover & learning from FDI do notoccur automatically; these must be
created by serious enterprise effort
and appropriate policy.

Standard Policies for Local Capability
BuildingIndustrial human resource- Universities, colleges and technical schools- Transfer of specialized skills to engineers- Subsidies for training- Skill certification, competition, awards and prizesEnterprise capability- Kaizen - quality & productivity mindset and tools- Shindan - state-supported SME diagnostic & advisory services- Subsidies for upgrading management, design, marketing,accounting, etc.
- Quality standards and certification, best practice awards

SME finance- Development finance institutions and subsidized bank loans- Credit guarantee- Equipment leasing- Enterprise credit information databaseStart-up and innovation support

Standard Policies for Linkage
Strategic FDI marketing and investor support
 Domestic and export market development
 Trade fairs and “reverse trade fairs”
 Enterprise database & matching service
 Subsidies for FDI-local linkage and technology transfer
 Official promotion and intermediation of subcontracting
 Establishment and strengthening of business/sectoral
associations
 Promoting local firm networks (for information sharing,support programs, joint order taking)Reverse Trade Fairs
Reverse trade fairs are trade fairs in which large firms
exhibit components and materials they want to buy fromlocal firms, instead of exhibiting what they want to sell.
 Japan External Trade Organization (JETRO) frequently hosts
such fairs in China and Southeast Asia to help Japanesemanufacturing FDI to procure inputs locally.
Vietnam: Hanoi University of Industry
Established in 1898 under French rule, HaUI was a technicalcollege, upgraded to a university in 2005. It now has 1,400
teachers and 60,000 students.
 In 2000-05, JICA supported HaUI to create metal, machining
and electronics programs with equipment and training.
 In 2010-13, JICA calibrated HaUI curriculums to meet thedemands of Japanese FDI.
 Newly created courses: 5S, mechanical drawing, machinery
maintenance, quality control, skills certification.
 Japanese firms cooperating with HaUI: Toyota, Panasonic,
Ebara, Toho, Takagi, Nagatsu, Showa Denko.
Vietnam: ESUHAI Company
Producing workers with mindset & skills
ESUHAI is a private firm founded by Mr. Le Long Son, aVietnamese engineer who studied die & mold in Japan.
 ESUHAI dispatches Vietnamese workers to Japan as technicaltrainees for 3 years (about 400 workers per year).
 Before being sent to Japan, workers are trained for 1 year inJapanese language, basic manufacturing mindset such as
greetings and 5S, and long-term life vision as engineer.
 After returning to Vietnam, they are supported with follow-up& level-up training, and matching with Japanese firms.
 ESUHAI also assists Japanese firms to establish factories inVietnam (worker database, rental factory, factory
construction, obtaining license, etc.)Kaizenin India

Indian auto partcompany practicing
kaizen near Delhi; Indian
engineers learned
kaizen from MarutiSuzuki, a Japanese JV.

Shindan:Enterprise Diagnosis & Advisory Service
Shindan is a state-authorized system of enterprisediagnostics and advisory services targeted at SMEs.
 Japan’s Shindan System started in 1948. Certified
consultants are aided by legislation, official recognition andassistance, and supporting organizations such as SME
Universities and J-SMECA (consultants association).
 Shindan experts advise SMEs in both management andtechnology. They also explain new policies. Shindan results
are strongly linked with commercial bank loans to SMEs.
 Japan has over 20,000 Shindan experts, many of whom are
JICA consultants working in developing countries.
 Shindan has been introduced to Thailand, Malaysia,
Indonesia, Philippines… But institutionalization is not easy.
Shindan Experts in Vietnam
JICA Senior Volunteers
Since 2010, about 20 experienced JICA senior volunteers
have been assisting Vietnam’s “supporting industry” (partsuppliers) in metals, plastic, electronics, nonferrous metals
and machinery. 100 firms are targeted.
 Assistance focuses on 5S & quality control. Other areas ofconcern are productivity & technology management.
 Shindan experts visit factories regularly and give themhomework for improving production lines. Seminars,
training in Japan, manuals and materials are also used.
 Improved local firms are listed in JETRO’s Excellent Local
Company Database. This facilitates Japanese FDI firms tofind local partners.
Thailand
Linking Local Part Suppliers with Japanese Auto FDI
Technology Promotion Association (TPA) is a local NPO
established in 1973 by Thai students who studied
engineering in Japan. TPA has offered courses in Japanesemanagement, technology & language to Thai people for 40
years. In 2007 it created Thai-Nichi Institute ofTechnology (TNI), a university dedicated to Japanesestyle manufacturing.
 Thailand Automotive Institute (TAI) is a state-created,but now financially independent, NPO that drafts auto
master plans and implements policies.
 Under Automotive Human Resource Development
Program (AHRDP, 2006-10), Denso, Honda, Nissan andToyota taught lean production, mold & die, skill certification& Toyota Production System to Thai suppliers withadditional support from JICA and JETRO.
3. The Malaysia Model
1980s-90s:
 Automotive—PROTON, a state-owned national car company,
was created and promoted under heavy policy support &protection. Local (Malay) part suppliers were also assisted.
 Electronics (E&E)—FDI clusters formed in semi-conductor& consumer electronics under open & free environment.
Today:
 Although E&E remains the largest exporter (33% in 2012),
Malaysia no longer promotes SME-FDI linkage. Instead, it
hopes to create innovative SMEs independent of FDI.
 Strong emergence of innovative SMEs is key to overcoming
the middle income trap & achievement of “2020 Vision”(become a fully developed nation).

Supporting Agencies for SMEs
Implementation agencies collectively assist SMEs. Many
have long history and good performance records:
SME Corp—one stop service for all SME policy issues; overall
policy coordination
 MIDA—investment promotion (both domestic & FDI)
 MATRADE—promotion of trade & outward FDI
 Malaysia Productivity Corporation—quality & productivity
training, consultation, research, certification, etc.
 SIRIM—state-owned corporation for technology & innovation
 Dev. Finance Institutions—SME Bank, Agro Bank, Exim
Bank, National Saving Bank, Dev. Bank, Rakyat Bank, MIDF
 Malaysia Automotive Institute Halal Industry Development Corporation
Malaysia:
Noteworthy Policy Measures
SME policy coordination, master plan, One Referral Centre,
SCORE (SME rating), database, campaigns (SME Corp).
 Effective screening, support & post-license follow-up ofinvestors (MIDA).
 Hand-holding program—assisting selected SMEs individuallyand comprehensively for 3 years until they succeed inpenetrating foreign markets (MATRADE).
 A wide variety of short-term management, productivity,
quality, etc. courses taught by local experts (MPC).
 State-owned corporation developing technology & offering
testing & certification services (SIRIM).
 12 National Key Economic Areas (11 sectors & 1 region)—
support agencies work in concert toward NKEAs.
Summary Up to This Point
Ethiopian way is acceptable—but it will be better if FDI isgiven stronger commercial motives for transferring
technology (not as required conditions for aid or investment).
 Thailand model is good—but impractical for Ethiopia as itlacks a large cluster of mechanical type FDI. Ethiopia must
attract FDI and strengthen local SMEs in different ways.
 Malaysia model is difficult—creating globally competitive
SMEs without foreign linkage is unrealistic, at least initially.


Local
firms

FDI
Parts supply
Innovation &competitivenessGlobal market

Request for TT

4. A Suggested Model for Ethiopia(A revised Thailand model)
 Ethiopia should build linkage with light manufacturing &agro-processing FDI (leather, garment, coffee, sesame,jewelry, horticulture…) rather than automotive or E&E.
 Build linkage even with a small number of FDI; a massive
inflow of FDI (hundreds & thousands) is not required.
 Also, the size of FDI firm does not matter; investment byforeign SMEs should be welcomed.
 Devise “win-win” incentive mechanisms for both FDI and
local firms.
 Add & institutionalize technology transfer to existing
industrial projects (kaizen, export champions, TVET, EIA
reform, TIDI, LIDI…) as an overarching aim rather thantreating technology transfer separately.

Integrated & FDI-linked Technology Transfer (TT)Technology transfer as an overarching policy objective- TT to enhance quality, productivity & ownership- Firm effort + policy support + international cooperation- Targeted: light manufacturing & agro processing
Three policy pillars (to be built up and strengthened over time)Targeted
attraction of
FDI & buyers- General improvement ofbusiness climate- Strategic marketing (bringlight manuf. FDI from Asia)- One-stop service- Efficient logistics- Hard & soft infrastructure- Fast & reliable customs- Industrial parks- Reform laws, EIA, ERCA…

Local enterprise
capacity building
for linkage
Linkage policy- Incentives, subsidies& policy support for TT- Matching of business& JV partners- Handholding- Effective follow-up &monitoring- Kaizen- Benchmarking- Management training- Sector-specific TT & QCD- Export marketing (incl.
champion products)- TVET- Strengthening support
agencies: EKI, TIDI, LIDI…

Examples of Policy Actions in the
Proposed TT Mechanism
Product development—assist foreigners wanting to create
new products from unique Ethiopian materials (“champions”).
 Partner enhancement for foreign buyers of existingproducts (coffee, leather goods, flower, gems, jewelry, etc)
but with higher quality—improve local partner companies &workers to the level required by targeted markets.
 Linkage with kaizen—upon request, EKI/JICA can send akaizen team to FDI or its partner factory for improvement,or adjust kaizen programs to firms’ requirements.
 Handholding & continued follow-up—assist selected
local firms comprehensively & continuously for 2-3 years
until they attain technology or penetrate foreign markets.
Continue to monitor them for any additional problems.
 Incentives for TT & training—firms acquiring designatedtechnology or training workers in designated fields canreceive matching grants from government.
The Japanese Business Model Fits Wellwith Proposed Technology Transfer
Japanese FDI & ODA should be mobilized in an integral way.
 Unique features of Japanese FDI should be noted & utilized Manufacturing-oriented
 Endless pursuit of quality & customer satisfaction
 Long-term orientation—last in coming but staying long
 Teaching skills & technology to local partner companies
 Compliance of local labor, tax, environment laws
 Japanese cooperation (JICA, JETRO…) should: Assist Japanese firms in realizing desired investment or
trade with technology transfer
 Negotiate/cooperate with the Ethiopian government toimprove policies, institutions and incentives
 Japan should declare FDI codes of conduct that all
Japanese firms must observe, which include promotion of
FDI-linked TT (in Ethiopia & Africa—even globally).

Additional RemarksLong-term endeavor: existing & new measures should be
combined in a linked way, and progress must be monitored
regularly at high level. The entire mechanism should bebuilt step-by-step as it cannot be completed in short term.
Forced vs. voluntary: unrealistically high demand for TT,
without cultivating local capability, keeps manufacturing
FDI away. Understand business needs well, and offer
encouraging measures so FDI will transfer technology
happily & willingly (soft push).