Multinational enterprises (MNEs) investment
in developing world: Does institution play any role in technological spillovers
to local firms?
Introduction
This essay is on technological spillovers from MNEs
to local firms in the local markets especially in developing world in Africa
and Asia. It elucidates how MNEs transfer technology to local firms and the
role of institutions in enhancing technological spillovers to local firms.
Furthermore, gaps in the literature are uncovered, unit of analysis is
mentioned and methodology to tackle the issue is mentioned.
MNEs investment and
its positive effects on technological spill overs to the local firms
Piscitello (2003) argued that Multinational enterprises have become important economic
agents with respect to generation, commercialization and international transfer
of technological knowledge to local companies especially in developing
countries. MNEs and their FDI transfer technology to local firms in terms
of R&D capabilities and equipments, manufacturing know how, marketing
resources, work practices and managerial techniques, supplier and distribution
expertise; physical transfer of resources to new locations or sharing resources
without physical transfer between parts involved. Additionally, Meyer and
Sinani (2009) argued that local firms learn from MNEs by observing technology
and management practices employed by MNEs or by attracting employees trained by
MNEs.
Furthermore, Liefner, Hennemann and Xin (2006)
added that trading with foreign companies helps domestic companies to get new
ideas that enable them to enter the market with new products. This implies that,
domestic companies gain absorption capacities from MNEs in the form of
knowledge base, skilled human resources and some form of in house knowledge
generation. This concur with Cantwell and Athreye (2007) statement that MNE and
FDI promote technological catch up to the countries that already have acquired
sufficient absorptive capacity and spill over through skilled labour and technological
innovation infrastructures such as R&D institutions.
On top of that, Marin and Bell
(2005) argued that Multinational Companies’
subsidiaries are leaky containers at the end of the technological transfer
process of technology spill over. This implies that MNCs subsidiaries own
knowledge creations that are significant source of spill over potential. Innovation Spill over occur in different
industries such as electronics, agriculture, service and manufacturing because
they employ skilled workers and undertake R&D (Marin & Bell, 2005).
Moreover, Glass and Sagi (1998)
argued that technology transfer from FDI to the local firms in the developing
world is linked to the rate of imitation of best technology available. Moreover,
Glass and Sagi (1998) argued that indicators
of technological innovation transfer to domestic firms are such as R&D (Reported
expenditures on R&D), employees’ training intensity, skills intensity of
employees employed in production such as
engineers, professionals and technicians; Investment in licensed technology
(Evidenced in licensed designs, know how), Investment in capital embodied
technology, investment on IT, investment on equipment for innovation and report on expenditure to introduced new
products. However, Spill over is not automatic phenomenon as it occurs to a
particular group of domestic firms that do investment in technology
infrastructures and in training of human resources (Marin & Bell, 2005).This
means that limited absorptive capacity of the domestic firms in the developing
world act as a constraint of the technology transfer tunnel from FDI. This is
also emphasized by Meyer and Sinani (2009) who argued
that productivity spill overs are related to the host country level of
development in terms of level of income in the economy. This is to say when
country is very poor, it is hard for spill over to take place because catch up
potential of innovation technology is very low as absorptive capacity is
associated with the level of income which provide firms with financial
resources to acquire technology, equipments and other complementary resources,
to pay wages that match foreign investors wages and to attract and retain
skilled employees.
Institution’s
Role in MNEs Technological Spillovers
Giddens (1984) defined institutions as the more
enduring features of social life which includes conventions (regularities in
action and norms), rules, rituals, organizations and systems of organizations.
This means that institutions are applied to customs and behaviour patterns of a
society as well as formal organization of government and public services. Put
differently, Institutions consist of norms, values, laws and regulations that
formulate behaviour that governs daily interactions in the society.
Additionally, Benito and Larimo (2003) argued that institutions involve the way
the governments are shaping the conditions for developing various sectors in
the economy including education, tax and competition policies.
Meyer and Sinani
(2009) stated that institutional development of the host economy influences
national innovation system of the country; as institutions are fundamental cause
of economic development of any country (
Acemoglu et al, 2004).This is supported by Glass and Sagi (1998) who argued
that Government policies in a given county enable the upgrading of technology
through fair competition, trade and market openness, R&D policies,
regulations that provides good environment for international trade such as FDI
and development in higher education. The best example is Singapore which
emerged as new technology producer through setting good policies and
regulations that attracts FDI; another
example is China’s positive economic results due to good policies. Chinese
government policies promoted joint venture and encouraged domestic firms to
become suppliers of foreign firms as well as special economic zones that
encouraged FDI to invest in China. Moreover, Korea’s economic
development relied little on technological spillovers from FDI but depended on
setting good policies and regulations on international trade, copying, reverse
engineering, Licencing, R&D policies and higher education. This implies
that technology spill over of a country from MNEs to local firms rely on the
institutions of a given country (Glass & Sagi, 1998).
Weak Institutions as impediment of innovation technology
spillovers
World Bank (2002) stated that weak/inadequate
institutions include tangled laws, corruption and corrupt courts, biased credit
systems and elaborate business registration. Furthermore, Meyer and Sinani (2009) argued that weak institutions are
associated with inefficient market, network driven business practices and
protected niches for local firms. Weak institutions make local firms to take
advantage of business practices and fail to observe fair competition and intellectual
property rights. This results into local firms to attain illegally knowledge
that FDIs prevents from diffusing. Athreye and Cantwell, (2007) argued that property rights
and licensing are more sensitive to local institutions and governance of a
specific country; this implies that FDI and international trade flourish in the
countries with adequate institutions. Thus Meyer and
Sinani (2009) further argued that MNEs and FDI prefer going to the
countries where there is open trade regimes, free trade and fair competition.
This means therefore that enforcing adequate institutions should be prioritized
since it is a prerequisite behind innovation catch up and flourishing of international
business.
Gaps available in
the literature
Firstly, a gap in the literature
is how do human capital and institutional development affect increase in firms’
productivity. Secondly, there is a gap in the literature as to why other
countries in the emerging markets with almost the same strategies like China are
not progressing in the same pace as China despite following the same Chinese
policies such as promoting joint venture and encouraging domestic firms to
become suppliers of foreign firms. Moreover, literature seem not to address the
technology and human capital gap between domestic and foreign firms since the
larger the gap in technology between the two,
the less likely the domestic firms can gain from the foreign firms spill overs. Lastly, the literature has a gap in showing the
effects of exchange rates levels on FDI inflows.
Unit
of analysis
Unit of analysis is Government institutions,
MNEs subsidiaries,domestic firms, Higher institutions and R&D institutions.
Methodology
to takle the issue
Literature review especially
on meta analysis papers on FDI can shed
the light on FDI and its positive and negative spliovers to the developing world.Additionally, openness
to international trade generates competitive market environment and higher level of exchange between host
country firms and FDIs.
Reference
Acemoglu D., Johnson S., & Robinson
J.,(2004).Institutions as the fundamental cause of long run growth, NBER
Working paper 10481.(http://www.nber.org/papers/w.10481)
Athreye, S., & Cantwell, J.,(2007).Creating
competition? Globalization and the emergence of new technology producers.
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Benito G.R.G., & Larimo
(2003).Multinational Enterprises from small economies: Internationalizing
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Management and Organization, 32(1)57-78.
Giddens, A., (1976).New rules of
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Glass A.J.,& Saggi
K.,(1998).International technology transfer and the technology gap.Journal of
Development economic 55,369-398.
Liefner I.,Hennemann S., Xin
L.,(2006).Cooperation in the innovation process in developing
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Marin, A.,& Bell
M.,(2005).Technology spill overs from FDI: the active role of MNC subsidiaries
in Argentina in the 1990s.Journal of Development studies,42(4)678-697.
Meyer K.E & Sinani E., (2009).Where
and When does FDI generate positive spillovers. A Meta analysis. Journal of
International Business studies, 1075-1094
Piscitello L., (2003).Knowledge
transfer in cross boarder acquisitions. Knowledge transfer between firms. Paper
presented at the DRUID SUMMER CONFERENCE, Copenhagen, Denmark
World Bank (2002).World
Development report 2002: Building Institutions for markets, Oxford, Oxford
University Press.
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