FDI transfers may be intra-firm or inter-firm.FDI, thus, may improve efficiency of the host country firms by direct investment and also through spilled over benefits (through observing, copying and applying technologies). The development of China is entirely due to FDI.
Many of the newly industrialised countries such as South Korea, Taiwan, Singapore, Malaysia and China are also involved in outward FDI, showing a successful build-up of their technological capabilities. Recently, many MNCs have decided to relocate their R&D activities outside their home country bases, thus helping in enhancement of the overall innovative capacity of the parent company.
2. Licensing Technology:
The mode of technology transfer through licensing is older than the FDI. Prior to liberalisation this was a very popular mode. But now almost all states are eager to welcome FDI. Under licensing arrangement a patent holder allows a foreign company to produce the product in return of royalty.
Licensing may be inward (using the technology for a fee) and outward (sharing patents for a royalty. It may be an assignment (all rights in relation to a particular patent handed over to transferee) or sole licence (rights retained by the licensor but licences not to be extended to third parties). Licensing is better suited where host country restricts imports. Licensing allows the licensor to take an ownership interest in the foreign operation.
The patents remain the property of the licensor. Licensing gives licensee access to the technologies developed and to the licensor an assurance that licensee will probably not become a fierce competitor in future. Licensing provides licensor an opportunity to exploit the technology as much as possible before it becomes obsolete.
Licensing can be a means for testing and developing a product in a foreign market as a precursor to FDI. However, if the licensor does not maintain the licensor’s standards, the licensor’s global reputation gets damaged. Some countries put conditions while granting approval.
3. Joint Venture and Strategic Alliances:
Innovation through collaboration is in currency among firms in advanced countries and also between developed and developing countries. Alliances should not be formed to correct a weakness of one of the partners or a weakness of both the partners. Proprietary technology should never be licensed in strategic alliances.
Alliances need to be formed when one or both the parties have a unique strength. The most commonly identified reasons for an alliance are exploitation of complementary technology need to reduce the time taken for an innovation, and access to markets. One of the most experienced companies with technological alliances is Toshiba (a major Japanese electronics company).
Its first alliance was with General Electric Company (GE) (making light bulb filament for GE) at the beginning of 2oth century. Since then it has engaged in alliances with United Technologies, apple Computer, Sun Microsystems, Motorola and National Semiconductor, carrier (all from the US), Olivetti, Siemens, Rhone-Poulen, Ericsson, and S G Thomson (all from Europe).
4. International Trade:
Import of machinery and equipment and the product may provide an alternative to assimilate the technology. What was an issue in Japan – sharing technology – comes under this category only. Through reverse engineering Japan got the technology and became a techno leader.
A Chinese company (SAIC Chery), the local partner of General Motors, through reverse engineering of GM owned Daewoo’s Matiz car have offered their own brand QQ for 30% less than the Matiz. Sony had bought transistor technology from Bell Laboratories at a price of $25,000, and today Sony is the world leader with no radio manufacturers in the US.