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The anatomy of technology transfer

A general definition of technology transfer is the movement of technology into new contexts.²⁰ And by technology we mean the stock of knowledge required for the operation of the various components of the techno-system. In techno-system terms, technology refers principally to the information subsystem (see figure 1). When viewed in the techno-system framework, the relevance of the economic, political, and socio-cultural factors in technology transfer become quite explicit. The information subsystem is physically manifested in the living minds of the social carriers of technology and various storage media. This concept is useful in clarifying the notion of the absorptive capacity of a country for technology transfer. Figure 1 also shows the linkages of the information subsystem to the training and R&D subsystems. This idea enables one to understand the two broad categories of technology transfer: the transfer of commercial assets and the transfer of noncommercial assets. The transfer of non-commercial assets, which are knowledge in the public domain, usually involves the training and the R&D subsystems, and is therefore only indirectly relevant to the production activities. Most technical assistance agreements are transfers of non-commercial assets.

When the term technology transfer was first used, the meaning was restricted to the transformation of the results of R&D in the basic sciences into commercial technologies. In current usage this movement of knowledge is now called vertical technology transfer. However, technology transfer is now universally used to mean the movement of technology from one country to another, which is also called horizontal technology transfer.

Technology transfer is not a new phenomenon. Technology diffusion is a natural process. Skills and techniques are transferred from one culture to another as a result of contacts through commerce and conquest. In the past -that is, before the colonial period - the prevailing direction of technology transfer was often from East to West. Today, most of the debate in technology transfer centres on the North-South technology transfer. It must be kept in mind, however, that technology transfer between industrialized countries is of a greater magnitude.¹² The main sources of technologies at present are the US, UK, Federal Republic of Germany, and Japan. The main channels used are the transnational corporations (TNCs) which account for 80-90 per cent of technology transfers.

Technology is often transferred informally through personal contacts, readings of the literature, and professional meetings. In the techno-system framework, these could be viewed as inputs to the training and R&D subsystems and hence as not immediately crucial in productive activities.

The various formal mechanisms used in technology transfer are shown in figure 16. Direct forms of transfer include the direct purchase of capital goods and equipment, the training of nationals in specific technologies, and the hiring of foreign experts and consulting firms. The indirect mechanisms consist of the establishment of wholly owned subsidiaries of foreign companies, turnkey construction of plants and facilities, joint ventures with local companies, and variations on these dominant forms depending on the industry, national policies, and the policies of the technology suppliers. There are no established rules for obtaining the best terms. In the final analysis, technology transfer is the result of a negotiation process. The most crucial element is the ability to bargain in order to get the best terms, including the assurance that technology will really be transferred.

Fig. 16. The anatomy of technology transfer

The developing countries must contend with the stark reality of the modern world: that the most critical resource for development - the technology of production - is controlled by a few TNCs. For example, the TNCs control over 60 per cent of the world's petrochemicals.²² Only these few large enterprises have the necessary organization, resources, and expertise to undertake the expense and risks of modern R&D for commercially competitive products. The production technologies of the TNCs are internationally tested and commercially viable. They have worldwide marketing networks.

The historical origin of the dominance of the global technology "industry" by the TNCs is traceable to the head start in empirical science by a few countries. Of the 110 significant innovations identified by the OECD in the twentieth century, 60 per cent originated from the US, 14 per cent from the UK and 11 per cent from Germany.²³

An important aspect of technology transfer is its rapid growth in the developing countries of Asia. This is shown in table 22. Between 1972 and 1981 technology imports in the Philippines increased fourfold. In terms of technology payments for royalties and fees, the increase was sixfold. For Thailand, the increase was more than eightfold. It is important to note that even technologically advanced Japan increased its import of technology by threefold in the decade 1972-1981. Although Japan is an exporter of technology, it was still a net importer as of 1981. It should also be mentioned that there is technology transfer between developing countries; the supply of capital goods and consultancies are the prevailing mechanisms. Moreover, there is a growing number of third-world TNCs.

The experiences of Japan and the newly industrializing countries of Asia suggest that technology transfer is an essential ingredient of industrialization. The fact that modern technology is controlled by a few firms from a few countries exposes the developing countries to the dangers of monopolistic pricing, technological dependence, and inappropriate technology.

Because of the fact that technological development will certainly affect the distribution of wealth and power locally and internationally, technology transfer has a political economy dimension. In many countries, the import of technology has been associated with the emergence of a dualistic economy. One of the common features of the third world is the existence of a modern, urban, and affluent sector amidst a traditional, rural, and poor countryside. The situation is that of a micro first-world enclave. This is the inevitable result of introducing capital-intensive industries into an environment of unemployment and poverty with a feudal political economy. Unrestricted and unplanned technology transfer accentuates and perpetuates the worst features of the third world. It is not surprising, therefore, to expect that attempts to control the terms of technology transfer will be resisted by local and international vested interests.

It is quite plausible to assume that technology transfer can be a potent instrument to advance the foreign policy interests of a developed country. There are instances in which exports of high-technology products to the socialist block countries have been prohibited. On the other hand, the liberal technology transfer to strategically significant countries like the Republic of Korea and Turkey suggests that forces other than commercial considerations are at work. In the process of technology transfer negotiations, the developing countries would do well to take these implicit factors into account in calculating the trade-offs. One of the imminent dangers of technology transfer is the perpetuation of technological dependence. Unless safeguards are deliberately sought by governments, the alliance between vested interests in the importing and exporting countries will constitute a powerful combination that will continue to defend and promote the existing political economy of technological dependence. The terms of technology transfers may contain restrictive provisions which could negate the attempts of developing countries to achieve S&T self-reliance and technological mastery. The following is a summary of the onerous terms that technology transfers may involve.

Table 22. Payments for transfer of technology: selected ESCAP member countries, 1972-1981 ($US millions)

Sources: Japan: Science and Technology Bureau, Report on Annual Introduction of Foreign Technology, Tokyo, 1981 (in Japanese) India: Government of India, Foreign Investment Board; Republic of Korea: Government of the Republic of Korea, Technology Transfer Centre; Philippines: Central Bank of the Philippines; Thailand: Bank of Thailand.

1. The cost of technology transfer. This could be very high in monopolistic situations and where the technology is transferred in completely packaged form, as in turnkey contracts. In some cases this is accomplished through the manipulation of payments in many joint venture agreements. The favourite techniques are the overinvoicing of imports and the underinvoicing of exports.

2. Tied inputs. In many countries with low technological capacity, the contracts for technology transfer often contain provisions for the exclusive supply of machinery, equipment, spare parts, and other inputs.

3. Unreasonable government guarantees. Some exporters of technology demand guarantees against changes in taxes, tariffs, and currency exchange rates. Others ask for guaranteed remittances and royalties.

4. Limited learning effects. Some technology transfer arrangements are self-defeating because of the excessive use of expensive expatriate expertise when either such expertise is locally available or local people could be easily trained to the desired level of competence. Some contracts even call for the discouragement of local technological effort in the same field as the imported technology.

5. Limits on competing technologies. This is usually accomplished by imposing terms limiting the imports of similar technologies, or through provisions of exclusive access to local resources.

It is safe to presume that it was only during the Spanish colonization that significant technology transfer occurred in the Philippines. The principal technologies brought in by the Spaniards were those relating to construction and plantation agriculture, mainly sugar, coconut, tobacco, and hemp. The relevant manufacturing technologies that were introduced were those concerning the processing of the major crops: the milling and processing of copra and the manufacture of cigars, cigarettes, and ropes. Since this took place before the era of the commercialization of technology, needless to say, the transfers were accomplished through informal channels and by direct investments.

The technology transfer process in the early years of Philippine industrialization is exemplified by the sugar industry and the role of the Roxas family. The family dates back to the mid-eighteenth century when Juan Pablo de Roxas came to the Philippines from Acapulco. His grandson Domingo Roxas started the family's sugar business by employing a Frenchman named Gaston to experiment with sugar-cane cultivation in Batangas. While the cultivation of sugar started much earlier, the first sugar mill was constructed in 1912. Presumably, machinery and expertise were imported from Europe with gradual local adaptations. By 1930, the Roxas sugar mill had grown into a milling complex. The total Spanish investment in sugar had grown to over $20 million before the war.²⁴

The history of the San Miguel Corporation, the Philippines' largest manufacturing company, typifies the transition from informal technology transfer to the more formal, indirect mechanism of licensing agreement. The enterprise started manufacturing beer in 1880 by importing expertise from Europe, and thrived in spite of the open access of the American company, which established an office in Manila to oversee the management.

The licensing agreement has been the principle mode of technology transfer in the manufacturing of electric appliances, pharmaceuticals, transport equipment, batteries, and paints. Up to the present, all are heavily dependent on foreign technology and use foreign brands. Even in cases where local brands are used, there is a heavy dependence on foreign technology.

During the era of unregulated technology transfer in the Philippines, the dominant mechanisms used to transfer technology in support of the industrialization programme were direct investment in majority-owned subsidiaries and licensing agreements in the use of manufacturing know-how, patents, and trademarks. It has been estimated that foreign investment in the Philippines was $100 million in 1914, $300 million in 1930, $315 million in 1935 and $240 million just before the outbreak of the war.²⁵ Table 23 shows the breakdown of ownership of domestic and foreign enterprises in the Philippines based on the first 250 largest manufacturing corporations. This table clearly shows the foreign dominance in the more modern sectors of the industry such as petroleum, chemicals, machinery, and transport equipment. Domestic companies are more active in the traditional sectors like tobacco, textiles, and beverages.

Table 23. Foreign ownership of Filipino corporations

Source: Yoshihara, 1985.

The first earnest attempt to regulate technology transfer began in 1967 with the creation of the Board of Investments (BOI) under Republic Act 5186. However, under this regulatory regime the effort was concentrated on the discrimination between pioneer and non-pioneer industries. Pioneer projects were granted liberal incentives by the government, and could be 100 per cent owned by foreigners; non-pioneer projects could only be owned by Filipinos. Projects registered with the BOI could bring into the country any number of foreign technicians.

In a study made in 1970 on foreign collaboration agreements,²⁶ it was found that almost 50 per cent of the sample agreements contained onerous and restrictive clauses which were unfavourable to the country. Provisions on royalties and technology were vague and nonexistent, which raised the suspicion that payments were being made in other forms to evade existing foreign currency regulations. This suspicion was reinforced by the fact that most agreements were between parent companies and their subsidiaries. The initial official response to this problem was a circular by the Monetary Board which limited payments of royalties to not more than 5 per cent of net sales and for not more than five years (Monetary Board Circular 393, 1973). Like most regulations promulgated under martial law, the circular provided loopholes under the guise of "exemptions" based on the "merits" of the project.

After a review of the performance of the technology transfer regulations based on the 1967 Investment Act and the Monetary Board Circular, the necessity for the creation of an institution specializing in the field was recognized by both government and industry. Thus, a Technology Transfer Board (TTB) was created under Presidential Decree 1520, which took effect in 1978. The TTB requires a prior evaluation of all technology transfer agreements before project implementation.

Rule V of the implementing rules and regulations for P.D. 1520 conveys the principal concerns of the current technology transfer regulation. This is reproduced below.

Rule V. Policy Guidelines for Evaluation

Section 1. In evaluating agreements, the Board shall be guided by policy guidelines which shall include:

(a) Appropriateness and need for the technology/industrial property right;

(b) Reasonableness of the technology payment in relation to the value of the technology to the technology recipient and the national economy as well. For this purpose, the rate of payment for contracts involving manufacturing or processing technology shall not go beyond the rate that will be established by the Board for the specific technology or industrial right to be transferred;

(c) Restrictive business clauses shall not be allowed in any agreement; specifically, the following clauses shall be prohibited:

1. Those which restrict the use of technology supplied after the expiry of the agreement (without prejudice to the application of the Philippine Patent Law).

2. Those which require payments for patents and other industrial property rights after their expiration, termination or invalidation.

3. Those which restrict the technology recipient from access to continued improvements in techniques and processes related to the technology involved during the period of the agreement even if the technology recipient is willing to make additional payments thereon.

4. Those which provide patentable improvements made by the technology recipient shall be patented in the name of the technology supplier and required to be exclusively assigned to the technology supplier; or required to be communicated to the technology supplier for its use, free of charge.

5. Those which require the technology recipient not to contest the validity of any of the patents of the technology supplier.

6. Those which restrict a non-exclusive technology recipient from obtaining patented or unpatented technology from other technology suppliers with regard to the sale or manufacture of competing products.

7. Those which require the technology recipient to purchase its raw materials, components and equipment from the technology supplier or a person designated by him (except where it could be proven that the selling price is based on international market prices or the same price that the supplier charges third parties and there are no cheaper sources of supply).

8. Those which restrict directly or indirectly the export of the products manufactured by the technology recipient under the agreement.

9. Those which limit the scope, volume of production or the sale or resale prices of the products manufactured by the technology recipient.

10. Those which limit the research activities of the technology recipient to improve the technology.

(d) The agreement shall provide that the law of the Philippines shall govern the interpretation of the contract.

(e) The agreement shall provide for a fixed term not exceeding five (5) years and shall not contain an automatic renewal clause in order to ensure adequate adaptation and absorption of technology.

Section 2. Exceptional cases. In cases where substantial benefits will accrue to the economy, such as in export-oriented ventures, labor-intensive industries, those that would promote regional dispersal of industries or which involve substantial use of raw materials, exemption from any of the above requirements may be allowed when feasible under such guidelines to be determined by the Board.

As usual, the rules and regulations contained have a deliberate loophole in section 2. There is no information available from TTB on how many applications took advantage of this provision.

After the first year of implementation, the TTB processed some 151 applications for technology transfer. Tables 24, 25, 26, 27, and 28 summarize the review by the TTB staff of the first year of operation. From these tables the following observations may be made:

1. The US is the dominant collaborator, with Japan a poor second, and the UK a very poor third. However, the US dominance has been declining. Agreements with the US constituted 67 per cent in 1970, 50 per cent in 1974, and only 46 per cent in 1980. On the other hand, Japan's role increased from 7 per cent in 1970 to 21 per cent in 1980.

2. Most of the agreements are with minority foreign capital companies
(13 per cent), followed by technical agreements with domestic companies (34 per cent) and majority-owned subsidiaries (23 per cent).

3. Licences in electrical supplies and appliances have the biggest share of agreements, with the US and Japan contributing equally. This is followed by metal products and pharmaceuticals, which came mainly from the US. However, the transportation equipment sector is dominated by Japan, with the US as a poor second.

4. The relatively high technology areas of industrial chemicals and data processing are exclusively for the US.

5. The biggest share of the agreements (69 per cent) from table 27 involves trademarks which are mostly American and Japanese.

Table 24. National classification of agreements by type of company, 1978-1979

Source: Bautista, 1980.

Table 25. National classification of licensor by products^a

Source: Bautista, 1980.
a. Some contracts have several product classifications included in the same contract.

Table 26. Classification of agreements by industry

Table 27. Classification of agreements by type of assets transferred

Source: Bautista, 1980.

These empirical observations further confirm the results of the previous historical analysis concerning the colonial origins of the country's technological dependence. The domination of technology transfer by the US and the prevalence of trademark agreements continue to cater to the Filipino taste for American brands (Japanese brands are now also making headway in the Philippine market). This, of course, de presses the demand for local products and so inhibits the growth of local technology. The increasing trend for purely know-how transfers and the emergence of Japan as a supplier of technology will some

Table 28. Classification of agreements by type of assets transferred against country of origin

Source: Bautista, 1980. how dilute the historic American bias of Philippine manufacturing industries.

The industry-type classification of agreements (table 26) supports the qualitative assessment of Filipino technological capabilities represented in table 16. Moreover, the necessity for agreements in electrical equipment, which is a second-wave technology, and the absence of agreements on third-wave or high technologies further reinforce this assessment.

In their self-evaluation of the performance of the TTB, the only indicators used were the savings in foreign exchange and employment generation.

From all the available reports of the TTB, there is no information on how the contribution of technology transfer to local technological capabilities is determined. Since this is the very essence of technology transfer, it is a very significant shortcoming of the country's technology transfer regulations. Presumably, this is the responsibility of the NSTA (now called Department of Science and Technology).

The development of technological capability is a complex process. Here we can use the ideas of the stages of technological capability as a guide in determining the learning effects of a technology transfer agreement. An essential element, however, is "learning by doing." The agreements must contain an assurance that local technologists are given "hands-on" experience. In order to reach the creative stage, it has been suggested²⁷ that what is needed is an integrated technology transfer where know-how is blended with learning-to-know. In other words, to move forward technologically the seed must be planted, and the possibility of reaching the innovative and creative levels must not be foreclosed in any technology transfer agreement.

When a technology is transferred in a completely packaged form, as in turnkey contracts, the learning effects are minimal, and the development of each stage of technological capability will be delayed. Yet, in spite of this well-known fact, the TTB does not explicitly prohibit pure turnkey contracts.

A monitoring scheme for the purpose of determining whether technology is really transferred or transferred in the right way should be a first priority of the TTB. At the outset the details of the learning process must be spelled out clearly in the technology transfer agreements.

Conceptually and operationally, the determination of the existence of the conditions for a particular technology transfer agreement is a very difficult one. Considering the meagre resources of the TTB, it seems unlikely that this process is undertaken properly. Neither the

NSTA nor the Technology Resource Center, which are members of the TTB, has the necessary expertise to make an enlightened choice among the bewildering number of alternative technologies and sources. This calls for high expertise which may not be available locally. It has often been pointed out that the fundamental problem of many developing countries in this respect is one of making autonomous decisions on types, sources, and degrees of packaging of technologies. The American dominance in technology transfer in the Philippines strongly suggests that long-standing contracts and familiarity are the primary factors in the choice of technology.

Each type of technology is associated with a set of characteristics: the required inputs, the scale of production, the required supporting infrastructures, the income levels of the potential consumers, and the required skills. Those responsible for technology transfer must make sure that the transferred technology fits into existing and profitable techno-systems. In other words, the technology must be appropriate. Although the determination of appropriateness is in the rules of the TTB, the implementation is not clearly spelled out in the available records.

The usual notions associated with appropriate technology are labour intensiveness, small scale, the use of local materials, and products for low-income consumers. However, if the national objective is technological development, then it is clear that technologies promoting self-reliance and technological mastery are appropriate.

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