Transfer of Technology to Developing Countries

Dr Surendra J. Patel, who passed away in Geneva on December 15, 2006, was indeed one of the most brilliant minds of the twentieth century. At a time when the so-called ‘globalisers’ are in full control of the international economic system, it is necessary to highlight the central message he conveyed in his Technological Transformation and Development in the South (co-edited by Professors Krishna Ahooja-Patel and Henry Voltmoyer), as spelt out in the Foreword of the book by Prof. Krishna Ahooja-Patel, his wife and Director of the Institute on Equity of Development, Gujarat Vidyapeeth, Ahmedabad, that “technological transfer should not respond to the private interest of a few transnational corporations that dominate the world economy but rather advance the need, and support the drive, by the South for development†. While offering our homage to Dr Patel’s abiding memory (he was close to the Mainstream family having been a friend and associate of N.C. for long years), and conveying our heartfelt condolences to the bereaved family, notably his wife and three sons, we are reproducing the following article he wrote for Mainstream Annual 1972. - Editor

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1. Main Features of Transfer Process

Most of the technological and social innovations originated up to the Industrial Revolution in countries now called “developing†. Medieval Europe was the recipient of this knowledge. Its technological superiority is thus very recent in origin. Only a few centuries ago the flow of technology was the other way around.

The technological gap between the rich and the poor countries lies at the root of the economic distance between these two areas. It, however, offers a certain advantage to the acceleration of the rate of economic and social growth of the “late-comer†to development. Its origin lies in the accumulation of technological knowledge in the advanced countries. In the growth of such knowledge, no single nation or race has remained pioneer for long. An important feature of this transnational and cumulative stock of world technological knowledge is its relatively easy transmissibility—across geographical and cultural frontiers—in comparison with the skills used in pastoral operations, peasant agriculture and handicrafts. And the use of such knowledge anywhere else does not in any way diminish its supply to its originator or to others.

As pointed out by Lord Snow in his The Two Cultures: and a Second Look, the improvement in the level of living in the developing countries does not require any major new scientific discoveries. The accumulated knowledge is sufficient to accomplish this task. What is needed is to ensure its transfer to the needy.

In the nineteenth century such transfer played an important role in the spread of development of countries in the West. Each new nation embarking upon industrialisation, bought, borrowed or stole the technical knowledge accumulated in the country which industrialised earlier. Industrial espionage was the most carefully cultivated external activity—often surpassing military espionage—of these countries.

As a result of such transfer, there has been a progressive rise in the growth rate of per capita output as industrialisation spread from one country to another. From 1.2 per cent for England—the pioneer of Industrial Revolution—the per capita growth rate increased progressively to 1.4 to 1.8 per cent for France, Germany, Denmark, Switserland, the United States and Canada; to 2.1 to 2.8 per cent for Norway, Sweden, Japan; and to at least four per cent for the Soviet Union. Learning from other people’s experience has thus formed the basis of the widely recognised “advantage to the late-comers†in economic development.

Those who are impatient with the slowness of the developing countries in assimilating new techniques may well recall how incomparably much slower was the process in Medieval Europe. Only two instances may suffice: the use of Arabic (in origin Indian) numerals, banned during the twelfth century in all respectable centres of learning, including the famous University of Padua, took nearly three centuries for their acceptance; and even the enlightened Protestant ethic took two centuries to adopt the Gregorian (solar) calendar simply because a Catholic Pope had given his benediction to it.

Moreover, the seal of private property has now been put over technical knowledge. Its owners—whether individuals or enterprises—guard its secrecy as the most highly prised possession. Its transfer is thus severely limited.
The transfer of technology is thus neither free nor automatic. And the market mechanism through which this transfer usually takes place is highly inadequate. These weaknesses may be briefly summarised here.

In the first place, the market for technological knowledge by its very nature is even more imperfect than that for commodities. This makes it extremely difficult to fix a real price for the technological information. Secondly, the enterprises in the developing countries do not even have the basic information needed for looking for a new production technology and the details of its operation. Moreover, in such an imperfect market, the enterprises in the developed countries keep the information on production process a closely guarded secret. Finally, there is a greater difficulty in the decisions to import technology than in other decisions to draw a balance between private and social costs and benefits.

These inadequacies of the market mechanism are compounded by the fact that developing countries are only receivers of technology. In this one-way exchange, the weaknesses of the market mechanism are accentuated rather than being partially cancelled out, as they might be, if the exchange were in both directions.

There is thus neither a world market, nor world exchange nor world prices for technology. In it, the developing countries are like tourists buying souvenirs in foreign lands. In the international exchange of technology, the developing countries are thus inherently in the position of unequal partners. Hence the importance of deliberate action at the national, regional and international levels for strengthening their bargaining capacity.
These issues have formed the background of the growing concern of the developing countries with the problems of transfer of technology. Throughout the sixties they have therefore attempted to have these problems discussed at various international forums in the hope of finding suitable solutions. During the sixties, they have moved from an early concern with patents to the broad stream of the transfer of technology as a whole.

2. Foreign Exchange Costs of Transfer of Technology

Transfer of technology is a rather new subject for national and international attention. Understandably, therefore, there is a lack of agreed definitions and of reliable information. All empirical data on this subject have therefore to be taken with a very large grain of salt.

The developing countries pay for the transfer of technology in several ways: direct, indirect, and for want of a better title, “not yet perceived†ways.
The direct costs consist of the payments for the right to use patents licences, process know-how and trade marks and for technical services needed at all levels from the pre-investment phase to the full operation of the enterprise. These are called direct costs because in most contractual arrangements they are specifically designated as payments for technology.
The direct costs, however, have to be treated only as the tip of the iceberg. The hidden portion, or the indirect cost, forms a much larger part of the total. The indirect costs are paid for in various ways. Chief amongst them are payments through over-pricing of imports of intermediate products and equipment (“price mark-ups†); profits on capitalisation of know-how; a portion of repatriated profits of the wholly-owned subsidiaries or joint ventures; price mark-up for technology, included in the cost of imported capital goods and equipment.

In a study prepared for the Third Conference, the UNCTAD Secretariat estimated the order of magnitude for direct costs for 15 countries (Argentina, Brasil, Chile, Colombia, Mexico and Venesuela in Latin America; Ceylon, India, Indonesia, Israel, Republic of Korea and Pakistan from Asia; and Nigeria from Africa). On certain assumptions these estimates have been extended to cover all the developing countries. According to them, the direct foreign exchange costs for transfer to technology amounted to a conservative estimate of 500 million dollars around 1968—or equal to over one-half of one per cent of the combined gross domestic product of all developing countries.

The full significance of these direct costs may be more readily appreciated when the amount is compared with some other magnitudes. It was equal to five per cent of the exports of developing countries (excluding major oil exporters); two-fifths of their debt-servicing costs; nearly three-fifths of the flow of direct private foreign investment (including reinvested earnings); and some two-and-one-half times the expenditure by all developing countries on domestic research and development.

Experience of six countries (Argentina, Ceylon, India, Republic of Korea, Mexico and Nigeria) suggests that the direct costs have been growing at some 20 per cent per year. They seem to be the most dynamic sector of these economies. At that rate, they could rise six-fold in a decade—from 1500 million dollars in 1968 to over 9000 million dollars by the end of the seventies. The latter sum is equal to some 30 per cent of the current exports of all developing countries (excluding the major oil exporters).

Systematic evidence on indirect costs is rather spotty. The studies by Mr C. Vaitsos suggest that price mark-ups of products imported by foreign-owned enterprises in the pharmaceutical industry alone in Colombia was higher than all the direct payments for the transfer of technology in the whole economy of Colombia. This estimate of only one of several forms of indirect costs may serve as an illustration of how large the hidden part of the iceberg is likely to be.

Beyond the direct and indirect costs, there are other “not yet perceived†—but qualitatively of major significance for national policies—real costs, or benefits foregone, of the transfer. They result from transfer of wrong or inappropriate technology, or from inadequate or delayed transfer, or from the “non-transfer†of technology, or the long-term influence of imported technology on deflecting national policy away from a sound development of national technical capabilities.

3. Third UNCTAD and Transfer of Technology

In view of its importance, the transfer of technology has come to be regarded as the third pillar of UNCTAD. The mandate for work on trade and “aid†—the other two pillars—was given in 1964; to them was added in 1970-71 “transfer†as the third pillar.

The subject was discussed as a major item at the third UNCTAD held in Santiago in April-May 1972. The results of this Conference have been reported as “highly disappointing†in world press. This would seem to apply to problems of trade and “aid†, the two areas which have been of central concern to UNCTAD since its foundation in 1964.

The results of the third Conference in the field of transfer of technology could, however, be considered as “a decisive breakthrough†. The unanimously agreed resolution on “Transfer of Technology†(resolution 39 III) represented “a considerable broadening†of UNCTAD’s mandate. It can serve as a “Charter†for improving the access of developing countries to technology. It marks a major step forward in the work on transfer of technology now underway at the national, regional and international levels. It may be helpful if its principal directives are discussed in some detail.

The Conference invited, in paragraph 3 of its resolution, the developing countries to establish institutions for the specific purpose of dealing with the whole range of questions connected with transfer of technology, which could have as their functions, among others,
(i) be responsible for the registration, deposit, review and approval of agreements involving transfer of technology in the public and private sectors;
(ii) undertake or assist in the evaluation, negotiation or renegotiation of contracts involving the transfer of technology;
(iii) assist domestic enterprises in finding alternative potential suppliers of technology in accordance with the priorities of national development planning;
(iv) make arrangements for training of personnel to man institutions concerned with the transfer of technology.

UNCTAD is now required to provide advisory services to the developing countries in the negotiation of transfer of technology agreements. It is also called upon to initiate and participate in training programmes concerning the transfer of technology for personnel from developing countries.

The Conference addressed a series of major recommendations to the developed market economy countries, to the socialist countries of Eastern Europe and to the international community to take measures towards improving the access of the developing countries to technology.

The proposals made by the developing countries in the Lima Declaration also found their reflection in the third Conference resolution. In particular the whole of part III of the resolution dealing with the improvement of scientific and technological infrastructure in the developing countries takes detailed account of the proposals made in the Lima Declaration; and several of the paragraphs in part II of the resolution, especially paragraphs 4, 5, 11 and 12, also to incorporate the Lima proposals.

The resolution is also important because it elucidates ideas which had not been expressed in any detail prior to the Conference. In particular, paragraphs 9 and 10 of that resolution are of great significance. Paragraph 9 requests the Secretary-General of UNCTAD and the Director-General of World Intellectual Property Organisation (WIPO) to carry out jointly a study of possible bases for new international legislation regulating the transfer from developed to developing countries of patented and non-patented technology, including related commercial and legal aspects of such transfer. An agreement among governments for such international legislation would obviously have to be preceded by painstaking preparations. All these would take quite some time. But its successful accomplishment would indeed represent a major step forward.

UNCTAD, in cooperation with other bodies, is also asked to bring uptodate an earlier study on the Role of Patents in the Transfer of Technology to Developing Countries and to devote special consideration to providing a better understanding of this role in the context of future revision of the patent system.

With such a strong and wide-ranging mandate given by the third Conference, the stage is now clearly set for developing action-oriented proposals for improving the access of the developing countries to sharing in the accumulated treasure-house of world technology.