International Technology Transfer Case Study

1. International Technology Transfer Case Study Dec. 15 2008

2. Definition and Channels • International technology transfer (ITT) is a comprehensive term covering mechanisms for shifting information across borders and its effective diffusion into recipient economies. • it refers to numerous complex processes, ranging from innovation and international marketing of technology to its absorption and imitation. Included in these processes are technology, trade, and investment policies that can affect the terms of access to knowledge. • Channels • One major channel is trade in goods, especially capital goods and technological inputs. • A second is foreign direct investment (FDI) • A third is technology licensing • non-market channels of ITT: the process of imitation through product inspection, reverse engineering • temporary migration of students, scientists, and managerial and technical personnel

3. Policies impacting ITT • Host country policies • Absorption of ITT and its translation into greater competition depend on having an adequate supply of engineering and management skills. • Backward spillovers from ITT appear to be strongest in countries where multinational firms are capable of working with competitive suppliers in order to increase their productivity and standards. Reducing entry barriers in supplier industries can assist ITT. • Important factors include, among others, an effective infrastructure, transparency and stability in government, and a reasonably open trade and investment regime. • Governments may reduce the "technological distance" between their firms and foreign firms in order to encourage ITT. • attention should be paid to selecting IP standards that recognize the rights of inventors but encourage dynamic competition.

4. Policies (cont) • Source country policies • Governments in developed countries could increase their technical and financial assistance for improving the ability of poor countries to absorb technology and trade. • Governments could agree to offer identical fiscal benefits to firms transferring technologies to developing countries as to developing home regions. • Developed countries could offer the same tax advantages for R&D performed abroad as for R&D done at home. • Governments could ensure that tax deductions are available for contributions of technology to non-profit entities engaged in ITT. • Fiscal incentives could be offered to encourage enterprises to employ, at least • temporarily, recent scientific and engineering and management graduates from developing countries. • Universities could be encouraged to recruit and train students from LDCs in science, technology, and management.

5. Case: Auto Industry in Chinese Economy • 1.6 million Chinese were directly employed by this industry as of 2003 (not counting the employees of industries that supply the auto industry (i.e. steel, rubber), which are estimated at approximately 36.4 million workers). Auto industry is 3 percent of total manufacturing employment. • The value added by the Chinese auto industry represented 6.3% of the total value added of manufacturing in China in 2003, a tripling of this percentage from its level in 1990 (CATARC 2004).

6. History of Chinese Auto Industry • Little to no manufacturing experience prior to WWII • Tech transfer from Soviets before Sino-Soviet split in 1960 • After Cultural Revolution, no technological capabilities in this sector • Decision to “make or buy” – forced to buy because of weak technological capabilities • Formation of many joint ventures with foreign firms and licensing of technology from them as well, but without formal industrial policy • 1994 Auto Industry Policy – intention to create national industry • Consolidation of industry, but currently 118 manufacturers; all the major ones have formed joint ventures with foreign auto companies • Joining WTO in 2001 effectively reversed many previous policies, but increased competition • 2004 Auto Industry Policy – auto industry as “pillar” industry; create better technological capabilities and consolidate industry

7. Chinese Automakers • Currently 116 automakers in China • Vast majority of output comes from the firms that have formed joint ventures with foreign companies (quasi-exceptions are Chery and Geely) • High profitability • Skills in manufacturing, parts and components, and business development • Weak design and innovation capabilities, especially for advanced engines and system integration

8. Terms of WTO for Chinese Auto Industry • Import tariffs for complete vehicles are to be reduced from the current 80 to 100 percent to 25 percent by July 1, 2006 • Import tariffs for parts and components are to be reduced from 35 percent to 10 percent by the same date • Import quotas on vehicles will be decreased 15 percent per year until they are cancelled in 2005 • Import licenses will also be phased out by 2005. • Majority ownership limits on foreign manufacturers for engines will also be eliminated • Also, provincial governments will be given the authority to approve foreign direct investment projects up to $150 million by 2005 (used to be $30 million) • All of the Chinese government’s requirements regarding technology transfer, maintaining a foreign exchange balance, maintaining a trade balance, and meeting localization standards were eliminated upon China’s entry to the WTO in 2001.

9. 2004 Auto Industry Policy • 10-year update to 1994 policy • Emphasizes need for consolidation of industry (i.e. FAW-Tianjin-Toyota) • Urges more capacity-building and innovation • First articulation of concern about environment and oil imports • More emphasis on (and incentives for) exports

10. 11th 5-Year Plan for Auto Industry • 依托现有基础加快产业自主发展。 • Speed up autonomous development based on the current conditions (Chinese branding) • 依靠技术进步推动产业可持续发展。 • Promote sustainable development by using advanced technologies • 利用市场机制促进产业结构优化升级。 • Optimize and upgrade the industrial structure using market mechanisms

11. Background Data

12. Comparisons

14. Production Mix is Changing Source: CATARC, 2006

15. Vehicles Per Capita

16. Historical

17. BP Statistical Review of World Energy, 2004

18. The Sino-U.S. Joint Ventures

19. Foreign Investment in China’s Auto Industry: A Complicated Network VW Shenyang Brilliance Honda First Auto Works Shanghai Auto Industry Corp. Ford General Motors BMW Guangzhou Auto Works Chang’An Chery Nissan Toyota Suzuki Beijing Auto Industry Holding Co. Kia Dongfeng Auto Works (former SAW) Tianjin Auto Works ? Hyundai DaimlerChrysler Geely Citroen

20. Comparative Analysis

21. Seven Main Findings • U.S. FDI did not substantially contribute to improving Chinese vehicle technological capabilities because little knowledge was transferred along with the product. • Chinese government failed to design and implement an aggressive, consistent strategy for the acquisition of technological capabilities from foreigners in the automobile industry. • U.S. companies in JV’s are purely profit-motivated – Chinese also seek profits in short term, but most want skills for long term.

22. Findings (cont.) • Chinese firms have acquired good manufacturing skills and also acquired some product adaptation capabilities. Parts suppliers appear to have more advanced capabilities due to local content requirements. • Technologies that were transferred by U.S. firms in the period studied were rarely, if ever, updated once a model was in production, with the emerging exception of SGM. This is now changing due to competitiveness. • Even though technology transfer was purely product, the FDI has contributed to the growth of the industry, which has benefited the Chinese economy in terms of jobs and spillovers. • U.S. firms did not transfer pollution-control technology until required to do so by the Chinese government.