Trade, foreign direct investment, and international technology transfer : a survey

The author surveys the literature on trade and foreign direct investment--especially wholly-owned subsidiaries of multinational firms and international joint ventures--as channels for technology transfer. He also discusses licensing and other arm's length channels of technology transfer. He concludes: 1) How trade encourages growth depends on whether knowledge spillover is national or international. Spillover is more likely to be national for developing countries than for industrial countries. 2) Local policy often makes pureforeign direct investment infeasible, so foreign firms choose licensing or joint ventures. The jury is still out on whether licensing or joint ventures lead to more learning by local firms. 3) Policies designed to attract foreign direct investment are proliferating. Several plant-level studies have failed to find positive spillover from foreign direct investment to firms competing directly with subsidiaries of multinationals. (However, these studies treat foreign direct investment as exogenous and assume spillover to be horizontal-when it may be vertical.) All such studies do find the subsidiaries of multinationals to be more productive than domestic firms, so foreign direct investment does result in host countries using resources more effectively. 4) Absorptive capacity in the host country is essential for getting significant benefits from foreign direct investment. Without adequate human capital or investments in research and development, spillover fails to materialize. 5) A country's policy on protection of intellectual property rights affects the type of industry it attracts. Firms for which such rights are crucial (such as pharmaceutical firms) are unlikely to invest directly in countries where such protections are weak, or will not invest in manufacturing and research and development activities. Policy on intellectual property rights also influences whether technology transfer comes through licensing, joint ventures, or the establishment of wholly-owned subsidiaries.Economic Theory&Research,Environmental Economics&Policies,ICT Policy and Strategies,General Technology,Knowledge Economy,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,ICT Policy and Strategies,Economic Theory&Research,General Technology,Environmental Economics&Policies

Size Inequality, Coordination Externalities and International Trade Agreements

Developing countries now account for a significant fraction of both world trade and two thirds of the membership of the World Trade Organization (WTO). However, many are still individually small and thus have a limited ability to bilaterally extract and enforce trade concessions from larger developed economies even though as a group they would be able to do so. We show that this coordination externality generates asymmetric outcomes under agreements that rely on bilateral threats of trade retaliation. such as the WTO. but not under agreements extended to include certain financial instruments. In particular, we find that an extended agreement generates improvements in global efficiency and equity if it Includes the exchange of bonds prior to trading but not if it relies solely on ex-post fines. Moreover, a combination of bonds and fines generates similar improvements even if small countries are subject to financial constraints that prevent them from posting bonds.

Tariff retaliation versus financial compensation in the enforcement of international trade agreements

The authors analyze whether financial compensation is preferable to the current system of dispute settlement in the World Trade Organization that permits member countries to impose retaliatory tariffs in response to trade violations committed by other members. They show that monetary fines are more efficient than tariffs in terms of granting compensation to injured parties when there are violations in equilibrium. However, fines suffer from an enforcement problem since they must be paid by the violating country. If fines must ultimately be supported by the threat of retaliatory tariffs, they fail to yield a more cooperative outcome than the current system. The authors also consider the use of bonds as a means of settling disputes. If bonds can be posted with a third party, they do not have to be supported by retaliatory tariffs and can improve the negotiating position of countries that are too small to threaten tariff retaliation.Free Trade,International Trade and Trade Rules,Contract Law,Tax Law,Economic Theory&Research

Trading market access for competition policy enforcement

Motivated by discussions at the World Trade Organization (WTO) on multilateral disciplines with respect to competition law, the authors develop a two-country model that explores the incentives of a developing country to offer increased market access (by way of a tariff reduction) in exchange for a ban on foreign export cartels by its developed country trading partner. They show that such a bargain is feasible and can generate a globally welfare-maximizing outcome. The authors also explore the incentives for bilateral cooperation when the developing country uses transfers to"pay"for competition enforcement by the developed country. A comparison of the two cases shows that there exist circumstances in which the stick (the tariff) is more effective in sustaining bilateral cooperation than the carrot (the transfer). Furthermore, the scope for cooperation is maximized when both instruments are used. An implication of the analysis is that developing countries have incentives to support an explicit WTO prohibition of export cartels.Environmental Economics&Policies,Markets and Market Access,Labor Policies,Economic Theory&Research,ICT Policy and Strategies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research,Environmental Economics&Policies,Access to Markets,Markets and Market Access

The case for industrial policy : a critical survey

What are the underlying rationales for industrial policy? Does empirical evidence support the use of industrial policy for correcting market failures that plague the process of industrialization? To address these questions, the authors provide a critical survey of the analytical literature on industrial policy. They also review some recent industry successes and argue that only a limited role was played by public interventions. Moreover, the recent ascendance of international industrial networks, which dominate the sectors in which less developed countries have in the past had considerable success, implies a further limitation on the potential role of industrial policies as traditionally understood. Overall, there appears to be little empirical support for an activist government policy even though market failures exist that can, in principle, justify the use of industrial policy.Economic Theory&Research,ICT Policy and Strategies,Water and Industry,Industrial Management,Markets and Market Access

Exporting, externalities, and technology transfer

Developed-country purchasers of exports from developing-country industrial firms have often provided considerable technical aid to the exporting firms. Some question the benefits to both OECD and developing country firms of such transfers. The authors developed a model to analyze the implications of diffusion of the transferred technology to other developing country firms and the impact of the market entry of additional firms. Surprisingly, diffusion upstream combined with entry downstream may increase the profits of both the OECD importer and its initial developing-country supplier because the diffusion increases competition both upstream and downstream. The intuition isthat a firm does not necessarily lose from competition in its market so long as its buyer/supplier is also forced to behave more competitively as a result of diffusion. A limited amount of increased competition at both stages moves the two firms closer to a vertically integrated firm.ICT Policy and Strategies,Environmental Economics&Policies,Markets and Market Access,General Technology,Economic Theory&Research,Environmental Economics&Policies,Economic Theory&Research,General Technology,ICT Policy and Strategies,Markets and Market Access

Multinational firms, exclusivity, and the degree of backward linkages

This paper develops a two-tier oligopoly model in which the entry of a multinational firm results in technology transfer to its local suppliers and also impacts the degree of backward linkages in the local industry. The model endogenizes the multinational's choice between anonymous market interaction with its suppliers and contractual relationships with them under which the multinational transfer technology to its suppliers who in turn agree to serve the multinational exclusively. The multinational's entry under an exclusive contract has a de-linking effect that can reduce the degree of competition among suppliers thereby leading to a decline in the level of backward linkages and local welfare. With its emphasis on the supply-side effects of the multinational's entry on local industry, this paper complements existing studies of backward linkages that focus more on demand-side effects. --Multinational Firms,Backward Linkages,Vertical Technology Transfer,Exclusivity

Multilateral disciplines for investment-related policies

The authors evaluate the potential benefits of international disciplines on policies toward foreign direct investment for developing countries. They conclude that the case for initiating negotiations on investment policies is weak at present. Negotiating efforts that center on further liberalizing market access on a non-discriminatory basis - especially for services - are likely to be more fruitful in terms of economic welfare and growth. Existing multilateral instruments, although imperfect, are far from fully exploited and provide significant opportunities for governments opening further access to markets. The authors conclude that priority should be given to expanding coverage of the General Agreement on Trade in Services (GATS) before seeking to negotiate general disciplines on investment policies.Labor Policies,Environmental Economics&Policies,Health Economics&Finance,Economic Theory&Research,Decentralization,Health Economics&Finance,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Environmental Economics&Policies,Economic Theory&Research,Trade and Regional Integration

Welfare effects of preferential trade agreements under optimal tariffs

In a three country model with endogenous tariffs, this paper evaluates and contrasts the welfare effects of free trade agreements (FTAs) and customs unions (CUs) — the two most commonly occurring preferential trade agreements (PTAs). We show that if the external tariff of a PTA is not too high, it benefits both members and non-members. We also highlight the implications of a key (but commonly ignored) distinction between the two types of PTAs: while an FTA member can form an another (independent) FTA with an existing non-member, a CU member cannot. Under a pair of independent bilateral FTAs, the common member’s welfare is higher than that under free trade. Furthermore, if the common member is relatively efficient compared to the other two countries, such a ‘hub and spoke’ pattern of FTAs can yield higher global welfare than free trade. By contrast, such an outcome is never possible under a CU.Free Trade Agreements, Customs Unions, External Tariffs, Welfare, Intraindustry Trade, Oligopoly

Multinational firms and technology transfer

The authors construct an oligopoly model in which a multinational firm has a technology superior to those of local firms in the host country. Workers employed by the multinational acquire knowledge of the superior technology and can spread their knowledge to local firms by switching employers. The multinational chooses to pay a wage premium to prevent local firms from hiring away its workers if the local firms are sufficiently disadvantaged or if there are enough local firms. Diffusion of the superior technology benefits local firms at the expense of workers, whose wages suffer. The host government might have an incentive to attract foreign direct investment even when technology transfer will not result, because of the wage premium local employees of the multinational firm earn. Also, foreign direct investment with technology transfer may reduce the total economic rent the host country earns.Foreign Direct Investment,General Technology,Environmental Economics&Policies,ICT Policy and Strategies,Education for the Knowledge Economy