Direct Foreign Investment and Technology Transfer in ASEAN

Technological upgrading constitutes a critical element of the development process. Member countries of the Association of Southeast Asian Nations (ASEAN) have placed a strong emphasis on attracting direct foreign investment (DFI) flows as a means of promoting technology transfer. This article explores the relationship between DFI and technological upgrading in a developing-country context, with an emphasis on ASEAN. It begins with a review of the theoretical literature on DFI and real-world applications in the ASEAN countries. Next, it develops a simple model of technological upgrading in ASEAN, which underscores the importance of national policies in the process. Finally, it considers how multinational enterprises and DFI are contributing to regional economic integration in ASEAN. I. Introductionl It is probably accurate to claim that most of what has been learnt about the relationship between direct foreign investment (DFI) and technological upgrading in the process of development has been learned in the thirty years coinciding with the existence of ASEAN. It is probably not immodest to claim that much of this learning came from the experiences of the ASEAN member countries themselves. These countries received a significant proportion of the worldwide DFI flows during this period; over 1961-80, the original five ASEAN countries received US$11.9 billion in net foreign investment flows and US$47 billion over 1981-90 (Chia 1993, p. 73). Moreover, these countries, coming from diverse starting points and resource constraints but sharing the same development ambitions, engaged in much policy experimentation with regard to DFI during the period (Chia 1993). These experiences have the potential to shed light on the relationship between DFI and economic development. There have been a variety of treatments of this topic in the literature (see, for example, Ramstteter 1991), but the issue of the role of DFI in the technological upgrading of developing countries has proven to be illusive.2 The objective of this article is to identify key features of the ASEAN experience with respect to DFI and technological upgrading, as well as to highlight the theoretical meaning of these features. Section II provides an inventory of these key areas, followed in Section III by an analytical interpretation of this experience. Section IV discusses the implications of the ASEAN experience its regional integration efforts. Finally, Section V gives some concluding remarks. II. FDI and Technological Upgrading in the ASEAN Experience Countries acquire technology in five ways, namely through: (1) licensing agreements and outright purchase, (2) purchasing foreign capital goods, (3) DFI inflows, (4) turnkey projects, and (5) various forms of international technical assistance. In its development process, Japan relied heavily on licensing, turnkey projects, and the reverse engineering of imported goods; Korea has relied heavily on machinery imports and turnkey projects (Kakazu 1990). The acquisition of technology through DFI relies on the interaction between the absorptive capacity and policies of the host country and the objectives and the character of the domestic operations of the foreign enterprise which owns the technology. The transfer of technology through DFI does stimulate competing firms in the domestic market to carry out technological upgrading; employees can also learn the technology while working for the firm and there are many instances of local employees starting their own ventures using the acquired technology.3 Since the hardware is more easily purchased, the component is the most essential element of any technology; DFI ensures that the technology will be operational in the host location. But in order to assimilate the technology into the host economy, the multinational enterprise (MNE) must deem it advantageous to share its software component. An overwhelming proportion of research and development that provides the basis for technology development is found within MNE operations, perhaps as much as 75 to 80 per cent of global civilian expenditures (Dunning 1993). …