Strategic Management: Formulation and Implementation


It is difficult to generalize on the direct or indirect effects of MNEs on the innovatory capacity of host country. Two main views has been expressed:

  1. The first is that foreign direct investment (FDI) speeds up the process of economic development and restricting by providing technology, entrepreneurship and organizational skills at a lower cost than any alternative usage of resources, and by its competitive stimulus and spillover effects on the rest of the economy.
  2. Second, in the long run it is only likely to happen if MNEs do not distort (or add to the distortion) of assets or product markets, and so long as the control exerted their affiliates' activities is consistent with innovatory goals of the countries in which the operate.

The globalization of markets and the growth of intraindustry trade and investment is helping to bridge these views. All countries cannot expect to be technologically competent in all sectors. No country can expect to be entirely selfsufficient in its innovatory capabilities any more than it can expect to be self sufficient in all goods and services. Thus, the role of the MNE must be judged not only in the light of the effect it has in the generation of innovatory capacity, but also on the allocation of that capacity; and this, in turn, on the longterm economic interests of the country concerned.

To be able to utilize efficiently the accumulated technological expertise of foreign MNEs, host governments needs to pursues a positive and well defined technological strategy.

However, some countries may have limited power to influence the kind of technology they receive from MNEs or the terms of the technology creation or transfer. Thus, they may find it beneficial to group together to exchange information inter alia about other's bargaining and negotiating strategies and/ to formulate common policies towards technology acquisition or the creation of technological capacity by MNEs.

Nations have always sought to protect themselves against the perceived erosion of their competitive advantages. As consequence, home governments have hade to take account the unique and special role of MNEs as crossborder carriers of technology. Figure 21 identifies some of the concerns only expressed by home countries over the export of technology.

Several economists including Caves (1982) and Teece (1986), have suggested that where MNEs operate in an efficiencyenhancing way (e.g., by overcoming "natural" market failure in crossborder technology markets), they will enhance the longterm competitiveness of the home countries. They will do so both by promoting a more efficient international division of labour and by better exploiting the economies of common governance of crossborder activities.

Other economists (e.g., Kojima, (1978, 1990) and political scientists have argued that where MNEs engage in defensive oligopolistic tactics and where governments distort prices for the technology creating and using products, such activities of MNEs are likely to be welfare reduce. Robert Gilpin (1978) adds a political dimension to this argument and suggests, if the importing country should gain the higher share of the benefits from the import of technology, it could than well be at the expense of the political power of the exporting country.

The impact of FDI on the technological capacity of the home country will depend on the type of foreign investment, the condition under which it occurs, the home and host countries involved and the time horizon being considered. There are four main categories of foreign investment: market seeking, (natural) resource seeking, efficiency seeking (or rationalized) and strategic asset seeking.

Market seeking investment
Market seeking investment may positive affect the technological capacity of the home country in various ways. For example, an increase in demand for a firm's products may allow it to exploit economies of size and scope, and to finance new marketing and innovatory activities.
Resourcebased investment
There is no substitution between and domestic investment; the purpose of the technological transfer is to increase of protect the existing supply of primary products or to improve the terms of trade for the importing country.
Between countries with dissimilar economic structures
The transfer of technology associated with this kind to facilitate investment is likely to have the greatest effect on domestic employment as they are labourintensive activities. This kind investment is strongly criticized. However, it is not the transfer of technology by MNEs per se which is the root of the concern, but the general dissemination of technology from developed countries to developing countries, coupled with the consequence of free trade.
Between countries with similar economic structures
This type of transfer is likely to promote a crossborder division of labour, provided that it is undertaken to overcome endemic market failure rather than to advance the market power of the investing firm or, to take advantage of governmentinduced price and other distortions.

While this type of activity will increase MNE technological capability, the extent to which home country gains will depend, in the short run, on the effect of the acquisition on the form and distribution of the technological capacity. In the long run, it will depend on the global competitiveness of the acquiring firm.

It is important to distinguish between the consequences, for technology exporting countries, of transfers of technology to developing countries and those of the transfer of technological capabilities to developed countries. While the former is likely to give considerable cause for concern among labour leaders in advanced countries, the latter is more likely to have more far reaching significance to the longterm competitiveness of the exporting countries (Ohmae, 1985).

To illustrate the possible conflicts between a foreign investor and its host country, Exhibit 22 presents two extreme positions:

At one extreme, the investment is considered from the viewpoint of the investor, who focus on the benefits of investment to the host.

At the other extreme, the investment is considered from the viewpoint of the host government, which examines the cost of the investment to its society.

Therefore, the question of whether the export of technology is a "good" or a "bad" thing takes on completely new meaning, if the activities of MNEs are seen not as a threat to domestic investment, jobs and technological capacity, but as a means of:

  1. gaining or protecting access to foreign markets,
  2. acquiring resources and capabilities vital to the competitiveness of the capitalexporting country,
  3. ensuring a stake in the prosperity of developing countries,
  4. protecting or advancing the international competitive position of one industrialized country relative to another.

There are divergences of interest between home and host countries as to the technological impact of MNE activity.

To the host country, the opportunity cost of obtaining technology via inward investment is the cost of obtaining it by other routs or by the internal generation of that technology.

To the home country, the cost is essentially the impactbeneficial or otherwise which the sale make to its overall competitive position. The possible costs to the home country include an erosion of its longterm competitive advantage and a weakening of its balance of payments position. However, it is important both to take account of the (opportunity) costs of not exporting technology; and of the opportunities FDI might provide for a restructuring of domestic technological activities.