External Sourcing of Technology
NSF 95-309

External Sourcing of Technology

Purchasing High-Tech Products
Licensing Technology
Acquiring High-Tech Products
Encouraging Foreign Investment

Four methods of gaining access to externally developed technological advances are examined in this section: importing high-tech products, licensing foreign technical know-how, acquiring companies active in high-technology fields, and encouraging foreign investment.[18] Nations that acquire access to technological advancements through these mechanisms can often accelerate their competency in particular technologies. The Asian region's external sourcing of technology is viewed through its interactions with U.S. firms.

Purchasing High-Tech Products

Trends in the region's purchases of foreign-made products that contain cutting-edge technologies give some indication of the economies' degree of technological sophistication and of their national direction regarding technology development. Data on U.S. exports of high-tech products to the nine-country Asian region provide a measure of these trends.[19] This category includes those products that embody new or leading-edge technology, and comprises 10 classes of technology: biotechnology, life science technologies (i.e., the application of scientific advances to medical science), optoelectronics, computers and telecommunications technologies, electronics, computer-integrated manufacturing (e.g., robotics), material design, aerospace, weapons, and nuclear technologies.[20]

Asia is an important customer for U.S. high-tech products. The region's purchases during a recent 3-year period increased annually from $24 billion in 1989 to over $30 billion in 1991. (See figure 10 and appendix table 14.) High-tech products account for over one-quarter of all merchandise purchased from the United States by Asia, and this share is rising. In 1991, Asia consumed 28 percent of U.S. exports of high-tech products.

The value of Japan's high-tech product purchases from the United States is nearly three times that of the next largest U.S. customer in the region, South Korea. Among the emerging Asian economies, Malaysia buys more high-tech products from the United States than the others, although China increased its purchases significantly in 1990 and 1991.

Aerospace products, which include both commercial and military aircraft, account for over 35 percent of U.S. high-tech exports to the region and led all other technology fields in terms of sales. Computers and telecommunication technologies ranked second. (See text table 2.)

The fastest growing groups of U.S. high-tech products sold to the region during the 1989-91 period were optoelectronic and aerospace technologies; growth in these product areas was driven in large part by purchases from Japan. (See figure 10.) Elsewhere in the region, the U.S. technology groups that showed the greatest sales growth varied:

Figure 10

In contrast to the above-described trends, sales of U.S. high-tech products to India declined during this 3-year period. An uneven acceptance of foreign-made products and weak IPR laws contributed to this decline.

Licensing Technology

The data discussed in this section examine transactions between unaffiliated firms buying and selling technological know-how through licensing agreements.[21] These transactions, where market prices are set through a market-related bargaining process, tend to reflect the value of the technological know-how exchanged at that point in time. The record of the resulting receipts and payments provides an indicator of the production and diffusion of technical knowledge.

Unlike the trade trends between Asia and the United States for manufactured goods and high-tech products, Asia is a net importer of U.S. technological know-how sold as intellectual property. Royalties and fees paid to U.S. firms to license use of their proprietary industrial processes nearly doubled during the 1987-91 period; these were, on average, 10 times that paid to Asian firms by U.S. companies. (See figure 11 and appendix table 16.) Japan is the largest Asian consumer of U.S. technology sold in this manner, and, during the 5-year period studied, it steadily increased its purchases of U.S. technological know-how.

Figure 11

Japanese purchases accounted for about 75 percent of the region's payments to the United States. Japan's share generally declined, however, as several of the NIEs' payments to the United States increased. (See figure 11.)

As a group, purchases by the EAEs grew from 1987 to 1989; these then declined through 1991 as purchases by China and India fell off. China led EAE technological know-how purchases for 4 of the 5 years examined and, until 1990, purchased more U.S. technological know-how than several NIEs. Indonesia's purchases, though small, have risen steadily since 1988. (See figure 11.)

Acquiring High-Tech Products

The acquisition of existing high-tech companies can provide fast transfers of technology to the acquiring firm while facilitating easier market access for its own technologies. About 11 percent of small newly formed companies operating in the various high-tech fields are foreign-owned; only about 2 percent are owned by Asian companies.[22] (See text table 3.) Japan of course leads the region in foreign business acquisitions, with much smaller ownership positions by Taiwan and South Korea. (See appendix table 17.)

The largest share of Asian-owned, U.S. high-tech companies are involved in computer hardware development. Seventeen percent of all the U.S. high-tech firms owned by Japan are computer hardware companies. Companies in this field account for over a quarter of NIE U.S. high-tech company acquisitions (26 percent for Hong Kong and Singapore acquisitions, 27 percent for South Korea, and 29 percent for Taiwan). U.S. companies developing electronic components and systems also appear to attract NIE interest.

Encouraging Foreign Investment

Prior to the 1980s, many of the Asian economies under consideration here had policies that restricted investment by foreign corporations. By the late seventies and early eighties, many of these barriers were lowered as domestic industries began to outgrow internal capital, technological, and managerial resources. Foreign investment was sought to fill the gap, especially among the NIEs and EAEs. (See Dahlman 1994.)

Singapore was the leading recipient of foreign direct investment among the NIEs during the eighties. In the late 1980s, foreign investors were drawn by the rapid economic growth taking place in several EAEs - in particular Malaysia, but also China and Indonesia. In Singapore and Malaysia, the investment financed by domestic sources did not keep pace with the large and growing amounts of foreign investment in those countries; consequently, foreign investment accounts for a significant share of total domestic investment. Net flows of foreign direct investment represented over 25 percent of Singapore's gross domestic fixed investment in 1990 and 18 percent of Malaysia's. (See figure 12 and appendix table 18.) In comparison, the ratio of foreign direct investment (net flows) to gross domestic fixed investment in Taiwan and South Korea did not exceed 2.2 percent throughout the 1980s.

Figure 12

The Western industrialized nations have been major investors in Asia for many years. But during the 1980s, other Asian nations replaced the United States and Western Europe as major suppliers of foreign capital. India is the sole exception to this trend; it still received over 80 percent of its inward foreign investment from the United States and Western Europe. (See text table 4.) Elsewhere in the region, U.S. importance as a source of foreign investment diminished as Japan's investments increased during the mid- to late 1980s.[23] By the decade's end, supported by revenues generated by their successes in international markets, the Asian NIEs also became a major source of capital within the region - especially to the EAEs, as they invested in Malaysia, Indonesia, and, increasingly, China.

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18. Another very important means of technology transfer is the education of a country's students in foreign institutions. Data describing trends in Asian students studying in the United States and their return rates are presented in NSF (1993).
19. The United States is just one of several suppliers of high-tech products to the Asian region and should not be seen as the region's dominant foreign supplier. Intraregional trade in high-tech products, especially from Japan, is - in most cases - the primary source of foreign technology products.
20. For an explanation of the methodologies used to identify the products included in this definition of "high technology," see Abbott (1991) and Bureau of the Census (1989). See appendix table 14 for more complete descriptions and examples of the high-tech products included in this discussion.
21. Due to data availability, the discussion focuses on exchanges between Asia and the United States. Specifically, it covers royalties and fees from transactions between unaffiliated parties for the use or exchange of technological know-how such as patents and other proprietary inventions and technology; data on royalties and fees paid between affiliated parties were not available. Appendix table 15 provides data on royalties and fees generated between both affiliated and unaffiliated parties for all intellectual property, including not only fees generated from agreements exchanging industrial processes, but also franchise fees and fees paid and received for use of all types of media (books, tapes, movies, etc.). In 1991 Asian payments to the United States for access to all intellectual property (all transactions between all parties) were about twice those for transactions involving only industrial processes between unaffiliated parties.
22. This discussion is based on information compiled in the CorpTech database, Corporate Technology Information Services, Inc., Woburn, Massachusetts. This database is one of the most current sources of information on small newly formed companies active in high-tech fields, and includes many of the new start-up and private companies missed by or not yet part of other databases. The CorpTech database does not claim to include all such U.S. companies, but estimates that it contains 65 percent of the high-tech companies with under 250 employees, 75 percent of medium-sized companies with 250 to 1,000 employees, and 99 percent of large companies (over 1,000 employees). Foreign ownership is determined by the national identity of the majority owner.
23. Much of this discussion on investment patterns in Asia draws on information presented in USITC (1993).

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