Meeting technology needs of enterprises for national competitiveness

Abstract

This paper addresses the question of how enterprises can improve their competitiveness through the acquisition and development of technology, and hence how countries are able to raise the level of industrial development and grow their GDP. It takes the example of East Asia to demonstrate how fast economic growth can be achieved through the ''stages'' approach to technology acquisition and development. It also provides some case studies of technology transfer to China as a means of illustrating how successful transfer can be achieved and the problems that can be encountered. Finally, some comparisons are made with, and among, the Arab countries and an attempt is made to draw some lessons for the development of the Arab world from experiences gained elsewhere.

Full text

Meeting Technology Needs of
Meeting Technology Needs of
Enterprises for National
Enterprises for National
Competitiveness
Competitiveness
Prof. David BENNETT
and
Kirit VAIDYA
Global Forum on Management of Technology:
Global Forum on Management of Technology:
Focus on the Arab Region
Focus on the Arab Region
Vienna, Austria, 29
Vienna, Austria, 29-
-30 May 2001
30 May 2001
Prepared by
Organized by
United Nations Industrial Development Organization

Meeting Technology Needs of Enterprises for
National Competitiveness
Prepared by
David Bennett*
Professor of Technology Management
and
Kirit Vaidya
Lecturer in Business Economics
___________________________
* The views expressed in this paper are those of the author and do not necessarily reflect the views
of the Secretariat of the United Nations Industrial Development Organization (UNIDO). The
document has not been edited.

1
UNIDO Forum on Management of Technology:
Global Forum with Focus on the Arab Region
“Issues for Developing Countries and the Arab Region”
29th & 30th May 2001, Vienna International Centre, Austria
Meeting Technology Needs of Enterprises for National Competitiveness
David Bennett
Professor of Technology Management
and
Kirit Vaidya
Lecturer in Business Economics
Aston Business School
Birmingham, United Kingdom
Abstract
This paper addresses the question of how enterprises can improve their
competitiveness through the acquisition and development of technology, and hence
how countries are able to raise the level of industrial development and grow their
GDP. It takes the example of East Asia to demonstrate how fast economic growth
can be achieved through the "stages" approach to technology acquisition and
development. It also provides some case studies of technology transfer to China as a
means of illustrating how successful transfer can be achieved and the problems that
can be encountered. Finally, some comparisons are made with, and among, the Arab
countries and an attempt is made to draw some lessons for the development of the
Arab world from experiences gained elsewhere.
Technology and the learning process
A fundamental point when understanding how technology is acquired is that technology is
not just a physical thing but also comprises knowledge embedded in hardware and software.
The acquisition of technological capability is therefore not a one-off process but a cumulative
one in which learning is derived from the development and use of technology. There is a
view that national competitiveness is obtained by strengthening the science base and
developing Research and Development (R&D) capacity. However, activities formally
identified as science and R&D are only one part of the overall process which includes
learning by doing (increasing the efficiency of production operations), learning by using
(increasing efficiency by the use of advanced equipment and complex systems) and learning
by interacting with suppliers and customers. It should also be noted that in many industries
only a fraction of the technological efforts of firms is carried out in dedicated scientific or
R&D facilities. Evangelista et al (1998) recognise the different elements of innovation and
innovation processes. They use evidence from a large-scale survey of European enterprises to
show that 50 per cent of the total innovation expenditure is embodied in plant, machinery and
equipment purchased by firms. The internal technological expenditures devoted to R&D,
design and trial production are 20 per cent, 10 per cent and 11 per cent respectively of the
total innovation expenditure with the rest devoted to acquiring technology through patents

2
and licences. Therefore reported R&D expenditures are only a proxy for innovation related
activities
The accumulation of skills, experiences and technical know-how at the levels of firms,
industrial sectors and countries takes time and is essential for the long run development of
national competitiveness. The existing knowledge base is important for developing further
knowledge and capabilities and new products and processes. The above observations have
clear implications for the absorptive capacity of a country. The policies and stances taken by
enterprises and institutes are often based on the assumption that acquiring technology in the
form of designs and hardware and possibly reverse engineering are sufficient for absorbing
and using technologies and developing innovative capabilities. This may be true for some
basic technologies but is unlikely to be the case with more advanced technologies.
Box 1 - Types of transferred technology and assessing its impact
It is important to recognise that there are two types of technology transfer. The first of
these is vertical transfer, which is when technology is transferred from research to
development to production. Thus it follows the progressive stages of invention,
innovation and diffusion, with the technology becoming more commercialised as it
proceeds through each stage. Vertical transfer can be within one organisation or
there may be an intermediate transaction between, say, a research institute and a
manufacturing company.
The second type of technology transfer is horizontal transfer. Here an established
technology is transferred from one operational environment to another. The purpose
of horizontal transfer is not to commercialise the technology, rather it is to
disseminate the technology and extend its application into other contexts. This type
of transfer is of concern to companies that wish to maximise the return from their
technology, but may be unable to do this by direct selling of end products into the
market place. More importantly for the purpose of this paper is that horizontal
transfer is the most common type when technology is being transferred from
industrialised to developing countries. There is usually no further improvement or
change to the technology unless it needs to be modified to suit local circumstances
or environmental conditions.
Regarding the technology being transferred, this itself can be of two types. First, it
can be ‘product technology’, the transfer elements of which would involve the design
details of a particular product and the know-how for part, or all, of its manufacture.
Second, it can be ‘process technology’. Here, transfer would be of the means of
manufacture and could be used in connection with the production of different
products or parts of products; either existing or new. These two technology types
are not mutually exclusive. It is not unusual, for example, for the transfer of product
technology to be accompanied by the transfer of some aspect of the process for
making the product.
When technology is transferred it can be in various forms. For example, in product
technology transfer it can involve the materials and components that together form
the end-product, while in process technology transfer it can comprise production
equipment and tools. This would normally be the hardware aspect of technology.
However, in both product and process technology transfer it can also comprise
documentation and procedures on the design and manufacture of the product or
instructions in use of the equipment, which is the technology software. Also, in both

3
product and process technology transfer it can comprise know-how and skills, which
is often called the technology ‘humanware’. This differs from software in that it will
embrace the technology supplier's accumulated knowledge about how and why
things are done, i.e. the 'tacit' knowledge aspects of the technology.
To further understand the impact of technology transfer through its subsequent
dissemination in different applications consider the framework in Figure 1.
This places transferred technology on a vertical scale according to its scope, as
determined by the spread of user application, and on a horizontal scale according to
its span, as determined by the number of users per technology application.
Four modes of technology transfer are thereby defined by this classification. “Simple
point to point transfer” is where the spread of user applications is narrow and the
number of users few. An example could be the technology for an integrated steel
making. Its use is strictly limited to the production of steel and the number of
integrated plants in operation would be relatively small. “Simple diffusion” is where
the spread of user applications is narrow and the number of users many. An example
of this could be the technology for canning food. Again the use of this technology is
limited but the number of applications would be much greater. “Complex diffusion” is
where the spread of applications is wide and the number of users many. Here an
example could be ink jet printing technology. Here the application goes beyond its
use in printers for computers. It can also be applied in printing code numbers onto
packaging, 'sell by' dates onto containers, seating details onto theatre tickets etc.
Lastly, “complex point-to-point transfer” is where the spread of applications is wide
but the number of users few. The computer numerically controlled, or CNC, machine
tool falls into this category. The numbers produced are usually fairly low compared
with other products while user applications are extremely diverse. In fact, it is quite
common for each machine to be individually engineered for a particular application,
which could be in a wide range of different industries.
Figure 1 Technology transfer modes and types of dissemination
Source - Adapted from Leonard-Barton, D (1990)
Technology scope
Narrow
Wide
(Spread of user application)
Technology span
Few Many
(Number of users per technology application)
Complex diffusion
e.g. ink jet printing
technology
Complex point-to-point
transfer
e.g. CNC
machine tool
technology
Simple point-to-point
transfer
e.g. integrated
steel making
technology
Simple diffusion
e.g. food
canning
technology

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Technology and competitiveness
In discussing the relationship between technology, competitiveness and economic growth at
the macro level, the OECD (1992) concludes that “the proposition that investment in R&D
and technological progress are essential for future economic growth has not yet been
conclusively empirically demonstrated”. The difficulty of demonstrating this relationship is
understandable as R&D is just one component of innovative activity that takes place within
enterprises, albeit within the context of its external linkages and government policies. For an
enterprise, competitiveness refers to the capacity to create and sustain cost and/or product
advantages to gain or maintain strong positions in the markets for its products and a high
level of profitability. In general, the advantages are based on the ability of a firm to (a)
successfully define its scope, (b) manage and coordinate the core functions and operations
within the enterprise as well as relationships with suppliers and customers, and (c) be aware
of market demand characteristics and respond to them appropriately. In advanced technology
sectors, technology and the ability to innovate are key aspects of the organisational
knowledge of a firm that give it distinctive capabilities and competitive advantages.
However, it is also necessary to combine these capabilities with the ability to commercialise
the technology. Such a combination requires effective interactive and responsive
relationships between marketing, formal R&D and design engineering. In this respect, a
strong correlation has been found between a corporation’s competitiveness and its ability to
commercialise technology. In a diverse range of markets and products (photocopiers, fax
machines, computers, cars, semi-conductor production equipment and pharmaceuticals),
industry leadership not only rests on technology but on the superior commercialisation skills.
According to Nevens et al (1990) in such R&D intensive industries “companies that are first
to market the products based on advanced technologies demand higher margins and gain
market shares. Companies that spin out variants more rapidly and leverage their core
technology across more markets earn higher returns.” The ability to make better use of
generic features of key contemporary technologies is also another feature of firm level
competitiveness.
There are some clear implications of the above observations for the competitiveness of
enterprises. The recognition of commercialisable technologies and the capability to
commercialise them are crucial. However, an important qualification is that most of the
evidence is from industrialised countries. The gaining of technological capability in the
newly industrialised countries was based initially on learning to use established technology.
Their emphasis has therefore been less on basic research and more on combining applicable
technological knowledge which could be appropriated from what was publicly available with
that supplied by companies from industrialised countries in technology transfer arrangements.
The concept of competitiveness at the national level is more problematic and controversial.
The debate on this subject is complex because of the confusion that arises between the
implications of static comparative cost advantage and the dynamic gains that exist if a
country has a significant number of firms and industrial sectors which gain market shares
internationally because of their competitiveness. The OECD defines the competitiveness of a
country as:
“the degree to which a country can, under free and fair market conditions, produce
goods and services which meet the test of international markets, whilst

5
simultaneously maintaining and expanding the real incomes of its people over the
long term”.
The European Commission (1994) attempts to encompass entities other than countries in the
following definition of competitiveness as:
“the capacity of businesses, industries regions, nations or supernational associations
exposed, and remaining exposed, to secure international competition, to secure a
relatively high return on the factors of production and relatively high employment
levels on a sustainable basis.”
Krugman (1994) is a strong critic of the notion of country competitiveness and argues that the
concept implies there are winners and losers in world trade. He argues, primarily on the
grounds of static comparative advantage, that international trade is a non-zero sum game in
which there are gains for all the parties. This is a valid point to the extent that all
specialisation and trade generate gains for the trading parties and therefore trade is preferable
to no trade.
In both the OECD and the European Commission definitions, competitiveness represents the
ability to make dynamic gains in the form of higher growth rates. These gains need not be at
the expense of other countries as the growth in world output and trade should, in principle,
enable all countries to increase their volume of exports and growth. However, in practice,
there are relative gainers and losers as indicated by differences in the long term economic
growth rates between countries. Typically, countries with high growth rates have also had
high growth of exports showing that some have made relative gains at the expense of others.
In this sense, a measure indicating maintenance of competitiveness is the long term growth
rate for a particular country or region in comparison with that of other countries and regions.
The definitions of competitiveness for a country or wider entity imply that the entity has a
significant number of firms and industrial sectors which “meet the test of international
markets” to maintain and expand “the real incomes of its people over the long term”.
However, a firm rarely develops competitiveness in isolation of the external linkages and
environment in which it operates. This external context may include some or all of (a)
competitive rivalry with national firms, (b) related and supporting firms, industrial sectors
and industry associations, and (c) regulatory and enabling public agencies (see Nelson, 1992;
Porter 1990 and Freeman, 1987).
Latecomer industrialisation and the role of technology in development
It can also be said that the fast economic growth rates achieved by Japan between the 1950s
and the 1980s, the East Asian NICs between the 1970s and 1990s and China’s recent fast
industrialisation are demonstrations of country competitiveness, though not necessarily based
on advanced technology. The following discussion refers to the earlier stages of acquisition
of technological capability by the so-called “first tier” Asian NICs or the four tigers, South
Korea, Taiwan, Hong Kong and Singapore.
Conventional economics based explanations put the industrialisation and growth performance
of the Asian NICs down to the outward oriented economic policies pursued by them.
Important components of such a policy regime are (a) fiscal and monetary management
which ensure low inflation rates and a stable and competitive currency, (b) a liberal trade

6
regime, and (c) as few distortions as possible in the factor, goods and services markets. This
explanation is also related to the "stages" theory of comparative advantage in which
advantage shifts from the relatively low labour cost based industries to more skill and capital
intensive manufacturing as an economy’s factor endowments change in the course of
development.
It is assumed that once the policy and price distortions are corrected, firms in developing
countries are able to respond to world market demands using the comparative cost advantage
offered by the country. There are two main arguments against this explanation. Amsden
(1988 and 1989) and others have argued that in Korea a high level of government
intervention and price distortions were used to support the major industries and Wade (1990)
puts forward a similar thesis for Taiwan. Further, as competitive advantage is developed by
enterprises in specific product markets, macroeconomic policies are not sufficient
explanations of competitive advantage. In fact, no model can capture the diversity of the
experiences and policies of these countries.
The primary concern here is not with the economic policy issues but with the development of
technological capabilities at the firm level in the Asian NICs and their lessons in
understanding how national competitiveness can be developed through technology
acquisition by industries and individual companies. These capabilities can be grouped into
four broad categories:
i) Knowledge and skills required for the processing of production where shop floor
experience and learning by doing play an important role;
ii) Knowledge and skills required for investment, that is the establishment of new production
facilities and the expansion and/or modernisation of existing ones;
iii) Adaptive engineering and organisational adaptations required for the continuous and
incremental upgrading of product design, performance features, and process technology;
iv) The knowledge required for product and process innovation and the creation of new
technology in some manufacturing industries.
It is only in the last stage identified above that innovation and development of technological
capabilities take place. In the early period of rapid industrial growth, most industrial
production in the Asian NICs was concentrated in consumer non-durable industries with
relatively low technology requirements. Production capability was thus restricted to the
efficient operation of labour intensive production processes. Firms in the Asian NICs have
acquired the technological capabilities first and foremost by making judicious use of foreign
technology sourcing. To gain the required knowledge quickly they relied on customer firms
to provide specifications and concentrated on developing the capacity to produce to
specifications at low cost. Korean and Taiwanese firms used original equipment
manufacturer (OEM) agreements and Singapore and second tier NICs relied largely on FDI
as means of entry into world markets. What is important is how effectively a firm combines
foreign technology elements with its own experience and knowledge in order to strengthen its
internal capabilities.
This focus provided firms with valuable experience in mass production methods and the more
successful of them were able to learn from this experience and upgrade product quality,
improve production processes and efficiency, move into higher value added segments and
develop own brands. The "stages" for South Korea are set out in Table 1. This model refers
primarily to consumer products. As Amsden (1989), among others, has shown, for heavier

7
industries such as steel, chemicals and shipbuilding, there was much greater state support and
protection.
A striking feature of the early development of the Asian NICs is that they largely sought to
benefit from available technological knowledge from abroad. In this sense they were “free
riding” on the scientific and technological knowledge base developed by the industrialised
countries. However, in order to absorb the technological and scientific knowledge,
education, and especially technical education, had to be of a high level. The policy focus was
on improving education and training to develop the capacity to absorb and use the imported
technology efficiently. Table 2 shows that advanced R&D started relatively late in Korea.
The technological capability had to be combined with complementary management skills for
commercial success.
Table 1 Typical technological capability building process: the South Korean model
The process of
development Technology imports Production and R&D
1960s-1970s
Goal: establishment of
production base.
Characteristics: heavy
dependence on
imported technologies.
Packaged technology:
turnkey based plants.
Assembly technology.
Knock down production
(SKD/CKD).
OEM-dominated.
Almost no in-house R&D.
Early 1980s
Goal: promotion of
self-reliance.
Characteristics:
import substitution,
localisation of
parts/components
production
Unpackaged technology:
parts/components
technology.
Operation technology.
OEM/own brand: high ratio.
Product development.
Late 1980s-
1990s
Goal: export
promotion by means
of expansion of
domestic market.
Characteristics:
beginning of plant
exports, learning
advanced and core
technologies.
Materials-related
technology.
Control technology.
Design technology
High-quality product
technology.
OEM/own brand: low ratio.
Product innovation.
Process improvement.
Source: OECD (1996) Review of National Science and Technology Policy: Republic of Korea, OECD,
Paris.

8
The Korean approach to technology development contrasts sharply with that adopted in India
and China, both of which have long traditions of basic and applied science research, although
a significant proportion of this is in military related fields (aeronautics, space and nuclear).
Despite, or possibly because of, their scientific expertise and focus they have been slow to
acquire proficiency in commercial applications of new technologies. This is partly because of
sizeable barriers to diffusion of scientific knowledge, which raises questions about the
effectiveness of the institutional structure or the national innovation system in the two
countries. Another possible reason is that the scientific knowledge being developed was not
of the kind that could be easily commercialised. Diffusion of scientific knowledge to raise the
level of national competitiveness is by no means an automatic process and requires a number
of relationships and appropriate incentive structures which are imperfectly formed in these
economies.
Table 2 Main aspects of industrialisation and S&T (science and technology)
development since the 1960s in South Korea
Industrialisation S&T development
1960s
Develop import-substitution industries.
Expand export-oriented light
industries.
Support producer-goods industries.
Initiate S&T education.
Construct scientific and technological
infrastructure.
Promote foreign technology imports.
1970s Expand heavy and chemical industries.
Shift emphasis from capital imports to
technology imports.
Strengthen export-oriented industrial
competitiveness.
Expand technical training.
Improve institutional mechanism for
adapting imported technology.
Promote research applicable to
industrial needs.
1980s Transform industrial structure to
advanced and balanced form.
Expand technology-intensive industry.
Encourage human resource
development and improve productivity
of industries.
Develop and acquire top-level scientists
and engineers.
Perform national R&D projects
efficiently.
Promote industrial technology
development.
1990s Promote adjustment of industrial
structure and technical innovation.
Promote efficient use of human and
other resources.
Improve information network.
Realign national R&D projects
Strengthen demand-oriented technology
development system.
Internationalise R&D systems and
information networks.
Construct S&T infrastructure.
Source: OECD (1996) Review of National Science and Technology Policy: Republic of Korea, OECD,
Paris.
By contrast, in the Asian first tier NICs a much higher percentage of R&D is focused on
commercial applications. Taiwan’s R&D sector, for example, includes a number of quasi
public research institutes with close links to the private sector and scientists are encouraged to
establish their own firms to commercialise the results of their R&D. Until the 1980s, Korean
government research institutes concentrated almost entirely on improving production

9
technology to support the needs of private sector firms. A reorganisation of the R&D
infrastructure started in the 1980s in Korea. Under this reorganisation, new advanced
technology programmes were launched in ultra-large-scale integrated circuits (ULSI),
advanced materials for information electronics and energy industries, advanced
manufacturing systems, bio-technology, environmental technology, energy technology and
nuclear reactors (see OECD, 1996).
Box 2 - Trade or investment?
There are two recognised channels for transferring technology to enterprises, apart
from the unofficial channels of espionage and copying (which is sometimes
legitimised and termed ‘reverse engineering’).
The first of these is the trade channel (Figure 2). This is where the foreign supplier
provides technology in exchange for a financial return such as a one off payment,
instalments, or a licence fee. The technology can be transferred though a local agent
and there may be some local content added, depending on the conditions in the
recipient country and the particular arrangement between the supplier and acquirer.
is under the trade channel that there is the greatest risk of leakage or
misappropriation of the technology, so for this reason suppliers often withhold key
hardware components or important pieces of know-how.
Figure 2 The channels for transferring technology to enterprises
Foreign technology
supplier
Local agent
Local
content
Trade channel
Technology
acquisition
One off payment,
instalments,
licence fee etc.
Investment channel
Technology
acquisition
Local
partner(s)
Local
content
Wholly owned
subsidiary, joint
venture etc.
The second transfer channel is the investment channel. This is where the transfer of
technology forms part of the investment made by a foreign company in a host
country. This can be through a wholly owned subsidiary, an equity joint venture or
any other form of arrangement where there is a tangible or intangible contribution
that gives the foreign supplier some management control within the host country. In
anything other than a wholly owned subsidiary this control would be shared with a
local partner who will also contribute a minor or major part of the total investment,
which itself will have an influence on the amount of control exercised by each
partner. With the investment channel there is more likely to be some local content,

10
but it will probably be greater than with the trade channel with the amount increasing
as the project develops.
In practice there is a wide spectrum of types of arrangement for transferring
technology (Bennett et al, 1997). These are shown in Figure 3. Direct exporting of
technology products, one off technology transactions, licensing, co-production and
subcontracting are all trade channel arrangements. Contract joint ventures, equity
joint ventures and wholly owned subsidiaries are all investment channel
arrangements, though there may also be some investment involved in co-production
and sub-contracting. The extent of foreign investment, potential returns and financial
risk increase as the form of arrangement moves increasingly away from pure trade
and towards greater investment. Of course not all foreign investment is in the form
of technology but in countries with fast economic growth a high percentage of
technology based investment is a common feature. For example it is estimated that
about 80% of the foreign direct investment into China has been in the form of
technology.
Figure 3 Types of arrangement for transferring technology
Increasing foreign investment,
potential return and financial risk
•Direct exporting
•One-off transaction
•Licensing
•Co-production
•Sub-contracting
{
{
{
Trade
channel {
{•Contract joint venture
•Equity joint venture
•Wholly owned subsidiary
{
{
{
Investment
channel
{
{
Fast growth by acquiring technology through FDI: The case of China
As the global business environment becomes more competitive there is increasing pressure
for companies in the industrialised countries to make maximum use of the proprietary
resources that form the basis of their technological competencies. Therefore, there often
becomes a need to extend the application of their know-how through some form of
technology collaboration. The international transfer of technology is being seen increasingly
as a means whereby companies can globalise their production operations in order to take
advantage of resource or market factors (De Toni et al, 1992). To most manufacturing
companies and many service businesses technology is a key resource that provides their
distinctive capability and competitive advantage (Kogut and Zander, 1993). Often the
transfer of technology will be to overseas subsidiaries, which may have been created as
greenfield operations or could result from the takeover of a local company. However, in
many cases, it will involve collaboration with foreign partners, possibly including some
associated investment. Through joint use of technology, future added value can be generated
that will provide a return to the technology ‘owner’ in exchange for its transfer, but only
when the perceived benefits of transfer outweigh the costs and risks should owners share their

11
technology through collaborative operations (Dunning, 1991). It is therefore significant that,
during the 1970s and 80s, such a form of collaboration, the international joint venture,
replaced wholly owned subsidiaries as the preferred method for US multinationals of
transferring technology internationally (Shenkar and Zeira, 1987).
For the receiving country, technology transfer also has potential internal benefits. For
example many developing countries regard the inward transfer of technology as a means of
rapidly catching up with the industrialised nations. China has been promoting technology
transfer for this purpose in a range of advanced technology sectors. Transfer though
collaborative partnerships involving foreign direct investment has been encouraged by the
Chinese authorities as the preferred means of acquisition since its "open door" policy was
introduced in the early 1980s (Lan, 1996). At the same time the formation of technology-
based collaborations provides foreign businesses with an important means of gaining entry to
the Chinese market as well as providing the opportunity to take advantage of China as a
production base. According to statistics provided by MOFTEC (the Chinese Ministry of
Foreign Trade and International Cooperation) actual foreign direct investment into China
since 1979 reached a cumulative total of around £306 billion by the end of 1999 and the
number of foreign funded projects reached about 285,000 in the same period.
China's foreign investment and technology transfer policies
The policy on technology transfer has undergone a number of changes since the People's
Republic of China was established (Saich, 1989; Zhu et al, 1995). At first, turnkey project
investments supplied by the former Soviet Union and Eastern European countries were the
most important form of technology transfer. These investments typically established whole
industrial enterprises mainly in heavy industries such as steel, machinery and vehicle
manufacture. After the deterioration of relations with the USSR, followed by the 'Cultural
Revolution', China turned inwards and tried to develop its own technological capability.
During this period there was limited technology transfer from Western countries and Japan,
mainly key facilities and equipment for scientific research. During the 1970s the bulk of
technology imports were still in the form of complete sets of equipment or turnkey plants
(Shi, 1998). Investments during this time occurred mainly in the technologically backward
sectors of petrochemicals, steel, electricity generation equipment and mining machinery
industries, with the objective of developing technological capability in these sectors based on
the more modern technology of the capitalist economies.
Following the end of the Cultural Revolution the decision was taken to begin some limited
market reforms and to open up parts of the economy to more foreign trade and investment. A
government review of technology transfer policy soon afterwards found previous approaches,
which relied on turnkey projects and purchase of equipment, deficient in a number of respects
(Bennett, Vaidya, Wang and Zhu, 1997). The turnkey projects were expensive and provided
limited scope for developing local technological capability. This conclusion is consistent with
experience elsewhere, that developing capability beyond simply the ability to use technology
requires time to learning and often necessitates long-term collaboration with the technology
supplier (Lall, 1992).
In 1986 the Chinese authorities announced the "Provisions of the State Council of the
People’s Republic of China for the Encouragement of Foreign Investment" to encourage the
transfer of technology through foreign investment into what the government considered to be
more ‘productive’ areas of the economy. Under these provisions, foreign joint ventures were

12
granted a number of privileges including preferential taxation, simpler licensing procedures,
freedom to import inputs of materials and equipment, more autonomy from bureaucratic
interference, interest free loans, and the right to retain and swap foreign exchange with each
other. Foreign investment enterprises that employed advanced technology and were export
oriented also enjoyed additional tax benefits.
Box 3 - The phases of China's industrial development and related technology
transfer policies
First Phase (1950s)
Industrial development based mainly on projects introduced from the Soviet Union
and Eastern Europe.
- Technology acquisition through turnkey projects into large scale industries.
Second Phase (1960's)
Largely independent industrial development.
- Small amounts of technology transferred from Western countries and Japan (mainly
key facilities and equipment for scientific research).
Third Phase (1970s)
Industrial restructuring based on capital projects in technologically backward sectors.
- Technology acquisition mainly through turnkey plants in an attempt to develop
technological capability in weak industries.
Fourth Phase (1980s)
Accelerating pace of industrial reform, particularly in the manufacturing sector.
- Emphasis placed on learning through technology transfer (mainly via Sino-foreign
joint ventures - incentives for foreign investment through tax concessions etc).
Fifth Phase (1990s)
Rapid growth, less state ownership and intervention, extensive opening-up to foreign
investment. Establishment of a 'socialist market economy'.
- More emphasis placed on the transfer of high technology. Concessions removed
for low technology, labour intensive processing industries.
Sixth Phase (2000s)
Preparation for admission to WTO. Equalisation of tax regime for foreign owned and
local companies.
- Transfer of high technology into wholly foreign-owned subsidiaries as well as joint
ventures, including R&D and design capability.
These improved incentives and a growing awareness of the potential of the Chinese economy
stimulated a dramatic increase in foreign investment into China in the early 1990s. For
example in 1993 alone the contract value of new foreign investments was US$110 billion,
which was more than the entire contact value of investments up to the end of the previous

13
year. However, much of the foreign investment was in relatively low-technology, labour
intensive, operations that took advantage of China's low wage costs and policies to attract
investment into the Special Economic Zones (Thoburn and Howell, 1995). Many such
investments were in subcontracting operations, with higher level functions such as design and
marketing often remaining in the home country (Lan, 1996). Also, with many operations only
involving assembly work of components supplied from outside (in 'screwdriver factories'),
opportunities for local parts suppliers to upgrade their capabilities and grow their businesses
were also limited.
As a consequence of this situation there has been some tightening of regulations and
concessions affecting foreign investments. In 1994 the State Council announced a number of
policies to promote foreign investment in specified key sectors including communications,
energy and raw material sectors. There was also a tightening of procedures for the approval
of contracts and the registration of foreign enterprises. These included stricter penalties if
agreements were not fulfilled, new rules requiring foreign companies to invest capital within
a prescribed period so as to reduce the gap between pledged and utilised investment, and new
rules on the sharing of investment risks between Chinese and foreign investors to remove the
need for investment guarantees.
In 1995 further guidelines were published detailing the foreign investments the government
now wished to encourage, along with those that were to be restricted, prohibited or just
permitted. These guidelines encouraged investment in high technology sectors (chemical
fibres, micro-electronics, precision machinery, civilian aircraft, biotechnology and energy
development) as well as infrastructure and agricultural developments. Investment in the
priority sectors would continue to benefit from tax preferences and foreign invested
companies in these sectors would be permitted to sell up to 100% of their output in the
domestic market. Elsewhere, tax preferences were mainly to be phased out, although the
authorities subsequently relaxed their stance when a number of high profile foreign
companies made moves to reduce or withdraw their activities in China (Wu and Strange,
1997).
In 1998 the State Planning Commission identified eighteen industries, mostly in high-
technology sectors, where China wished to promote further foreign investment. These sectors
would be granted a restoration of duty free status on capital equipment imports (Note: foreign
funded companies could import capital equipment duty free but this concession was not
available to local enterprises, therefore the government was trying to phase it out as a way of
restoring a level playing field). These newly promoted sectors were high-technology
industries, new technologies, transport and telecommunications equipment, electric power
generation, aviation, oil and petrochemicals, machinery, electronics, pharmaceuticals,
medical equipment, textiles, metals and metallurgy, light industry, the service sector, and
agriculture. At the same time the State Planning Commission also reaffirmed broad limits to
foreign ownership in businesses in areas considered to be key sectors of the economy - such
as nuclear power plants, satellites and aviation.
Also in 1998 the government announced that the tax systems for foreign and domestic
companies were to be merged by the year 2000, a change that would more than double the tax
burden on some foreign-invested enterprises. However, favourable treatment was retained for
sectors and areas where China remains keen to attract foreign. This removal of some tax
incentives for foreign investors signals a more discriminatory approach to foreign investment
and is part of the Chinese government’s attempt to redirect growth from basic industries (e.g.

14
shoes and toys) in favour of higher-technology sectors. In effect, the foreign investment
regime is now more closely linked with domestic industrial policy priorities and wider
economic and social objectives.
Factors influencing successful technology transfer to enterprises
Empirical evidence from actual cases has provided information about the factors that
influence successful technology transfer. These can be summarised as follows:
• Having compatible objectives between the foreign supplier and local acquirer of the
technology.
• Establishing an appropriate relationship or partnership form between the technology
supplier and acquirer.
• Agreeing a value for the technology that is acceptable to both the supplier and
acquirer.
• Ensuring the necessary technical and managerial skills are in place to absorb the
technology.
• Confirming that the transferred technology will gain market acceptance and provide
sufficient commercial returns.
• Ensuring security of the technology and protection of the foreign supplier's
competitive advantage.
Four case studies of technology transfer to China are now described in order to demonstrate
the factors influencing success together with the some of various aspects that need to be
considered when transfer is taking place within different contexts. A discussion on each is
provided so as to highlight the main points in relation to the factors and aspects that have
been identified.
The case studies illustrate the following technology transfer situations:
1. Transfer of technology for the manufacture of mobile telecommunications equipment
through an equity joint venture.
2. Transfer of technology for the manufacture of airframes for civil aircraft through a
contracting agreement.
3. Transfer of technology for the manufacture of automotive engines through a one-off
purchase of product designs and processing equipment.
4. Transfer of technology for the manufacture and development of machine tools through a
collaborative co-production agreement.
The cases are all of real situations that have been investigated by the authors but fictitious
names have been used to avoid any inadvertent breach of commercial confidentiality.

15
Box 4 - Case Study: Nordica HongYing Telecommunications
Nordica is a Scandinavian telecommunications equipment manufacturer. In China it
manufactures telecommunications systems and equipment and mobile phones. It is
one of the main suppliers of GSM 900 networks, GSM1800 networks and mobile
telephones. It is also one of the key suppliers for fixed switching and transmission
systems to operators, railways and oilfields.
One quarter of Nordica's business is in the Asia Pacific region and there was a 30%
increase in sales to China in 1999 making China now the second most important
market for the company after the USA. Worldwide there are 12 telecommunications
infrastructure manufacturing facilities in 5 countries and 10 telephone handset
manufacturing facilities in 8 countries.
The company’s business in China started during the 1960s and 1970s with sales of
fixed telephone equipment. In 1985 a representative office was established Beijing.
For mobile telephone equipment Nordica has two major competitors in China. One
entered the Chinese market before Nordica selling pagers and the other earlier still
with switching equipment.
Nordica's development within China has been in three phases, i.e.
Phase 1: market entry 1985-1996
Phase 2: local manufacturing 1997-1999
Phase 3: integration into the Chinese telecommunications industry 1999 -
Nordica now has 7 joint ventures in China and one wholly owned subsidiary. It also
has branch and representative offices throughout the country. Altogether around
3,500 people are employed in China. Mobile communications are highly regulated.
Wholly-owned foreign enterprises are not allowed to provide services but they can
make products provided they fulfil certain conditions. For example, although
Nordica's wholly owned subsidiary makes the same product as other sites it is
required to focus on exports.
Beijing Nordica HongYing Telecommunications Systems Ltd. (NHT) was established
as part of Phase 2 of Nordica’s entry strategy for China. Negotiations started in 1993
and the business licence was granted in 1994. There was already a good brand
awareness of the company’s products that had been established under Phase 1 but
without local production its markets were limited to the railways, oilfields etc. It
therefore needed to have a local joint venture partner and manufacturing facilities in
China to be a credible supplier.
The Chinese partner is under the Aerospace Ministry, which it was thought had a
strong influence and would provide good support from the Chinese government.
HongYing already had experience of manufacturing telecommunications switching
equipment from an earlier co-operation with a German telecommunications company
to produce PABX exchanges. The joint venture contract is for 25 years. NHT’s
building is rented from HongYing which uses some of the space for its own
production. HongYing also has a separate building on the same site.
Initially NHT produced fixed telephone switching equipment and between 1994 and
1997 had begun to sell to the PTAs (Provincial Telecommunications Administrations)
and PTBs (local bureaux) in provinces such as Henan and Hebei. It did not have a
very big market share but had established a good position in the market. However,

16
local Chinese companies were improving their capability to produce fixed switching
equipment and were becoming a serious source of competition.
In 1997 Nordica therefore examined how it could move its strategy forward and in
1998 decided to change its business scope in China to manufacturing mobile GSM
systems. At the time it had a reasonably good position in the Chinese mobile
telecommunications market but it needed to be improved. Aother joint venture had
already been manufacturing handsets since 1996 and NHT therefore changed to
manufacturing mobile switching equipment. At the same time the ownership was
changed so that Nordica now has 70% of the shares and HongYing holds 30%. The
new ownership arrangement was reached amicably because HongYing thought 30%
was still a good share of the new business activities. An R&D facility was also
established on the same site in the same year but was a separate wholly owned
subsidiary of Nordica's holding company in China. It would not be easy for Nordica
to acquire 100% of the shares of the manufacturing company. Given its business
scope and local markets it would be prevented by the regulations. In any case
Nordica did not wish to have complete control because having a Chinese partner is
still vital in the telecommunications sector for reasons of access, to understand the
local regulations, handling the interface with the authorities etc. There are no
difficulties working with the local partner; the roles of the two parties are clearly
defined and there is good co-operation.
Between 1998 and the present time there have been big changes. A major
technology transfer project was started in mid 1998 to bring in the latest technology
and this has resulted in all mobile switching equipment for the Chinese market being
supplied by NHT in association with its subcontractors in China and the local partner.
In practice NHT does not actually manufacture any of the parts for its products
(Nordica’s core competencies are understanding market needs and designing new
products fast). Manufacture of the major parts of products is completely outsourced
to companies that have specialised manufacturing capability. NHT’s activities are
testing and integration so most of the production employees are software and
systems engineers.
NHT is one of only two facilities worldwide for Nordica’s mobile switching equipment,
the other being in Europe. Therefore it is now moving from its original position of
being simply a supplier to the Chinese market to becoming part of Nordica’s global
production network. NHT exports 20% of its output, but this will increase. Products
are exported throughout the world, not just to the Asian region.
In the electronics sector NHT is ranked number 4 in Beijing in terms of sales and
number 14 in China as a whole. Among mobile telecommunications equipment
companies Nordica is now the leader in China for telephones, while another
European based company is the leader for infrastructure. All Nordica's competitors
for mobile telephones are selling in China, including some emerging Chinese
companies such as HuaWae. Another Chinese company, EastCom, also produces
mobile telephones but they are essentially re-badged products of an American
partner.
NHT employs 170 people, more than 90% of whom are Chinese. Expatriates fill the
positions of General Manager, Financial Controller, Production Manager and Head of
the Software Centre. In the JV contract only the General Manager and Deputy
General Manager positions are specified as being nominated by the respective
partners. There are also expatriates in technical positions, typically for postings of 1

17
to 2 years. Chinese nationals are in the positions of Deputy General Manager
(originally recruited from the partner company), Quality Manager, Human Resources
Manager and Sales Manager. Nordica does not employ any 'overseas Chinese' staff
It is the company’s policy to develop its own Chinese managers, whereas some
other companies such as Nordica's main American competitor places heavy reliance
on using overseas Chinese staff (e.g. from its company in Taiwan).
Very few employees were transferred from the Chinese partner - only some key
managers. Recruitment is normally through advertising, job fairs and via the Internet.
There is also some rotation around the Nordica companies in China, although there
is still sometimes some difficulty with the authorities in transferring the personnel files
between cities so this is mainly relevant within Beijing. Apart from the normal
selection criteria regarding technical skills etc., a knowledge of English is usually
important. The company also tries to recruit people with the correct 'attitude' so
people who had spent a long time in state owned enterprises would not normally be
employed.
The company has a positive employee development policy. Each person has a job
profile and a training plan is arranged accordingly. There is a production and
software training centre and both theoretical and on-the-job training is used. A large
number of employees went to Europe for between one and three months in 1998 as
part of the major technology transfer project. Among the engineers about 30% went
to Europe (approximately 50 people). There is also considerable attention paid to
management and leadership training. There is a lot of theoretical training in China
but Nordica's global facilities are also used for practical management training. Its
facilities in the USA are often used for this purpose, especially when training relates
to new technology development. In addition to the formal study organised by the
company a lot of employees enrol for part-time study in local institutions.
The main target of the technology transfer project in 1998 for mobile switching
equipment was to transfer manufacturing totally to China and in particular to local
subcontractors. The emphasis was on systems integration. The person who ran the
project was subsequently appointed Production Manager. He had considerable
experience with transferring technology to other countries previously. The project
involved transfer of manufacturing technology, establishing logistics procedures and
systems to support production and supply together with training. The company made
the conscious decision not to have "troops" of expatriates going to China but to
recruit local people first. The emphasis was therefore on fast recruitment of local staff
and training. The company tried to make good use of the existing Chinese staff in the
Nordica organisation. There were many project teams comprising both European
and Chinese staff. Some were led by Europeans and some by Chinese.
The first objective was to develop competence within the Chinese operation. This
took between one and one-and-a-half years. The parent company in Europe was
surprised at the speed of knowledge acquisition by the Chinese operation and has
used the experience as an example of how to transfer knowledge to other countries.
The second phase of technology transfer was to further develop the company's
subcontractors. There are 4 or 5 subcontractors with significant orders from Nordica
in terms of volume. The company prefers to have a limited number and to get things
right. One contractor is HongYing, the joint venture partner, some were in China
already and others followed the company. Apart from the partner one other
contractor is a wholly Chinese company. Developing logistics systems took a long

18
time and by comparison the transfer of the necessary manufacturing technology was
completed quite quickly. The idea that the competence in telecommunications is
understanding market needs and designing new products, rather than
manufacturing, is new to the Chinese authorities that have been more used to
overseeing large vertically integrated enterprises. Nordica has been talking with MII
(The Ministry of Information Industries) about this concept and it is enthusiastic about
the idea. Under WTO Chinese telecommunications and electronics companies will
be exposed to the full forces of the market and will need to operate in the same way
so they have to become more focused. The MII needs to help Chinese companies to
invest in resources and to recognise that it is not a labour intensive industry so
labour cost is not important. Local companies such as HuaWei have this type of
assistance. Nordica does not object to this and thinks it is understandable given
China's circumstances.
NHT has done some benchmarking studies of its operations. It is now at about the
same level as other Nordica plants worldwide across a range of metrics. The "bottom
line" (i.e. cost of production) is about the same as the other mobile switching facility
in Europe. Nordica's advantage is not simply in having low cost facilities in China but
in having multiple production sites so it can balance supply and demand globally.
Access to the China market is a secondary consideration now. The objective is to get
"fair treatment" from the Chinese government and regulations. Having a
manufacturing plant in China allows entry to the controlled market for
telecommunications equipment. Then it is up to normal, competitive criteria such as
having good products, competitive prices, good service and a local "presence".
Establishing the Nordica brand is also important.
NHT has not experienced any big problems with technology transfer that has
adversely affected the business. There have just been some technical issues that
have required attention. The important thing has been to work closely with the
Ministry of Information Industries to help influence the development of the industry in
China. Most of the discussions are bi-lateral but there are also some multilateral
"round table" meetings with several manufacturers, although these are mainly
information sharing sessions rather than forums to discuss real issues.
Essentially the main problem for NHT is that the Chinese market is still regulated.
For example there are quotas on imports that would not be allowed in Europe.
However, this is changing. With the impending entry of China into WTO there will be
an eventual removal of barriers. Most negotiations with the local authorities can be
done by NHT itself now the company has become established but the Chinese
partner still needs to be involved in high-level discussions with the government.
However, this is something else that will change in the future.
The NHT case illustrates a number of aspects of technology transfer through Sino-foreign
equity joint ventures, which have been the most popular form of transfer in the late 1980s and
1990s. One of the most important is the selection of a suitable partner by the foreign owner
of the technology. As was mentioned above, compatibility of partners' objectives has been
found to be a key factor for ensuring successful transfer. HongYing was not one of the
established Chinese manufacturers of telecommunications equipment. It was under the
Aerospace Ministry. However it did have the necessary technological capability and
experience of telecommunications equipment through an earlier co-operation and appears to
have complementary objectives to Nordica. It has often been found that when partners are in
exactly the same industry they may not necessarily have the same objectives. For example

19
foreign companies transferring technology to China usually do so with the aim of accessing
the Chinese domestic market. On the other hand Chinese companies in the same industry
often have the intention of using the acquired technology to penetrate export markets, which
may be against the interests of the foreign partner. Another common example of
incompatible objectives is where the foreign partner is taking a long-term view while and the
Chinese partner is taking a short-term one. This is often the situation where the Chinese
partner is a state owned enterprise that is burdened with debt and making losses. It therefore
sees the technology transfer partnership as a means of helping its survival rather than as a
means of improving its competitive position. Such an objective would conflict with the
foreign partner's own strategic aims and probably lead to operational difficulties for the joint
venture.
Another important aspect of equity joint ventures is the relative ownership shares of the two
partners. Generally the foreign partner's preference is for a majority share. However, there
are some successful joint ventures where the foreign partner only owns 50% (e.g. Shanghai
Volkswagen) or even has a minority of shares (e.g. the UK company Pilkington owns only
17% of Shanghai Yaohua Pilkington Glass, although this has now converted from a joint
venture to a publicly quoted company). The 70% share of NHT held by Nordica ensures it
has adequate control over the joint venture while enabling the Chinese partner to have a
satisfactory share of a commercially successful business. Since wholly foreign-owned
companies are effectively not permitted in telecommunications equipment manufacture the
partners seem to have achieved the optimum ownership arrangement.
A further aspect that is important in the Nordica HongYing case is security of the transferred
technology. If the foreign supplier's know-how is appropriated by a third party then it might
find its competitive advantage is threatened. Chinese telecommunications manufacturers
have the ability to copy foreign products and adapt them to the local market. It is estimated
that their technology lags only about one year behind that which western companies are
producing. Copying can be done more effectively if there is an 'inside track' to the foreign
technology, which is why some of the software codes (or source codes) are not provided to
Chinese partners. Acquisition of the source code is a common issue in negotiations between
western telecommunications companies and their Chinese joint venture partners. The Chinese
side usually tries hard during negotiations to have the source code included in the transferred
technology. They would then be 90% of the way towards being able to completely replicate
the technology. Sometimes the source code has to be provided for effective localisation of
the product. For example with pay phones it is necessary to use it when designing LCD
displays with Chinese characters.
Box 5 - Case Study: DuCheng Aircraft Corporation
The DuCheng Aircraft Corporation, located in one of China’s inland provinces, was
originally established to manufacture jet fighters. It was founded in 1958 and the first
aircraft was produced in 1964. Although its military output is intended primarily for
the Chinese armed forces some of its production has been exported, mainly to the
air forces of developing countries. The plant carries out design and development of
aircraft as well as production and testing. There are 20,000 employees and 10,000
machines, 30 of which are modern numerically controlled machining centres. Military
production still represents about 80 per cent of the output by value at DuCheng.
However cuts in orders due to a scaling down of the Chinese armed forces in recent

20
years have necessitated a move towards the manufacture of civilian products to
make use of spare capacity. However, as an enterprise in the defence industry, it
has not been left to diversify entirely at the mercy of the market. Diversification into
non-defence activities was undertaken within a seven-year programme supported by
the government. Along with other military aircraft producers, the enterprise was set
the target to reduce revenue from its military production to 60 per cent of the total by
the end of the seven-year programme period. However, the company's view was that
this was too short a period for the required adjustment for such a large enterprise.
The major diversification for DuCheng has been related to its core business of
aircraft production. The enterprise won a contract with Air Corp, a major US
manufacturer of civilian and military aircraft, to produce nose sections for the
airframe of its AC80 civilian airliner. DuCheng was supplied with drawings initially
and, in addition, most of the materials and subassemblies were supplied by Air Corp
themselves or by suppliers approved by Air Corp and the FAA (US Federal Aviation
Agency). The tools and equipment were paid for by Air Corp. The training manuals
were provided by Air Corp and training was carried out jointly by the two companies.
Air Corp quality assurance personnel were stationed permanently at the factory.
Air Corp were looking for a low cost supplier in China and needed to make ‘offset’
agreements with Chinese companies as part of the contracts to sell its aircraft in
China. It chose DuCheng as a subcontractor after considering a number of possible
local companies. Other major world aircraft manufacturers also have similar
subcontracting arrangements in China. Apart from the cost advantage offered by
Chinese subcontractors, the Chinese civil aviation market is attractive for foreign
aircraft manufacturers and subcontracting locally can be offered as a way to win
orders. According to DuCheng, subcontracting from a Chinese company offers
significant cost advantage to Western enterprises but the choice among Chinese
subcontractors is not just based on cost but on competence and compatibility.
Because DuCheng was not well located and transporting products overland to the
coastal ports was difficult it needed to emphasise its technical competencies to
compensate for this disadvantage. It had already carried out some work in
cooperation with some European aircraft companies and had acquired a reputation
for good quality work. Its inland location also meant that wages were lower than
were paid by firms in the coastal areas of China. Although workers on civil aircraft
production were paid 10% more than those making military aircraft the wage costs
were still only a small fraction of those in the USA.
The contracting agreement was signed in 1989 and a number of DuCheng
workshops were separated-out and transformed to standards set down by Air Corp.
New lines were installed and production started after FAA approval with the first nose
section being delivered in 1991. At the early stages of production Air Corp asked for
quality improvements and increased production. The production capacity in 1994
was 24 per year but actual production was lower because of reduced demand.
Therefore, although initially parallel production continued in the USA, DuCheng
became the only producer of the nose sections for this particular model and all
production was exported to Air Corp’s plant in the USA where the final aircraft was
assembled. A similar contract was subsequently undertaken to supply nose sections
for another Air Corp aircraft, the AC90, with first delivery of these taking place in
June 1996.

21
In the DuCheng case the technology transfer is of the "international subcontracting" type
within a new value system created and coordinated by the technology supplier. Here, there is
no ownership of part of the local company by the foreign technology supplier. The foreign
investment in the project is also limited. Although Air Corp provided all the tools and
equipment for DuCheng these were technically still the property of Air Corp. In the longer
term, the capabilities and relationships developed through such contracts could lead to closer
cooperation with foreign enterprises to develop aircraft for the fast growing domestic market.
For aircraft production, such a cooperation is likely to require a number of Chinese partners
working with one or more foreign companies. However, at least two such potential
cooperations for aircraft development and production have failed without any aircraft being
produced. In one well-publicised case involving Chinese and European partners insufficient
demand and limited public funds available in China were cited as the main reasons for the
cancellation, while the reforms of China’s aircraft manufacturing industry with planned cuts
of 150,000 jobs were another consideration.
The case study has illustrated how DuCheng was able to use its existing capability for
manufacturing military aircraft to absorb the technology supplied by Air Corp to produce
civilian aircraft products. However, the business provided by Air Corp was insufficient to
compensate for the shortfall in orders for fighters from the Chinese armed forces. Therefore,
outside DuCheng's core business the company has diversified into a number of other product
areas. These have included production of motorcycles, dry cleaning machines, hydraulic
engineering products such as car jacks, water heaters, satellite dishes and wheelchairs. The
company also won a contract from a Sino-German joint venture to produce the press moulds
for car doors. Some of these other ventures are based on using DuCheng's in-house resources
and skills to develop products and enter new markets (e.g. the car jacks were developed using
its knowledge of hydraulics in aircraft and the order to manufacture press moulds was
achieved because it was highly experienced in the use of CNC machine tools). Other ventures
are examples of opportunistic diversification based on licences acquired from foreign
companies (e.g. the manufacture of dry cleaning machines).
Box 6 - Case Study: NanBan Engine Works
NanBan Engine works, located in the suburbs of Beijing, is part of the New China
Automotive Group (NCAG), which comprises a network of factories making engines
and components for light trucks, tractors and cars. It is one of a number of
automotive engine manufacturers given approval to develop engines by the Ministry
of Machine Building Industry. Over the years product technology has been
transferred into the group from the former Soviet Union, Germany and Japan.
Traditionally in China the automotive industry has been horizontally integrated, with
end product manufacturers (vehicle assemblers) being organisationally separate
from the major producers of mechanical sub-units such as engines.
NanBan, which is the largest engine producer in the group, and the group as a
whole, have been highly dependent on the sales of the MN283, an engine of old
design produced in a number of plants within the group. The engine is used in locally
produced light trucks and other indigenous vehicles such as ‘jeeps’ (the Chinese
‘jeep’, developed from the Russian ‘Gaz’ light military vehicle, has become a popular
and cheap commercial road car). One aim in forming the group in 1988 was to bring
together a number of plants producing the same or similar engines. The formation of

22
the group has facilitated shared knowledge about the production of this engine within
the group but no other rationalisation has taken place to date.
Although the MN283 engine is inexpensive, moderately reliable and produced in
large numbers it is not fuel-efficient and its emission standards are poor. Therefore in
the early 1990s NanBan acquired product and process technology from a major US
motor manufacturer, including a complete assembly line with capacity to produce
250,000 units per year, for manufacturing a more efficient, cleaner, four cylinder light
petrol engine. The assembly line was purchased at a cost of some US$ 18 million
but at this price it was considered a bargain as it had been installed in the USA at
around double the price in the early 1980s, but had been de-commissioned because
of excess capacity and was virtually unused. The technical task of transferring the
assembly line to China and re-installing it, a major undertaking involving some 40 of
the company's engineers and technicians, was considered a success. Installation of
the plant and bringing it up to the capability to make production test runs took less
time than was predicted by the US company that sold the line.
However, despite the technical success in transferring the technology, commercial
aspects proved more problematic and full production on the assembly line was not
started. The new engine was intended to replace the MN283 as the largest selling of
the company's engines. However, the NanBan found that the cost of production with
the assembly line working at full capacity would be 50 per cent higher than that for
the MN283. Consequently, although the new engine is of better quality and offers
greater fuel efficiency and reliability, the present customers of the MN283 (mainly
assemblers of light trucks, ‘jeeps’ and other vehicles of local manufacture), who
themselves face severe competition in the markets for their vehicles, have found this
higher cost unacceptable.
NanBan therefore decided to wait until its existing customers were ready to accept
the new engine and, meanwhile, tried to seek new customers. One idea was to try to
sell the engines to a recently established joint venture between another Chinese
company and the US motor manufacturer that had supplied the assembly line. This
joint venture, located in Northeast China, had been set up to make light trucks and
cars designed by the US partner. However, subsequent investigations revealed that
several technical and commercial difficulties stood in the way of this opportunity.
Most newer vehicles made in China involving foreign joint venture partners either
produce their own engines or have established relationships with engine suppliers,
thereby making market access for indigenous manufacturers very difficult. A further
difficulty was that the engine made by NanBan was no longer used by the US
company in its own vehicles.
NanBan was a technologically capable company and had demonstrated that it was able to
transfer and implement both the product and process the technology for the new engine.
However, the company found itself in a vicious spiral. During the time it was waiting for
new markets to emerge or for its existing customers to accept the new engine the production
line was becoming outdated, while spares and service for the sophisticated electronic control
systems were becoming increasingly difficult to acquire. NanBan also did not properly
assess the value of the technology. The price it paid seemed reasonable because it was much
lower than the original cost of the technology (the production line). However, value and price
are not the same thing. Value is a concept that is affected by many factors. Among these are
the cost to the 'owner', the potential for the technology in commercial terms, any substitutes
that are available, and the overall affect on the perceived worth of the company. It is also

23
dependent on the point along the 'value chain' that it is transferred. NanBan's judgement of
value was clearly wrong within the circumstances it faced at the time.
A major blow to the company came in the late 1990s when the Chinese government
introduced environmental legislation banning high polluting vehicles from major cities,
principally Beijing, thereby slashing demand for its core product, the MN283 engine. By this
time the end-customers for cars, who are increasingly becoming private individuals rather
then organisations, were being attracted towards imported vehicles and foreign models made
by joint ventures rather than locally designed and manufactured models. Upgrading local
vehicles with the new engine was therefore no longer an option. NanBan’s entire market was
therefore rapidly disappearing and the company’s future was put into jeopardy. This is an
example of a technically competent technology transfer that faced commercial difficulties
because the product intended to be made with the technology was not appropriate for
customers in the existing value system and development of new value systems was not
possible in the short-term. Developments of this type either require a clearly identified market
for the product or for the manufacturer to be within a vertically integrated production system.
Importing this technology into a horizontally integrated group in the prevailing market
conditions and industry structure proved to be fraught with difficulties.
Box 7 - Case Study: Midland Tools and ChangZhong: A Technology
Collaboration For New Product Manufacture And Development
Midland Tools, a UK company, and ChangZhong Machinery, a company in
Northwest China, are both in the medium size category of machine tool
manufacturers. Midland Tools’ major products include CNC single and multi spindle
automatic turning lathes and turning centres produced to international quality
standards. Changzhong is also a specialised turning machine manufacturer.
Approximately half its output is of conventional machines and half is CNC machines.
The quality of its machines has been given a high ranking in terms of customers’
satisfaction in the domestic market and in 1997 it shared with one other Chinese
company a national best quality award for its CNC turning lathes from the Ministry of
the Machinery Building Industry. ChangZhong has captured 24% of the Chinese
market for CNC turning machines.
The objective for ChangZhong in collaborating with Midlands Tools was to acquire
the advanced technology the company haddeveloped. Through the transfer process
ChangZhong could learn specialist subassembly skills, process programming know-
how, design know-how and final assembly skills. In terms of technological capability
improvement ChangZhong’s eventual aim from the collaboration was to enable it to
produce complete CNC turning centres of the type to be introduced to local market.
Midland Tools’ objective on the other hand was to improve product competitiveness
by combining technological and cost advantage. Through the collaboration Midland
Tools would be able technically to achieve greater competitive advantage and,
together with ChangZhong, could developed the product at lower cost. From a long-
term strategic point of view the competitive strength of their co-developed product,
coupling with high technology with low cost, would be very important in enhancing
their position in both local and world markets (see Table 3).
The technology collaboration agreement between the two companies was signed in
1997. The technology product was a CNC turning lathe of entirely new design. The
form of collaboration comprised subcontracting, new product co-development and
co-production. In the initial stage of the project the terms of payment agreed was that

24
Midland Tools provided technology free of charge in the form of drawings and in
return purchased machine carcasses supplied by CJC at reduced cost. The transfer
arrangement was based on four phases.
i) In phase one the basic machine was to be manufactured and sold by Midland Tools
with machine carcasses made and supplied to Midland Tools by ChangZhong.
ii) In phase two complete machines were to be made by ChangZhong.
iii) In phase three Midland Tools and ChangZhong would co-design and co-develop
new versions of the machine.
iv) In phase four, carcasses of the newly developed machines would be made in China
by ChangZhong for supply to Midland Tools and complete machines made by
ChangZhong for sale in the local market.
Table 3 Objectives for the technology collaboration between Midland Tools
and ChangZhong
Midland Tools ChangZhong
Objectives Development of new product Technology capability improvement
Cost reduction Introduction of a new product
Development of market Development of market
Financial benefit Increased sales in Export machine carcasses and increase
world markets local sales
Technological Cost effective product Acquisition of latest technology
benefit
Strategic benefit Development of new Development of new product
product and market and market
Midland Tools’ main activities would include provision of drawings, key parts, training
and technical supervision to ChangZhong as well as final assembly on the basis of
carcasses supplied from ChangZhong and sale of products in the world market.
ChangZhong’s responsibilities would be for machining parts and assembling
carcasses and for complete manufacture in the later phases. In relation to new
product development both parties would jointly be involved in design and
development. The focus of this would be to produce designs that would benefit from
the opportunities offered for cost reduction from:
i) Local “in-house” manufacture of parts by ChangZhong.
ii) Purchase of proprietary and commercial parts by ChangZhong from local suppliers
iii) Local assembly by ChangZhong
iv) Joint selling of the newly developed products in local and world markets
The collaboration arrangement between Midland Tools and ChangZhong was designed to
ensure there was immediate financial benefit to both parties. In many technology transfer
based collaboration arrangements, the acquiring partners have suffered financially because
they have lacked the marketing skills to sell more expensive co-produced machines in local
markets. This in fact has become one of the main causes of failure of many collaborative
ventures. Midland Tools recognised that converting technological success into commercial
results can be problematic, so from the start the company gave first priority to the issue of

25
market sales. In phase one Midland Tools was fully responsible for the sale of products in
all markets, so taking advantage of its established name and reputation throughout the
world. Additionally, by sourcing materials (parts and machine carcasses) at lower cost,
greater commercial benefits could be derived through either increased sales by offering
lower prices or by maintaining prices and selling at higher margins. Meanwhile,
ChangZhong could also achieve its commercial objectives by supplying carcasses to
Midland Tools rather than trying to sell finished machines. Equally important, the
subcontracting arrangement did not incur significant extra cost to ChangZhong because it
already had sufficient expertise to manufacture the sub-contract parts and the general
assembly skills to make the carcasses. Midland Tools and ChangZhong would be able to
share the product development costs and future profits from sales when the newly developed
products were introduced into the market, thereby ensuring a financially equitable
arrangement in phases three and four. Midland Tools would also receive a royalty on future
sales in China.
The main benefits of the collaboration for Midland Tools are in terms of cost reduction.
There are three aspects of the collaboration from which this is derived:
i) The purchase of carcasses from ChangZhong which would otherwise be manufactured by
Midlands Tools at higher cost.
ii) The purchasing of other parts from ChangZhong which otherwise would be supplied by
subcontractors at higher cost.
iii) The effective use of each partner’s expertise for co-design and co-development.
ChangZhong on the other hand obtained advanced knowledge and skills in the following
ways:
i) By learning process programming know-how and acquiring assembly know-how and
skills from the process planning and build specifications.
ii) By acquiring product design and development know-how from drawings provided by
Midland Tools and co-design and co-development exercises.
iii) By gathering quality control and production management knowledge through training
and phased project planning.
The collaboration brought invaluable strategic benefits to both partners. Midlands Tools had
the opportunity of exploiting the commercial potential of its technology by reducing cost,
increasing sales in existing markets and developing new markets. It also benefited from the
complementary knowledge of ChangZhong when co-designing and co-developing the new
products. ChangZhong gained access to leading edge technology for a specific product,
thereby enabling it to optimise its future product development. Since the machine being
chosen for the collaboration was relatively smaller in size and lower in value compared with
the other products in Midland Tool’s product portfolio, the strategic benefit for both partners
was the opportunity to develop a highly competitive new machine range in terms of
performance price ratio, and consequently to a create a new niche in both the world and
Chinese markets.
The collaboration was fundamentally based on the enhancement of joint competitive
strength by exploiting each party’s advantage. Midlands Tools (the technology supplier)
and ChangZhong (the acquirer) obtained, respectively, the benefits of technological and cost
advantages. Moreover, each other’s respective advantage was the other’s disadvantage. By

26
jointly using their complementary advantages they could achieve a competitive position that
would otherwise be out of reach of each partner on its own (see Figure 4). In line with this
strategy the operational approach to the collaboration placed emphasis on how best to
employ each party’s strength along with its capability for improvement so as to achieve
sustainable enhancement of joint competitiveness.
Successful transfer of technology through this type of collaboration depends on a
commitment on the part of both parties that will lead to the realisation of mutually
compatible objectives. Overall, Midland Tools’ and ChangZhong’s objectives were well
matched but the question arises of how to guide the operation towards realising the mutual
transfer objectives. As mentioned earlier, combining together high technology and low cost
advantage is the core for such technology collaborations. However, in many such cases
problems have been encountered in that acquirers may not have access to adequate
knowledge if transfer is driven by cost reduction objectives alone. This in turn often leads to
failure in achieving an adequate return with consequently neither of the two parties’
objectives being realised. To ensure the realisation of both parties’ objectives the
collaboration arrangement between Midland Tools and ChangZhong was designed as a
comprehensive package. One of the key features of the arrangement was to effectively link
cost reduction practice with the technology transfer and learning process. In other words,
costs were progressively reduced while technology was gradually transferred. Cost
reduction targets and transfer targets ran in parallel throughout each phase so that further
cost reductions could be achieved along with the acquirer’s technological capability
improvement derived from the transferred technology. The co-design and co-development
of the new product was the thread linking together cost reduction practice and the transfer
process and, based on this aspect, it was decided a new product featuring high technology
and low cost.
Figure 4 Enhancement of joint competitive strength through exploitation of
complementary advantage.
Technology
Cost
Low
High
High
Uncompetitive
Supplier’s
position
Acquirer’s
position
Joint
position
Lessons for the Arab world

27
This paper now looks at the situation in the Arab world and seeks to find some lessons based
on the foregoing discussion about technology transfer to East Asian countries. As an initial
comment, however, it should be said that no attempt has been made here to consider the
special circumstances relating to the Muslim faith that are often considered relevant to Arab
and other countries where Islam is the main religion among the population (Zuriek, 1978;
Niazi, 1996; Hegasy, 1999). In finding lessons for the Arab world regarding the question of
technology transfer and development it is first appropriate to make some comparisons
between the respective economies of the Arab and Asian regions. Table 4 therefore compares
the principal countries in the Arab region with those in the region of East and Southeast Asia.
In terms of total GDP it can be seen from the table that the economies of countries such as
Saudi Arabia, Egypt and Algeria are comparatively similar to those of Thailand, Singapore
and Malaysia. Also, in terms of GDP per capita the UAE, Qatar and Kuwait have similar
figures to Hong Kong, Taiwan and South Korea.
Table 4 GDP and GDP per capita in the principal countries of the Arab region and East
and Southeast Asia (1998)
Source: United National Economic and Social Commission for Western Asia / Asian Wall Street Journal
Arab countries
Asian countries
Country GDP
(US$
mill)
Pop.
(mill) GDP/
Capita
(US$)
Country GDP
(US$
mill)
Pop.
(mill) GDP/
capita
(US$)
S. Arabia 128,882 20.18 6,387 Japan 3,803,554 126.28 30,120
Egypt 82,704 65.98 1,253 China 989,100 1,260.00 785
Algeria 51,477 30.08 1,711 S Korea 318,528 46.11 10,360
UAE 46,490 2.35 19,783 Taiwan 253,510 21.20 11,958
Morocco 33,552 27.38 1,225 H. Kong 154,330 6.20 24,892
Libya 32,742 5.34 6,131 Thailand 114,269 60.30 1,895
Kuwait 25,234 1.81 13,946 Singapore 92,951 3.48 26,710
Syria 24,093 15.33 1,572 Indonesia 78,409 206.34 380
Tunisia 18,940 9.34 2,028 Malaysia 66,778 21.41 3,119
Lebanon 15,526 3.19 4,867 Philippines 64,625 72.94 866
Oman 14,174 2.38 5,955 Vietnam 23,501 77.56 303
Sudan 10,981 28.29 388
Qatar 9,653 0.58 16,643
Jordan 7,386 6.30 1,172
Bahrain 6,184 0.60 10,307
Yemen 5,160 16.89 306
Iraq 3,949 21.80 181
Of course it is important to recognise that the high GDP figures of many Arab countries,
especially those of the Gulf states, are inflated by revenues from the extractive industries,
principally oil and gas production. Table 5 puts this into perspective. In the case of nine of
the Arab countries in this table the added value for their extractive industries is in excess of
US$ 3 billion and seven have GDP per capita figures for their extractive industries in excess
of US$ 1,000. For comparative purposes this table also shows the value added and GDP per
capita for the manufacturing industries of the Arab countries. Here, for eight countries the
value added for manufacturing is more than US$3 billion and for five the GDP per capita for

28
manufacturing is more than US$ 1,000 (For detailed information on GDP and the output of
extractive and mining industries in the Arab countries see Appendices 1 to 5). However,
these data should be interpreted with care because in many of the oil and gas producing
countries their manufacturing activities are related to 'downstream' processes such as
petroleum refining and chemical production. Therefore the final column in the table shows
the ratio between the GDP per capita for each countries' manufacturing and extractive
industries ('B' ) 'A'). Where there is a higher value for this ratio the manufacturing activities
are likely to be less related to the oil and gas sector. For example Egypt, Tunisia and
Morocco all have well developed textile, clothing and footwear industries while Lebanon
produces furniture and metal goods. Iraq and Sudan are special cases in this analysis. Due to
the international embargo on exports Iraq's oil production was only $US 26 million in 1998
compared with US$ 1,665 million in 1990, while Sudan's long-running civil war has had the
effect of distorting its economic activities.
Table 5 The relative size of the extractive and manufacturing sectors in the Arab
countries Source: United Nations Economic and Social Commission for Western Asia and Arab Industrial
Development and Mining Organization
Country Value
added of
extractive
industries
(US$ mill)
GDP/capita
for extractive
industries
(US$)
'A'
Value added
of
manufacturing
industries
(US$ mill)
GDP/capita for
manufacturing
industries
(US$)
'B'
'B' ) 'A'
S. Arabia 35,870 1,776 12,542 620 0.34
Algeria 16,569 550 3,986 132 0.24
UAE 10,239 4,352 5,500 2,334 0.54
Libya 8,402 1,576 3,455 650 0.41
Kuwait 7,796 4,309 3,009 1,660 0.38
Egypt 5,879 89 10,112 153 1.72
Oman 4,327 1,816 669 1,231 0.68
Syria 4,055 264 1,723 113 0.43
Qatar 3,602 6,208 718 1,231 0.20
Yemen 976 58 629 37 0.64
Bahrain 841 1,402 788 1,308 0.93
Morocco 686 25 5,585 203 8.12
Jordan 305 48 1,197 190 3.96
Tunisia 243 26 6,066 650 25.00
Lebanon 39 15 1,538 482 32.13
Iraq 26 1 245 11 11.00
Sudan 5 2 637 113 56.50
In terms of their incentive to attract foreign investment and transfer technology, as well as
their ability to absorb and use the technology, the countries of the Arab region need to be
separated into two groups, i.e. those with comparatively large energy resources and those
without. Of course an additional factor for countries with energy resources is the extent to
which these support the overall economy and the relative period of time their reserves are
expected to last. Saudi Arabia has the largest reserves of oil in the world (26% of the proved
total) and, relative to its size, Kuwait is similarly well endowed (10% of the world total). The
UAE also has reserves of oil and gas that should last for over 100 years (CIA, 2000). All
these three countries have a large GDP per capita and buoyant economies. However, not all
the major oil and gas producing countries are as strong economically. For example both

29
Algeria and Libya have high levels of unemployment (both around 30%) and low living
standards (which in Libya's case is due to an uneven distribution of the country's wealth).
Both these countries have therefore tried to diversify by attracting foreign investment outside
the energy sector, but to date with limited success.
The most interesting case in the Arab region as far as technology acquisition is concerned is
Egypt. Here, production of oil and gas is large in absolute terms but relative to the total
population it is fairly small. It also has a moderately high unemployment rate (estimated at
12% in 1999). Through a reduction in the state-owned sector and the implementation of new
business legislation it has increasingly attracted foreign investment, mainly in low technology
industries such as textiles and clothing, but also in some higher technology areas such as
automotive manufacture. It has also sought to upgrade its physical and communications
infrastructure in order to improve its attractiveness to investors. As a consequence a number
of industrial sectors have been developed (Abdallah et al, 1999):
• The textile industry, representing 31% of total industrial output at US$ 2.3 billion
• The chemical industry, representing 26% of total industrial output at US$ 1.6 billion
• The food industry, representing 18% of total industrial output at US$ 1.2 billion
• The metal industries, representing 8% of total industrial output at US$ 750 million
Egypt has also tried to foster the growth of small, technology based, companies though a
nationwide incubator programme under the umbrella of the Social Fund for Development
(Darwish, 1999). It is important to note that during the last decade Egypt has experienced
one of the highest GDP growth rates in the Arab world, bringing it closer to energy-rich
Saudi Arabia in terms of total GDP (See Figure 5). This been achieved through a combination
of growth in both the extractive and manufacturing sectors (See Appendices 2 and 4).
Figure 5 GDP growths of Egypt and Saudi Arabia, 1990 - 1998 (million US$)
0
50,000
100,000
150,000
200,000
1990 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98
Saudi Arabia
Egypt
Box 8 – The foreign investment phenomenon
Foreign direct investment (as opposed to portfolio investment) is often assumed to
be a proxy for technology transfer. Although not all foreign investment is in the form
of technology (as was mentioned in Box 2), in countries with fast economic growth a
high percentage of technology based investment is a common feature. In the case of

30
China, for example, it is estimated that about 80% of the foreign direct investment
has been in the form of technology, much of which has been transferred into high
value-adding manufacturing industries and this is generally regarded as being one of
the main contributors to its success in becoming a major international competitor in a
number of key sectors. Some of the industries into which this technology has been
transferred include machinery, telecommunications equipment, steel making,
consumer electronics, pharmaceuticals etc., as illustrated in the earlier case studies
and elsewhere (Bennett et al, 1996; He et al, 1998).
However, when examining the situation in the Arab world the picture becomes less
clear. Many of the Arab countries have foreign investments in the oil and gas
industries that do not involve the type of technology that will raise the general level of
productive capability and hence improve national competitiveness. Figure 6 shows
the inward forward direct investment flows into a number of selected countries over
the last 15 years, including some in the Arab region.
Figure 6 Inward foreign direct investment into selected countries, in billions of
US$ (UNCAT, 2000)
-5
0
5
10
15
20
25
30
35
40
45
50
1985-
1995
Ave
1996 1997 1998 1999
China
Brazil
Egypt
Hong Kong
Morocco
Saudi Arabia
South Korea
Taiwan
The very large amount of investment into China is evident, although this has reduced
more recently. Brazil has also seen large amounts of investment, which have mainly
resulted from the policy of privatising its state owned industries during the early
1990s. This has led to foreign companies investing in a number of large Brazilian
domestic industries, especially in the telecommunications and utilities sectors,
although not always with accompanying technology transfer. Hong Kong's situation
is interesting in that it has always been a conduit for foreign investment into mainland
China, so it is significant that the amount of investment has continued to rise since
the handover in 1997. South Korea and Taiwan have also seen continued
increases, except for a temporary downturn in Taiwan in 1998. This has led to both
these countries developing world class productive capability in a number of high
technology manufacturing industries, especially electronics production where they
are now second only to Japan in the East Asian region (see Figure 7).
Two of the Arab countries selected for this analysis, Egypt and Morocco, have
received modest amounts of foreign direct investment compared with many of the
countries in the East Asian region. Nevertheless, at around US$ 1 billion per annum
it is significant compared to most of the Arab world. Among the Arab countries the

31
greatest amount of foreign investment has been going into Saudi Arabia. Despite its
huge oil reserves Saudi Arabia has a burgeoning population and has carried a
budget deficit since 1983. The government has therefore increased the amount of
private ownership of its economic activity and about 35% of GDP now comes from
the private sector. In turn this has increased the amount of foreign investment into
its petroleum and utilities sectors, although there has also been an attempt to
increase the amount of non-oil exports. To this end the Saudi government is
promoting a number of joint venture opportunities to foreign investors in such
industries as food processing, automotive component manufacture; building
materials and ceramics, chemicals, electrical equipment, engineering, furniture,
paper products, plastics, rubber and textiles (US - Saudi Arabian Business Council,
2001).
Figure 7 Output, capability and experience comparison of East Asian
electronics industries (WTEC, 1997)
It must be noted that one peculiar characteristic of the foreign investment data for
Saudi Arabia, along with some other Arab countries such as Yemen and Libya, is
that there have been periods where inward foreign investment has been negative,
possibly due to divestment of assets by foreign companies exceeding the
investments made during that period. Among the major East Asian counties only
Indonesia has exhibited this characteristic, during 1998 and 1999. The relative
change in foreign investment, and the erratic nature of investment into Saudi Arabia,
are clearly illustrated in Figure 8.
Figure 8 Growth in foreign direct investment into selected countries, 1985 -
1995 Average = 100 (Based on UNCAT, 2000)

32
-
2000
-1000
0
1000
2000
3000
4000
5000
6000
1985-
1995
Ave
1996 1997 1998 1999
China
Brazil
Egypt
Hong Kong
Morocco
Saudi Arabia
South Korea
Taiwan
The opportunities for national technology development
There appears to be common agreement that the countries of the Arab world need to improve
the output of their non-energy related industries (Maeena, 1997). However, the Arab
countries number around twenty with a total population of approximately 280 million.
Although there is a view that economic integration is a prerequisite for achieving the desired
level of industrial competitiveness the history of the region shows that numerous attempts at
unification and cooperation have come to very little (Zineldin, 1998). Therefore it is unlikely
that technological development could be achieved within a single economic policy as has
occurred in China over the last twenty years.
The way in which technological development and improved national competitiveness of the
non energy-rich countries could be achieved is through the "stages" approach of the Asian
NICs in which advantage shifts from the relatively low labour cost based industries such as
textiles and simple metal goods to more skill and capital intensive manufacturing as their
economies’ factor endowments change in the course of development. Like the Asian NICs
the Arab countries tend to compete with each other rather than cooperate. Therefore the
strongest companies that survive the intensity of competition would emerge as the major
industrial enterprises. These will be the companies that can acquire and harness technology
most efficiently to create their competitive advantage. The concept of technology acquisition
is not new to the Arab countries. Zahlan (1978) refers to the fact that more than six hundred
large and small petroleum and petrochemical projects were executed in the Arab world in a
period of almost twenty years since 1959. However, it is most probable that these would
mainly be turnkey projects with very little know-how being transferred to the host country.
Therefore the technological dependence on the foreign technology supplier remains. The
opinion of some, therefore, is that this technological dependence can be reduced by creating
domestic research and development (R&D) capability (UNCTAD, 1978) although, as was
mentioned earlier, R&D is only one part of the overall process of technological development
and improved competitiveness.
Given the above arguments, the way forward for the non energy-rich Arab countries would
seem to be based on the approach being taken by Egypt as being closest to fitting the "stages"

33
theory of the Asian NICs. This takes the form of a dual strategy comprising liberalisation of
the legislative and trade regime coupled with the acquisition and adsorption of technology
through foreign investment (Youssef, 1999). The main incentive for foreign companies to
transfer technology to Egypt is through a local content requirement that obliges them to
develop the capability of indigenous suppliers so their own vendor quality standards can be
met. This has worked with some success in the automotive sector. However, it is generally
agreed that the automotive industry in Egypt is populated by too many manufacturers for the
size of the market. Hence it is likely that this, and other industries, will eventually follow the
pattern of development that has been common in Asia where rationalisation subsequently
takes place involving closures and mergers between competing firms, leaving the most
efficient to form the bedrock of the technology based economy.
Based on the experiences of the East Asian economies there are a number of t mechanisms
that could be explored as a means of encouraging and supporting technology transfer and
development. There could include the following:
• Liberalisation of foreign investment regimes and provision of opportunities for
technology based foreign companies to participate in local economic activity (e.g.
Jomo et al, 1999).
• Identification and targeting of specific industrial sectors for special policies aimed at
promoting their growth and competitiveness (e.g. Belderbos, 1997; Lee, 1997).
• Provision of support for innovation in small to medium sized enterprises (e.g. Huang
and Ward, 2001).
• Establishment of high-tech incubators and industrial zones, i.e. creation of
"technopoles" (e.g. Bennett et al, 1999).
Apart from such specific measures, which to be most effective would ideally require co-
operation among the Arab countries as well as measures taken by individual governments,
there is also a need for the Arab world to engage with the developed world on issues relating
technological development. This needs to be done within the context of any policy
statements or papers that have been prepared by government bodies and agencies in, e.g. the
USA and European Union (see for example Office of Technology Assessment, 1984; EU,
2001).
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38
Appendix 1 GDP of the Arab countries in producer's value at current prices (Bulletin of industrial
Statistics for the Arab countries 1990 - 1998, United Nations Social and Economic Commission for Western Asia and
Arab Industrial Development and Mining Organization, Fourth Issue)
Million US$
Country 1990 1991 1992 1993 1994 1995 1996 1997 1998
Algeria 44,000 37,084 45,876 48,162 34,381 37,850 44,107 46,506 51,477
Bahrain 4,529 4,616 4,751 5,200 5,568 5,849 6,102 6,349 6,184
Djibouti 390 452 482 514 548 581 618 656 693
Egypt 35,491 34,228 41,647 46,677 51,471 60,000 67,690 75,605 82,704
Iraq 11,648 4,863 4,667 2,079 2,606 2,730 2,902 3,461 3,949
Jordan 4,012 4,206 5,209 5,568 6,076 6,506 6,645 6,976 7,386
Kuwait 18,308 10,833 19,886 24,022 24,848 26,595 30,696 30,242 25,234
Lebanon 2,784 4,151 5,464 7,539 8,924 10,968 12,822 14,293 15,526
Libya 28,415 33,209 31,083 34,932 32,593 35,337 35,811 33,272 32,742
Mauritania 1,087 1,196 870 911 975 1,013 1,076 942 939
Morocco 26,465 29,620 28,844 25,824 31,171 33,204 36,468 32,649 33,552
Oman 11,670 11,327 12,436 12,478 12,901 13,785 15,258 15,779 14,174
Palestinian Authority 2,219 2,362 2,845 2,874 2,976 3,575 3,897 4,173 4,532
Qatar 7,360 6,884 7,646 7,157 7,374 8,138 9,059 9,193 9,653
Republic of Yemen 8,903 6,607 6,414 4,783 3,329 3,697 5,167 5,611 5,160
Saudi Arabia 104,671 118,034 123,204 118,516 120,167 127,811 141,322 146,494 128,882
Somalia 875 671 … … … … … … …
Sudan 22,414 12,728 2,974 3,972 4,377 5,651 7,048 9,299 10,981
Syria 9,583 10,818 12,598 13,978 16,814 18,659 21,406 22,775 24,093
Tunisia 12,922 13,922 14,412 13,991 16,048 17,889 19,571 18,257 18,940
UAE 33,653 33,920 35,413 35,745 38,268 42,807 47,993 49,354 46,490
Total 391,401 381,731 404,720 414,920 421,414 462,644 515,660 531,886 523,292

39
Appendix 2 Value added of mining (extractive) industries for the Arab countries in producer's value
at current prices (Bulletin of industrial Statistics for the Arab countries 1990 - 1998, United Nations Social and
Economic Commission for Western Asia and Arab Industrial Development and Mining Organization, Fourth Issue)
Million US$
Country 1990 1991 1992 1993 1994 1995 1996 1997 1998
Algeria 10,270 10,939 11,014 10,368 7,791 9,648 12,951 14,013 16,569
Bahrain 867 779 774 815 796 900 1,105 1,187 841
Djibouti … … … … … … … … …
Egypt 1,678 2,881 2,891 3,595 3,958 4,834 4,686 5,286 5,879
Iraq 1,665 36 19 1 -1 -2 3 20 26
Jordan 291 229 234 191 182 262 268 285 305
Kuwait 7,222 1,161 6,146 9,840 9,531 10,528 13,816 12,158 7,796
Lebanon 8 11 15 21 25 30 35 37 39
Libya 9,544 9,743 9,797 8,169 7,602 8,017 8,205 8,259 8,402
Mauritania … … … … … … … … …
Morocco 426 459 491 514 575 579 621 654 686
Oman 5,601 4,770 5,102 4,656 4,743 5,281 6,441 6,353 4,327
Palestinian Authority 8 8 10 10 16 20 26 22 28
Qatar 2,799 2,240 2,739 2,334 2,358 3,004 3,509 3,503 3,602
Republic of Yemen 1,250 699 494 306 249 613 1,566 1,658 976
Saudi Arabia 37,507 42,411 47,230 39,978 39,810 44,297 54,070 54,320 35,870
Somalia … … … … … … … … …
Sudan 21 12 2 3 3 4 4 5 5
Syria 1,374 1,069 1,086 1,069 1,049 1,189 2,730 3,725 4,055
Tunisia 153 148 126 106 133 161 188 216 243
UAE 15,783 14,871 14,739 13,002 12,253 13,215 15,718 14,742 10,239
Total 96,467 92,466 102,910
94,977 91,072 102,577 125,942 126,424 99,886

40
Appendix 3 Percentage share of mining (extractive) industries in GDP for the Arab countries
(Bulletin of industrial Statistics for the Arab countries 1990 - 1998, United Nations Social and Economic
Commission for Western Asia and Arab Industrial Development and Mining Organization, Fourth Issue)
Percentage
Country 1990 1991 1992 1993 1994 1995 1996 1997 1998
Algeria 23.3 29.5 24 21.5 22.7 25.5 29.4 30.1 32.2
Bahrain 19.1 16.9 16.3 15.7 14.3 15.4 18.1 18.7 13.6
Djibouti … … … … … … … … …
Egypt 4.7 8.4 6.9 7.7 7.7 8.1 6.9 7 7.1
Iraq 14.3 0.7 0.4 0.1 -0.05 -0.1 0.1 0.6 0.7
Jordan 7.3 5.4 4.5 3.4 3 4 4 4.1 4.1
Kuwait 39.4 10.7 30.9 41 38.4 39.6 45 40.2 30.9
Lebanon 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Libya 33.6 29.3 31.5 23.4 23.3 22.7 22.9 24.8 25.7
Mauritania … … … … … … … … …
Morocco 1.6 1.5 1.8 2 1.8 1.7 1.7 2 2
Oman 48 42.1 41 37.3 36.8 38.3 42.2 40.3 30.5
Palestinian Authority 0.4 0.4 0.4 0.3 0.5 0.6 0.7 0.5 0.6
Qatar 38 32.5 35.8 32.6 32 36.9 45 40.2 30.9
Republic of Yemen 14 10.6 7.7 6.4 7.5 16.6 30.3 29.5 18.9
Saudi Arabia 35.8 35.9 38.3 33.7 33.1 34.7 38.3 37.1 27.8
Somalia … … … … … … … … …
Sudan 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.05
Syria 14.3 9.9 8.6 7.6 6.2 6.4 12.8 16.4 16.8
Tunisia 1.2 1.1 0.9 0.8 0.8 0.9 1 1.2 1.3
UAE 46.9 43.8 41.6 36.4 32 30.9 32.7 29.9 22
Total 24.6 24.2 25.4 22.9 21.6 22.2 24.4 23.8 19.1

41
Appendix 4 Value added of manufacturing industries for the Arab countries in producer's value at
current prices (Bulletin of industrial Statistics for the Arab countries 1990 - 1998, United Nations Social and
Economic Commission for Western Asia and Arab Industrial Development and Mining Organization, Fourth Issue)
Million US$
Country 1990 1991 1992 1993 1994 1995 1996 1997 1998
Algeria 4,083 3,309 4,167 4,588 3,008 3,081 3,225 3,724 3,986
Bahrain 493 517 516 640 808 1,026 896 932 788
Djibouti … … … … … … … … …
Egypt 4,431 4,496 5,484 5,729 6,033 6,851 8,060 9,061 10,112
Iraq 1,029 311 457 119 86 106 65 175 245
Jordan 579 608 735 787 986 1,001 962 1,066 1,197
Kuwait 2,121 536 1,784 2,109 2,638 2,982 3,683 4,033 3,009
Lebanon 352 474 703 899 1,028 1,250 1,439 1,477 1,538
Libya 2,670 2,343 3,043 2,358 2,412 2,776 2,992 3,231 3,455
Mauritania … … … … … … … … …
Morocco 3,553 4,042 3,936 3,690 4,522 5,056 5,218 5,260 5,585
Oman 342 390 456 525 560 643 616 634 669
Palestinian Authority 141 147 175 173 314 311 381 453 479
Qatar 874 852 814 717 694 683 687 688 718
Republic of Yemen 722 645 712 469 307 377 552 620 629
Saudi Arabia 8,511 9,559 10,481 10,090 10,540 11,434 12,546 13,509 12,542
Somalia … … … … … … … … …
Sudan 1,996 1,193 265 346 385 495 500 600 637
Syria 699 783 865 1,013 1,237 1,551 1,645 1,460 1,723
Tunisia 3,349 3,651 3,646 3,490 4,118 4,688 5,077 5,587 6,066
UAE 2,643 2,661 2,861 3,035 3,907 4,452 4,883 5,511 5,500
Total 38,599 36,529 41,111 40,813 43,593 48,775 53,439 58,032 58,891

42
Appendix 5 Percentage share of manufacturing industries in GDP for the Arab countries prices
(Bulletin of industrial Statistics for the Arab countries 1990 - 1998, United Nations Social and Economic Commission
for Western Asia and Arab Industrial Development and Mining Organization, Fourth Issue)
Percentages
Country 1990 1991 1992 1993 1994 1995 1996 1997 1998
Algeria 9.3 8.9 9.1 9.5 8.8 8.1 7.3 8 7.7
Bahrain 10.9 11.2 10.9 12.3 14.5 17.5 14.7 14.7 12.7
Djibouti … … … … … … … … …
Egypt 12.5 13.1 13.2 12.3 11.7 11.4 11.9 12 12.2
Iraq 8.8 6.4 9.8 5.7 3.3 3.9 2.2 5.1 6.2
Jordan 14.4 14.5 14.1 14.1 16.2 15.4 14.5 15.3 16.2
Kuwait 11.6 5 9 8.8 10.6 11.2 12 13.3 11.9
Lebanon 12.6 11.4 12.9 11.9 11.5 11.4 11.2 10.3 9.9
Libya 9.4 7.1 9.8 6.8 7.4 7.9 8.4 9.7 10.6
Mauritania 1 1 1 0.9 1 1 1 1.2 1.4
Morocco 13.4 13.6 14.7 14.3 14.5 15.2 14.3 16.1 16.6
Oman 2.9 3.4 3.7 4.2 4.3 4.7 4 4 4.7
Palestinian Authority 6.4 6.2 6.1 6 10.6 8.7 9.8 10.8 10.6
Qatar 11.9 12.4 10.7 10 9.4 8.4 7.6 7.5 7.4
Republic of Yemen 8.1 9.8 11.1 9.8 9.2 10.2 10.7 11.1 12.2
Saudi Arabia 8.1 8.1 8.5 8.5 8.8 8.9 8.9 9.2 9.7
Somalia … … … … … … … … …
Sudan 8.9 9.4 8.9 8.7 8.8 8.8 7.1 6.4 5.8
Syria 7.3 7.2 6.9 7.2 7.4 8.3 7.7 6.4 7.2
Tunisia 25.9 26.2 25.3 24.9 25.7 26.2 25.9 30.6 32
UAE 7.9 7.8 8.1 8.5 10.2 10.4 10.2 11.2 11.8
Total 9.9 9.6 10.2 9.8 10.3 10.5 10.4 10.9 11.3