THE
MIT JAPAN
PROGRAM
(a
a. '.
Science, Technology,
Management
Is
*
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.
JAPANESE FOREIGN DIRECT INVESTMENT
AND TECHNOLOGY TRANSFER
IN ASIA
Shujiro Urata
MITJP 96-23
Center for International Studies
Massachusetts Institute of Technology
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Distributed courtesy of the
MIT JAPAN PROGRAM
Science * Technology * Management
E38-754
Centerfor InternationalStudies
77 MassachusettsAvenue, Cambridge, MA 02139
Tel: 617-253-2839
Fax: 617-258-7432
Email: <robartimitedu>
OMIT Japan Program
JAPANESE FOREIGN DIRECT INVESTMENT
AND TECHNOLOGY TRANSFER
IN ASIA
Shujiro Urata
MITJP 96-23
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About the MIT Japan Program
and its Working Paper Series
The MIT Japan Program was founded in 1981 to create a new generation
of technologically sophisticated "Japan-aware" scientists, engineers, and
managers in the United States. The Program's corporate sponsors, as well
as support from the government and from private foundations, have made
it the largest, most comprehensive, and most widely emulated center of
applied Japanese studies in the world.
The intellectual focus of the Program is to integrate the research
methodologies of the social sciences, the humanities, and technology to
approach issues confronting the United States and Japan in their relations
involving science and technology. The Program is uniquely positioned to
make use of MIT's extensive network of Japan-related resources, which
include faculty, researchers, and library collections, as well as a Tokyobased office. Through its three core activities, namely, education,
research, and public awareness, the Program disseminates both to its
sponsors and to the interested public its expertise on Japanese science
and technology and on how that science and technology is managed.
The MIT Japan Program Working Paper Series provides an important
means to achieving these ends.
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I. Introduction
Foreign direct investment (FDI) in the world has increased rapidly in recent
years.
One of the main interests on the part of the countries hosting FDI is to
acquire technologies, which would contribute to their economic growth.
Among
various means of internationaltechnology transfer (hereafter, technology transfer
for short) including international trade in technology in the form of patents and
international trade in capital goods embodying technology, the importance of FDI
has increased significantly as multinational enterprises (MNEs) have expanded
their FDI activities rapidly. Technology transfer is also a main concern for MNEs,
as success or failure of technology transfer is a crucial element in determining the
outcome of their overseas operation.
In light of increasing importance of technology transfer involving FDI in
recent years, this paper attempts to examine the following two issues. One is to
identify the patterns of technology transfer through FDI and the other is to
analyze the determinants of the successful technology transfer.
Such analysis
will be of interest not only to academics but also to both MNEs undertaking FDI
and policy makers formulating FDI policies and technology policies.
The analysis will be conducted on Japanese firms in four machinery
industries
(general
machinery,
electric
machinery
including
electronics,
automobiles, and precision instruments) in East Asia, as a unique set of detailed
information on technology transfer by Japanese firms in these industries became
available. The choice of Japanese firms as a subject of the analysis is of interest
at least for the following two reasons. One is that Japanese firms have undertaken
FDI actively in East Asia and as a consequence their impact on economic activities
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of the host countries hat grown.
The other is that the pattern of technology
transfer by Japanese firms has been argued to be different from that by foreign
firms of other countries.
Despite the interest in making a comparison on the
patterns of technology transfer involving Japanese firms on the one hand and
those involving non-Japanese foreign firms on the other, this paper undertakes
an in-depth analysis of the patterns of technology transfer by Japanese firms
only due to data availability, and carries out some comparisons based on casual
observations made by local workers with experiences in working for foreign firms.
The paper is
organized as follows.
Section II discusses the recent
development of Japanese outward FDI with a focus on East Asia, with a purpose of
presenting background information for the analysis in Section III.
Section III
examines the pattern of technology transfer by Japanese firms in East Asia and
identifies the factors that would influence the success or failure of technology
transfer.
Section IV, the final section, presents some concluding comments.
II. Japanese Foreign Direct Investment in Asial
Japanese FDI increased on a large scale and underwent major changes in
its regional and sectoral composition in the latter half of the 1980s (Figures 1 and
2). The scale of FDI during the four year period of 1986-89 was unprecedented,
far exceeding the total FDI from all previous years combined. Equally as dramatic
as the size of the boom was the pace at which Japanese FDI declined after reaching
a peak in 1989.
Several factors may be responsible for such changes in Japanese FDI in the
l This section draws on Kawai and Urata (1995).
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L^.P·il-l-I·X-·-__---1_1_·--__1^.^____.._Xll.i-.ll.I
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latter half of the 1980s. First, the recent globalization of business activities, made
possible by a general rise in Japanese firms' managerial and technological
capabilities, was a natural underlying factor behind the surge of Japanese FDI.
Needless to say, the rapid and steep appreciation of the yen exchange rate against
the major international currencies was the most important macroeconomic factor
leading to the expansion of FDI in the second half of the 1980s and also in the
early 1990s.
The drastic yen appreciation stimulated Japanese FDI in two ways. One way
was the dramatic "relative price" effect. The yen appreciated by 37% between 1985
and 1988 on a real, effective basis.
These relative price effects substantially
reduced Japan's international price competitiveness.
To cope with the new
international price structure, a number of Japanese firms moved their production
base to foreign countries, especially to East Asia, where production costs were
lower.
Another way in which yen appreciation had a positive impact on Japanese
FDI was the "liquidity" or "wealth" effect.
To the extent that yen appreciation
made Japanese firms relatively more "wealthy" in the sense of increased collateral
and liquidity, it enabled them to finance FDI relatively more cheaply than their
foreign competitors. Liquidity was also injected into the economy by the Bank of
Japan in the second half of the 1980s, pushing up the prices of shares and stock
and land, to result in the "bubble economy." Such an increase in liquidity and the
subsequent asset-price inflation also had a positive impact on Japan's FDI.
Japanese FDI in the 1980s was directed largely to North America and Europe,
mainly in services and manufacturing.
These two developed regions together
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absorbed two-thirds of Japan's FDI outflows. Although a smaller share of Japan's
FDI went to East Asia in the 1980s, investments in manufacturing were relatively
active. The 1990s have seen some changes in the patterns of Japan's FDI. First,
Japan's FDI to East Asia started to rise, resulting in an increase in its share in
Japan's FDI. Major factors behind Japan's FDI in East Asia include the region's
robust economic growth, low unit labor costs, liberalization and pro-FDI policies,
and yen-rate appreciation.
Another noticeable change was that manufacturing
firms have been undertaking FDI actively, particularly in East Asia.
Since the mid-1980s, geographical distribution of Japan's FDI to Asia has
changed significantly, from the Asian NIEs(Newly Industrializing Economies) to
ASEAN (Association of South East Asian Nations), and then to China and other
Asian countries.
2
The NIEs attracted FDI until the late 1980s through FDI
promotion policies. Policy makers in Korea, Taiwan, and Singapore, in particular,
promoted inward FDI in their pursuit of high-tech industrialization.
These
countries enjoyed positive growth brought about by the simultaneous expansion
of trade and inward FDI.
However, Japanese FDI in the Asian NIEs reached a peak in the late 1980s
just as its overall FDI also peaked. The Asian NIEs started to lose some of their
cost advantages due to rapid wage increases and currency appreciation. Firms in
Japan and other advanced economies therefore started to look at other East Asian
countries such as ASEAN as hosts for investment.
One important factor in
2 This observation applies to new FDI. A lack of data precludes one from
obtaining accurate statistics, but there are signs showing that Japan's FDI
undertaken with reinvested earnings has continued to grow in the ASEAN
countries. See, for example, Okamoto and Urata (1994) for the case of Malaysia.
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attracting FDI in manufacturing to ASEAN has been the ASEAN countries' shift
from inward-oriented towards outward-oriented strategies, which were carried
out through their unilateral liberalization of trade and FDI inflows. Such regime
changes have been prompted by the earlier success of outward-oriented policies
in the NIEs.
FDI inflows into China have also grown quickly since 1988-1989 due to
China's gradual but persistent economic reforms, open-door liberalization policy,
and its political and social stability despite the Tiananmen Square incident in 1989.
As of 1994, China was the largest recipient of Japanese FDI in Asia. Attractiveness
of China as a host to FDI has increased recently because some ASEAN countries
have lost their attractiveness due to the emergence of serious bottlenecks in
conducting
businesses
in
these
countries
such
infrastructure and shortage of skilled manpower.
as
underdevelopment
of
In recent years, despite at
significantly lower scale, Japanese FDI to other Asian countries such as Vietnam
and India has begun to increase.
Since the 1980s, Japanese FDI in East Asia has primarily been aimed at the
manufacturing and services sectors. A distinct characteristic of Japanese FDI in
Asia is the relatively large share of manufacturing in comparison to other regions.
The magnitude of Japanese manufacturing FDI increased more than seven-fold in
eight years from $0.5 billion in 1985 to $3.7 billion in 1993. The rate of increase in
Japanese manufacturing FDI in East Asia during the period was greater than the
corresponding
FDI to the world,
and the share of East Asia in Japanese
manufacturing FDI rose from 19.6 percent in 1985 to 32.9 percent in 1993.
The
share of manufacturing in overall Japanese FDI in East Asia also rose from 32
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percent to 55 percent over the 1985-93 period.
The geographical shift in the
importance of Japanese manufacturing FDI away from the NIEs to ASEAN and then
to China is pronounced.
Sectoral composition of Japanese manufacturing FDI in East Asia has
changed notably since the latter half of the 1980s.
The most remarkable
development is that Japanese FDI in the electric machinery (including electronics)
has expanded sharply. At the end of 1991 the share of electric machinery in total
Japanese FDI in Asia stood at 9.4 percent, the largest share among manufacturing
sectors (Table 1) 3. The importance of electric machinery in Asia can be observed
by the fact that its share in Japanese FDI in Asia is significantly greater than the
corresponding share in Japanese FDI in the world (6.4 percent).
Among other
manufacturing sectors, chemicals and metals have relatively large shares in
Japanese FDI in Asia. The shares for general machinery, transport machinery, and
other
manufacturing,
in
which
precision
instruments
are
included,
are
respectively 3.6, 3.5 and 4.7 percent.
III. Technology Transfer by Japanese Firms in East Asia
This section investigates the pattern of technology transfer from Japanese
workers to local workers at Japanese firms in East Asia by using the results of a
questionnaire survey conducted by the Nikkei Research Institute of Industry and
Market. A main purpose of this exercise is to identify the effective strategies for
3 The discussions here refer to Japanese FDI in 1991, as the subsequent
analysis on technology transfer will be conducted by utilizing information in 1991.
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transferring technologies . In the analysis a brief attempt is made to compare the
patterns of technology transfer by Japanese firms and by U.S. firms based on the
observations drawn from the interviews with local workers employed by foreign
firms in several Asian countries.
Ideally an identical questionnaire survey is
conducted on Japanese and non-Japanese foreign firms to identify similarities and
differences regarding their patterns of technology transfer.
III.1 Characteristics of Japanese Firms Surveyed
A questionnaire survey was conducted on Japanese firms in October 1991.5
In addition to questions regarding the patterns of technology transfer, a number
of questions were asked regarding the characteristics of the firm and the methods
used to facilitate technology transfer.
Table 2 presents some characteristics of the surveyed firms.
Out of 133
firms, electric machinery has the largest representation, followed by general
machinery, automobiles and precision machinery. These sectoral shares among the
machinery sectors are similar to those reported in the official statistics (Table 1).
As for the year of start-up, the sample is almost evenly distributed among the
The issue of technology transfer has been extensively analyzed theoretically
and empirically. A large part of empirical studies have analyzed technology
transfer by Western firms and reviewed by several authors including Caves (1982)
and Reddy and Zhao (1990). Empirical studies on Japanese firms published in
English are very few, one of which is Yamashita (1991).
The survey was carried out by the Nikkei Research Institute of Industry
and Market as a part of a research project on technology transfer by Japanese
multinationals. The author participated in the project as a member of the project.
The results of the survey became available for independent research recently.
Questionnaire was sent to 326 firms and 175 firms returned the questionnaire. Out
of 175 firms, response from 133 firms were considered reliable.
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firms starting operation before 1985 and after 1986. As for the type of ownership,
for approximately 70 percent of the firms Japanese hold majority ownership while
for the remaining 30 percent of the firms Japanese have minority ownership.
The rate of job separation over a one-year period was investigated for each
job rank because of the conjecture that technology transfer would be undertaken
effectively under the environment where employment is stable. It was found that
the average job separation rate for officers of the executive class or higher was
a mere 0.6 percent.
Evidently, the people who serve in positions where local
management
is
policy
determined
stay, with the
company.
Even
at the
middle-management level of section chief or higher, the separation rate on average
was no more than 4.1 percent. This finding counters a popular perception of high
job separation rate, characterized as "job-hopping."
On the other hand, the job separation rate among personnel who work at
production sites was as high as 16.9 percent.
This translates into a complete
turnover of personnel within about 6 years. Among different industries, the job
separation rate is low for automobiles.
And among the countries under study,
Hong Kong has a particularly high turn-over rate, while the corresponding rate
is quite low in China and Indonesia.
The job separation rate for engineers, who
are generally involved in technology transfer, was found to be 4.7 percent, a level
which roughly equals that of middle management.
It
is often maintained
among Japanese corporations
that transfer of
technology does not add to the benefit of the company because the local personnel
who acquire the technology soon quit the company. Yet judging from the results
of the survey, it seems that this belief does not hold true, at least not for
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-.-
engineers.
Adoption of Japanese style management by the Japanese firms in their
overseas operation is an interesting
question.
It is often argued that the
success of Japanese firms in the post-WWII period is due to their practicing of
Japanese-style
management, which is generally characterized as having such
features as life-time employment system, labor-management
rotation and multi-task operation
.
conferences, job
Life-time employment system and labor-
management conferences lead to an environment, under which both workers and
management can have mutually agreeable long-term plans for themselves as well
as the firm, which would maximize the firm's profits as well as workers' benefits.
Job-rotation
and
multi-task
are
operation
likely to improve technological
capability of the workers, as both of these systems enable the workers to increase
their understanding of the technologies
perspective.
used in the firm from a broader
Recognizing the importance of Japanese style management for the
success of Japanese firms, one would assume that the success of overseas
affiliates of Japanese firms may depend on the extent to which Japanese firms have
successfully adopted Japanese style management in their overseas operation.
6 The issue of adoption of Japanese style management is closely related to the
issue of "appropriate technology," which has been one of centralissues regarding
technology transfer by foreign firms from developed countries to the recipient
developing countries. According to the critics of the behavior of foreign firms,
foreign firms bring with them technologies suited to developed countries but not
suited for developing countries without modifying the technologies, thereby
exacerbating the problems such as unemployment that host developing countries
face. See, for example, Caves (1982) for more detailed discussion.
I See Kawabe and Kimbara (1991) for concise discussions on Japanese style
management.
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According to the results
of the survey,
adoption of Japanese style
management by Japanese firms in their East Asian operation appears to be limited,
as the share of the firms that practice Japanese style management in total number
of firms under survey is less than 50 percent. Specifically, the respective shares
of firms adopting various components of Japanese style management considered
here in total number of firms are as follows: life-time employment system (30.8%),
labor-management
operation (47.4%).
conferences
(40.6%), job-rotation
Among the industries considered,
(35.3%), and
multi-task
a large proportion of
Japanese firms in automobiles have adopted job rotation and multi-task operation
systems, as approximately 70 percent of firms have adopted these systems. This
may be explained by the fact that the production of automobiles requires a large
number of processes and technologies.
Accordingly, the need for and the
usefulness of job-rotation and multi-task operation is high.
As for the geographical destinations of the sales of the firms under survey,
on average 46.6 percent of their sales were exported and the remaining 53.4
percent were sold in the local market.
There are wide variations in the export
ratios (exports/total sales) for the firms in different sectors and for those located
in different countries.
Among the industries under survey, the export ratio is
high for electric machinery and precision machinery.
These findings largely
reflect the types of policies pursued for different industries by the host country
governments.
Specifically, protective measures are applied in automobiles and
general machinery for their promotion, resulting in a greater emphasis on local
sales, while such measures are not applied to electric machinery and precision
instruments, leading to greater sales orientation toward export market.
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As for the firms located in different countries, the export ratio is high for
the firms in Hong Kong, Singapore, Malaysia, the Philippines and Thailand, while
it is low for the firms in Indonesia, Korea and Taiwan.
These observed patterns
largely reflect the types of trade policies pursued by these countries and the size
of the local market; the export ratio of the firms in the countries, where export
promotion policy is applied and/or where the local market is small, tends to be
high, while the export ratio of the firms in
the countries,
where import
substitution policy is applied and/or where the local market is large, tends to be
low.
The differences in the geographical patterns of sales destinations by
Japanese firms in different industries and in different countries clearly reflect
the motives behind their FDI, export sales or local sales (Table 3). In addition to
the consideration for sales, availability of cheap labor was an important motive for
the firms in generally machinery, electric machinery and precision machinery. For
the firms in the automobile industry, more than 50 percent of them were motivated
to undertake FDI by the FDI undertaken by their business partners.
This
observation reflects the importance of subcontracting production system, or
Shitauke, in automobile production, under which parent firms, assembler of final
products, and subcontractors, supplier of components, have close business ties.
As for the role of FDI promotion policy in attracting FDI, approximately 30 percent
of the Japanese firms considered the incentives given by the FDI promotion
policies an important factor in making their decision on FDI, indicating some
effectiveness of FDI promotion policies. It is interesting to find the variations in
the importance of FDI promotion policies as an FDI motive among the host
11
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countries.
For as many as 50 percent of the Japanese firms in Thailand and in
Malaysia, whose governments are active in FDI promotion, the incentives given to
FDI played an important role in making their decision on FDI.
III.2. Technology Transfer by Japanese Firms
To revealthe current status of technology transfer, two indicators are used
in the survey.
One indicator measures the extent of the targeted level of
technology transfer that has been achieved so far by drawing on the response to
the following question; to what extent (in percentage terms) the level of
technology transfer that was targeted at the time of start has been completed?
This is an indicator commonly used by other researchers, but it suffers from its
subjectivity 8 . The targeted level of technology transfer is usually not explicitly
specified by investing firms, and moreover, the judgement as to the extent of
technology transfer being accomplished is
often not based on observable
indicators but based on an impressionistic evaluation of the person responding to
the questionnaire.
To remedy the shortfall associated with the indicator just
discussed, a more objective indicator is devised. This indicator attempts to find
the extent of technology transfer
being accomplished
responsible for the specific operation.
by finding
who is
If the local staff, not expatriates, are
responsible, technology transfer is deemed as completed.
In the survey technologies are divided into 10 different types, and the
extent of technology transfer achieved for each technology measured by the latter
See, for example, Yamashita (1991).
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indicator is shown in Table 49.
According to the results, more than 70 percent of
the Asian affiliates of Japanese firms transferred the four types of technologies,
operation technology, maintenance and inspection, process control and quality
control.
These observations indicate that Japanese firms have rigorously
transferred the types of technologies that are required for manufacturing or
assembling operation.
The proportion of the firms that completed technology
transfer in total number of firms goes down significantly for the other types of
Specifically, less than 50 percent of the firms have transferred the
technologies.
technology
for
the
development
of
molds
and tools.
For technological
improvements and development of manufacturing process, approximately one out
of three firms has completed technology transfer.
The proportion of the firms
completed technology transfer in the total number of firms goes down to around
20-30 for design technology, the introduction and development of new products.
These observations clearly show that Japanese firms have not successfully
transferred more sophisticated technologies such as those require modification or
new development.
One observes interesting variations in the extent of technology transfer
undertaken among the affiliates of Japanese firms in different economies.
For
most technologies, transfer has advanced further for the affiliates in the NIEs
than those in ASEAN countries.
The difference is particularly notable for the
relatively more sophisticated technologies such as introduction and development
9
In Table 4 technologies are arranged in a descending order in terms of
the level of technology transfer achieved. It should be noted that the ordering
based on the other indicator is identical except "introduction of new technologies"
and "development of new products," whose orderings are reversed in comparison
to the ordering shown in the table.
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of new technologies. These differences reflect the differences in the technological
capability of the host countries. Technology transfer may be performed relatively
smoothly in the NIEs as their technological capability is higher than that in ASEAN
countries.
It may be worth commenting at this point on the differences in the patterns
of technology transfer undertaken by Japanese firms and by non-Japanese firms.
It is often argued that Japanese firms are slow or even hesitant in transferring
technologies, compared to firms of other nationals. More explicitly, Western firms
are said to be more active in transferring technologies than Japanese firms
0.
Although we have to undertake a detailed comparison between Western and
Japanese firms to derive a reliable result, it is interesting to note the following
observations made by some local workers with the work experiences at both
Western and Japanese firms f l .
According to their observations, Western firms are active and effective in
transferring operating technologies mainly with the help of manuals.
To put it
differently, at Western firms local workers acquire technologies more or less by
themselves with the help of manuals. As such, local workers learn to deal with the
problems discussed in the manuals. When a problem which is not discussed in the
manuals emerge, local workers call on engineers from the parent office.
By
contrast to these practices at Western firms, Japanese firms rely more on OJT for
transferring technologies. As such, it takes longer for Japanese firms to transfer
l0 For example, see Sedgwick (1995).
11These observations are obtained from the author's discussions with local
workers of Japanese and Western firms, and with government officials in Malaysia,
Thailand and Indonesia.
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technologies. But once technology is transferred, local workers of Japanese firms
acquire not only the operational technologies but also the technologies to deal with
the problems.
As a result, local workers can work more or less independently
without an assistance provided by Japanese workers.
If these observations are correct, one may argue that for Western firms
technology transfer means transferring operational technologies and therefore
technology transfer is
transferred.
By
considered completed once operational technology is
contrast, for Japanese firms technology
transfer means
transferring not only operational technologies but also more complicated and
sophisticated technologies, and therefore, technology transfer is not completed
unless all sorts of technologies are transferred. As stated earlier, this is only a
casual observation and therefore it needs to be analyzed more in detail to reveal
the differences and/or similarities in technology transfer by the firms with
different nationalities.
III.3 The Methods Used For Transferring Technologies
In order to transfer technologies expeditiously and effectively, a variety
of methods, which may also be considered as a means to develop human resources,
have been adopted by the Japanese firms (Table 5). On-the-job training (OJT) and
training workshops in local areas are two most commonly used activities for
transferring manufacturing technologies: i.e. operationaltechnology, maintenance,
quality control, and process control.
Indeed, approximately 60 percent of the
firms use these methods for transferring manufacturing technologies. As the level
of technologies involved in transfer goes up, the relative importance of training
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workshops both in local areas and in Japan goes up as a method used for
technology transfer in comparison to OJT.
The greater weight given to OJT and training workshops as a means of
transferring manufacturing technologies observed above indicates that actual
practice at the work place is considered to be more beneficial than class room
workshop
for transferring
relatively
simple
technologies.
However,
for
transferring relatively sophisticated technologies class room workshop is a main
method of technology transfer with OJT playing a subordinate role.
It is
interesting to note that training workshop in Japan is commonly used as a major
form of technology transfer in the case of introduction of new technologies and
new products, indicating that in-depth and intensive training is provided at
parent office in Japan for transferring sophisticated technologies by inviting
personnel from overseas offices. The use of small group activities as a means of
technology transfer is somewhat limited, compared to OJT or training workshops.
In particular, only a small number of Japanese firms use small group activities for
transferring sophisticated technologies.
Different
roles are placed on training
manuals written
in
different
Manuals written in local languages are given a major role for
languages.
transferring manufacturing technologies, while manuals written in English and
Japanese
are given relatively
technologies.
greater roles for transferring
sophisticated
In particular, the use of manuals written in Japanese is high for
transferring new technologies and new products.
The findings that training
workshops in Japan and the manuals written in Japanese are given important roles
for transferring sophisticated technologies indicate that the opportunities given
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to local personnel for acquiring sophisticated technologies are limited.
Although a
comparison, it
detailed
examination
is
needed to
conduct
an accurate
may be worthwhile to offer some observations regarding the
differences in the methods of technology transfer by Japanese firms and by
Western firms.
Compared to Western firms, Japanese firms rely less on the
manuals but more on OJT as a means of technology transfer. Indeed, the manuals
prepared and used by Western firms detail the directions for operating the
equipments.
As a result, local workers can learn how to operate the equipments
without much difficulty.
By contrast, the manuals prepared by Japanese firms
suffer from a lack of detailed information. Japanese firms rely on OJT to overcome
the shortcomings resulting from the manuals without detailed explanation.
This
difference in the importance placed on manuals and OJT between Western and
Japanese firms appears to be attributable to the difference in their perception of
the meaning or definition of technology transfer. The difference in the meaning
of technology transfer perceived by Western and Japanese firms naturally leads
to the difference in the extent of technology transfer targeted and the evaluation
of technology transfer, which will be discussed in the final section.
III.4 The Determinants of Successful Technology Transfer
We examined the patterns of technology transfer by the Asian affiliates of
Japanese firms and their characteristics such as the motives behind foreign direct
investment, length of operation,
technology transfer.
management practices, and the methods of
This section investigates the determinants of technology
transfer by conducting a regression analysis. Such an analysis would be useful
17
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not only for academic researchers interested in the behavior of foreign firms and
economic development but also for both policy makers and foreign firms involved
in formulating effective methods for transferring technologies.
The dependent variable is the indicator reflecting the extent of technology
transfer carried out, measured by the response to the question inquiring who is
in charge of specified technological activities, local workers or Japanese workers.
If the answer is local workers, then technology transfer is considered to have
been carried out, and the value of 1 is given to the dependent variable.
answer to the question is
If the
Japanese workers, then technology transfer is
considered not to have been carried out, and the value of 0 is given to the
dependent variable.
Independent variables, or explanatory variables, include
various firm specific characteristics, FDI motives, management practices, and the
methods used for facilitating technology transfer. Below we discuss the expected
impact of explanatory variables on the dependent variable and the results of the
analysis in turn.
The regression analysis is conducted for 10 different kinds of technologies,
and their results are shown in Table 6. As the dependent variable takes the value
of 1 or 0, the Probit analysis is applied to deal with the statistical problems
associated with a truncated dependent variable.
The length of operation in the host country is found to have a positive
impact on technology transfer, as the coefficient on the variable "year of
operation"
is positive in
most cases.
18
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ls
This finding is
consistent with the
expectation and the finding from the earlier studiesl 2 . In particular, the positive
impact is statistically significant for maintenance/inspection, quality control and
process control, indicating that the vintage effect is important for transferring
manufacturing technologies.
significant impact
By contrast, the vintage effect does not have a
on transferring
more
sophisticated
technologies.
This
observation seems to indicate that accumulated experiences on the part of
Japanese workers as well as local workers play an effective role in transferring
manufacturing technologies, but not in transferring sophisticated technologies.
High local participation in equity holdings is shown to promote transferring
sophisticated technologies, as the coefficient on local ownership is positive and
statistically significant for the transfer of sophisticated technologies. This result
is consistent with the expectation, since high local participation may enable local
management to put greater pressure on Japanese firms to transfer technologies.
Indeed, high correlation between local ownership and use of manuals in the local
language may serve as an evidence for this argument.
indicate that ownership
matters in
This finding seems to
determining the success or failure of
technology transfer; the greater the influence of local management expressed in
the share of equity holding, the more advanced in transferring technologies.
Along the similar line of reasoning as above, high share of local workers in
total workers is expected to contribute to technology transfer. Such expectation
is detected with statistical significance only in transferring technologies for
12 In his study of foreign firms in Thailand, Sedgwick (1995) finds that the
extent of technology transfer by Japanese firms is limited in comparison with the
Western firms, and he attributes the limited extent of technology transfer by
Japanese firms to an early stage of development of their operation.
19
I_
_
technological improvement.
In many cases it is not the number of local workers
but the importance of managerial authority measured by equity holding that
influences technology transfer.
Related to the issue of workers in the Asian
affiliates, high job mobility in Asian countries is often argued to be an obstacle for
transferring technology by Japanese firms.
The results here do not generally
support this argument, as the coefficient on job separation ratio is of expected
sign with statistical significance only in one case, transferring technologies for
process control..13
Motivation behind FDI is likely to influence the degree of achievement of
technology transfer.
Firms motivated to set up an export base by FDI may be
interested in undertaking technology transfer, as they are under pressure to
produce competitive exportable products. This assertion is not supported by our
results.
Indeed, it appears that technology transfer is not carried out by the
firms with a strong export orientation. Firms that have set up operations overseas
in order to export their products only have a short time to manufacture
competitive products to be sold in
the international market.
Under these
circumstances the firms have little time to transfer technology to local workers.
To deal with the situation, they install the most up-to-date technologies but not
transfer technologies. The finding that technology transfer is slow for the firms
interested in exports is consistent with the result that technology transfer has
not been carried out by the firms whose motive behind FDI was to take advantage
13 It may be important to note that "job-hopping" is a problem for a firm, as
it cannot recover the cost used for investing in workers, who leave the firm.
However, from the point of view of a society as a whole, job-hopping may be
beneficial, as technologies get spread by these workers.
20
_______l_l_·__C___I___·I_·
111_._.11111_----0·
of low-cost labor. The coefficient on cheap labor is negative in all the equations
except one, and moreover, in five cases the coefficient is statistically significant.
This observation indicates that Japanese firms invested in Asia to take advantage
of low-wage labor in Asia are not interested in technology transfer.
Japanese style management is often argued to provide an environment
conducive to the assimilation and improvement of technologies. Among the unique
features of Japanese-style management, life-time employment system, joint labormanagement conferences, job-rotation and multi-task assignment are taken up
here for the analysis 14. Life-time employment system is considered to promote
technology transfer.
Under the life-time employment system workers do not
oppose adoption of new technologies, which tend to be of labor-saving type,
because their positions in the firm are secured for life. This expectation is not
proven by the regression results.
Indeed, technology transfer appears to be
deterred under the life-time employment system. One possible explanation may be
that workers whose positions are secured under the life-time employment system
have not much incentive to work hard or to acquire technology.
Joint labor-management conferences facilitate the introduction of new
technologies, as acceptable conditions for the introduction of new technologies are
sought and agreed by both labor and management through joint labor-management
conferences. Indeed, the results weakly confirm this argument, as the coefficient
on labor-management conferences
is
positive in
six cases and statistically
14 A large number of works have discussed Japanese style management with
significant differences in their views. Kawabe and Kimbara (1991) presents a
concise review of these works. Thong (1991) discusses evolutionary changes in
Japanese management styles by analyzing Japanese firms in Malaysia.
21
significant in one case: the introduction of new technologies.
Job-rotation and
multi-task assignment also tend to promote technology transfer.
For local
workers, the experience at a variety of operations acquired through job-rotation
and multi-task assignment not only fosters flexibility but also gives the capacity
to grasp the flow of the processes as a whole, and thus facilitates to establish
locally the technologies involved.
The expected effect is observed with some
statistical significance only in a few cases; job rotation leads to technological
improvement, while multi-task assignment facilitates transfer of operational
technology and design technology.
Japanese style management is argued to have contributed to improving
technological capability of workers in Japan. However, our results show that the
effectiveness of Japanese style management in technology transfer is limited.
Japanese firms have adopted various methods for promoting the localization
of technology. The effectiveness of four methods have been investigated, namely,
manuals, on-the-job training, small group activities and workshops. The results
of the statistical analysis show that manuals written in local languages are
extremely effective means of transferring technologies.
manuals in
local languages
is
particularly
The effectiveness of
notable for transferring
such
sophisticated technologies as design technology, development of new products,
development
of
metal
molds
and
machining
tools,
and
development
of
manufacturing facilities. By contrast, manuals in English and in Japanese turn out
to be ineffective for transferring technologies. Indeed, the results show that the
use of manuals in either English or Japanese tends to deter technology transfer.
This somewhat unexpected result may not be surprising if the use of manuals in
22
~------~__I--- - -- _
---
foreign languages is interpreted to reflect the backward looking attitude of
Japanese firms toward technology transfer.
Seminars in local areas are shown to be quite effective in improving
technologies, designing technologies and developing new products. Seminars in
Japan are effective in transferring process control technologies but not in
transferring other types of technologies. Considering the differences in the cost
of hosting seminars in Japan and local areas, these observations indicate that the
effectiveness of local seminars would be much greater.
Contrary to the expectation, on the job training and small group discussion,
which are considered to be special features of Japanese practices, are generally
not effective for transferring technologies; small group discussion is shown to be
effective in transferring technologies for process control.
Coupled with the
earlier observation that Japanese style management does not promote technology
transfer except for few cases, the findings here seem to indicate one of the
following two possibilities or both of these possibilities.
One is that special
Japanese practices per se are not effective for transferring technologies at the
Asian affiliates, and the other is that these practices are not adopted in the way
that those adopted in Japan.
Detailed information on the practices of Asian
affiliates is needed to make judgement on this point. 15
IV. Conclusions
Japanese firms have actively undertaken foreign direct investment since
Sedgwick (1995) gives some examples of the latter case from his study in
Thailand.
23
the mid-1980s.
The survey conducted by the Nikkei Research Institute of
Industry and Markets on technology transfer by Japanese firms in East Asia
showed that a large part of manufacturing technologies such as operational
technologies, and maintenance and inspection technologies have been transferred
to the Asian affiliates of Japanese firms, but sophisticated technologies such as
design technology and development of new products have not been transferred
in many firms.
The analysis of the determinants of successful technology transfer by
Japanese firms in East Asia reveals a number of interesting observations. First,
the length of operation
manufacturing
technologies.
is
technologies
an important
but
not
in
transfer of
factor in facilitating
transferring
more
sophisticated
Second, localization of ownership leads to successful transfer of
sophisticated technologies, suggesting that ownership matters in transferring
sophisticated technologies. Third, transfer of sophisticated technologies is very
slow in the Japanese firm, which is set up to take advantage of cheap labor.
Fourth, Japanese style management such as life-time employment system and
Japanese style technology transfer methods such as on the job training and small
group discussion are in
technologies.
general shown not to be effective in transferring
Fifth, among the methods used for technology transfer, manuals
written in local language and seminars in local areas are found to be effective in
transferring technologies.
The importance of technology transfer for the Japanese firms undertaking
FDI is going to increase in the future for several reasons.
One is increasing
competition among the firms not only in the host country but also in the world
24
_____
_11_____1_
___11_
__11
market. Trade and FDI liberalization, which is under way in a number of countries
in Asia, will intensify competition in these markets. Expansion of the activities by
multinational enterprises has led to "mega-competition" among them at global
scale.
Another factor that forces Japanese firms to speed up the process of
technology transfer is the emergence of engineer shortage situation.
The
reduction in the number of engineers in Japan predicted in the near future will
put the Japanese firms in a difficult position to run their overseas operation in
the same way that they have pursued so far. One way to run overseas operation
efficiently is to transfer technologies, so that overseas operation may be run by
local workers without much support from Japanese workers.
It may not be an
overstatement that the success or the failure of overseas operation of Japanese
firms depends on technology transfer.
Technology transfer is equally important for the host countries to FDI, as
successful technology transfer will benefit the recipient countries by improving
technological capability, thereby leading to further economic growth. Tofacitate
technology transfer, sufficient supply of well educated and well trained personnel
has to be provided.
Moreover, a well functioning legal framework to protect
intellectual property rights has to be maintained, so that foreign firms may engage
themselves in active R&D in the host countries.
These observations point to the need for further examination of the
determinants of successful technology transfer by foreign firms. The important
factors that have not been examined in this paper mainly because of a lack of
reliable statistics include information on the host countries such as educational
level and industrial organization such as the level of competition in the host
25
I__
_
markets.
More detailed information on parent offices of Japanese firms such as
their R&D activities, overseas operations outside of East Asia, and industrial
organization in which these firms operate also have to be considered.
Finally,
extensions of this type of study on technology transfer by including nonJapanese foreign firms is very important.
References
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E.
Richard
(1982)
Multinational Enterprise and Economic Analysis,
Cambridge University Press, Cambridge.
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S.Yamashita,
ed.
Transfer of Japanese Technology and
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Kawai, Masahiro and Shujiro Urata (1995)
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------~ -1·-1_~_
1~ I~~~_
_ --~11111
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27
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