The substantial decline in foreign direct investment (FDI) flows in 2001 barely affected financial flows associated with international technology transfers, which dipped 4% worldwide that year, the latest year for which data are available. But this marginal decline was disproportionately concentrated in developing countries, whose payments tumbled by 26%. The moderate global slump is explained by the fact that financial flows from royalties and technical licence fees are related more to the overall level of economic activity, the stock of FDI that is in place and the volume of global sales, all of which increased in 2001 (albeit at a slower rate), and less to annual investment flows. In particular, royalty payments are generally tied to sales. A decline in technology payments may thus reflect the economic climate rather than a fall in FDI flows.
Nevertheless, there are close links between inward FDI and outward payments of royalties and licence fees. Transnational corporations (TNCs) are the leading source of international technology transfers in all forms: internal (to their affiliates) and external (to other companies). While a part of TNCs´ internal technology transfer is not charged for separately, the bulk of their royalties and licence fee earnings come from their affiliates. Generalizing from data for Germany, Japan and the United States, around three fifths of international royalties and fee payments are made intra-firm. And that share has risen steadily. This rise reflects:
- The growing cost and risk of innovation-making preferable the internalization of the transfer of the resulting proprietary technologies while also often ensuring, through contractual arrangements with affiliates, minimum returns on innovation;
- The growth of technology-intensive FDI;
- The liberalization of technology policies; and
- The relocation of high-tech activities overseas.
There was, however, a striking difference between developed and developing countries. In developed countries, inward FDI flows in 2001 fell by 47% while technology payments stayed constant. In developing countries, FDI was down 15% while technology payments fell by 26% (see figure). For developed countries, the FDI stock and production activities giving rise to current technology payments would not be affected by the fall in M&As, the immediate cause of much of the FDI decline in developed countries in 2001.
But why did technology payments fall so sharply in the developing world?
An explanation is that the economic downturn affected licensing-based activities more in developing countries than in developed countries, especially export-oriented production of electronics. In 2001, world exports of electronics slumped 8.5%, with developing-country exports declining by 12% and industrial country exports by 6%. But for East Asia the fall was 18%, if China is excluded. The region accounts for around 90% of the electronics exports of developing countries and 77% of their technology payments.
Technology payments by developing countries have risen steadily since the 1980s. In 1981-1985, they grew 4% a year, despite an annual 12% decline in FDI inflows, and in 1991-1995 they increased by 13% annually. That growth continued in the second half of the 1990s, when FDI expanded annually by 12% in developing countries.
The sudden downturn in technology payments in 2001 may thus well be a deviation from the long-term trend.
