Technology Transfer with Competitive Markets in the South

Abstract

This paper develops a model of technology transfer in an environment where Þrms in developing countries are unable to recover the costs of imitation and adaptation, because a competitive market structure in the South rules out any monopoly rents accruing to Southern Þrms. In such an environment, the technology transfer must be initiated by a Northern Þrm which risks its technology being copied widely throughout the South because of lower production costs in the South and because its markets in the North are protected by strong intellectual property rights or by natural means. Examples of tech- nology transfer under such an environment include subcontracting by Northern Þrms to Þrms in the South and the adaptation of .freely observable. technologies that are difficult to keep proprietary without strong intellectual property rights protection. The results of the paper suggest (in contrast to the previous work) that in such an environ- ment, developing countries do not experience the endogenous increase in their relative

wages by accumulating factors of production. While improvements in the productivity of the technology transfer process can restore the endogenous increase in relative wages from accumulation over some range, continued accumulation will eventually cause the relative wage of the South to fall. This provides us with a possible explanation for why some developing countries have been unable to sustain the high rates of factor accumulation that we have observed in the East Asian miracle economies.

Introduction

The common theme underlying existing models technology transfer based on imitation is that the technology transfer (involving the costs of imitation and adaptation) is carried out by imitating Þrms in the receiving country because it yields them a stream of monopoly proÞts.1 However, the concept of monopoly proÞts for Þrms in developing countries (the South) is difficult to justify in environments where we observe tough competition between large numbers of Southern Þrms using new technology from developed countries (the North) to produce the same or very similar products. In the absence of any rents or monopoly proÞts, it is difficult to imagine why the costs of imitation would be incurred. Indeed, under such an environment of competitive markets in the South, without any monopoly rents or proÞts for imitating Southern Þrms (and in the face of costly imitation), we are left with no explanation for technology transfer from North to South.2 This paper, therefore, develops a model of technology transfer in an environment where Þrms in developing countries are unable to recover the costs of imitation and adaptation, because a competitive market structure in the South rules out any monopoly rents accruing to Southern Þrms.3 We propose a model where the technology transfer is initiated by the Northern Þrm. The Northern Þrm risks its technology being copied in the South because of lower production costs in the South and because its market in the North is protected by strong patents or other natural means. Examples of technology transfer under such an environment include subcontracting by Northern Þrms to Þrms in the South and the adaptation of .freely observable. technologies that are difficult to keep proprietary without strong intellectual property rights (IPR) protection in the South. The results of the paper suggest (in contrast to the previous work) that in such an environment, developing countries do not experience the endogenous increase in their relative wages by accumulating factors of production. While improvements in the productivity of the technology transfer process
can restore the endogenous increase in relative wages from accumulation over some range, continued accumulation will eventually cause the relative wage of the South to fall. This provides us with a possible explanation for why some developing countries have been unable to sustain the high rates of factor accumulation that we have observed in the East Asian miracle economies.
The debate over the issue of intellectual property rights (IPR) enforcement in developing countries has featured prominently in recent World Trade Organization (WTO) rounds. In- dustry representatives from developed countries and multinational corporations have com- plained about staggering losses resulting from the lack of IPR protection in developing countries. PhRMA.the US pharmaceutical industry association.has estimated that losses for US drug companies attributable to deÞcient IPRs amount to $500mper year fromIndia alone.4 However, much of the recent work on this topic has focussed on how the lack of IPR protection in developing countries (the South) affects the incentives for innovation by Þrms in developed countries (the North).5 The model in this paper, on the other hand, allows us to focus instead on the effect of poor Southern intellectual property rights protec- tion on Þrms located in the South. Existing models of transfer based on imitation abstract from this issue. In the imitation model, poor Southern IPR affects only Northern Þrms and hence affects only the incentives for innovation. There is no effect on Þrms operating in the South and hence no effect on the incentives to transfer technology.6 In this paper,
poor Southern IPR protection has two types of effects on Þrms operating in the South: (i) it denies Southern imitating Þrms any proÞts; (ii) for Northern Þrms, it means producing in the South will lose them part of their proÞts. This paper is, therefore, able to capture the effect of poor Southern IPR protection on the incentives to transfer technology to the South.
potential for shifting production to the South raises the world rate of product development. Second, if there is an exogenous decline in the cost of transfer (through, for example, a reduction in the bureaucratic hassles associated with investing in developing countries), then the rate of innovation, the share of products in the South, and the Southern relative wage all rise. These results are consistent with the existing imitation-based technology transfer models.
A signiÞcant result which emerges in this paper is that given the environment of competitive markets in the South, factor accumulation in the South puts downward pressure on the Southern relative wage. This is because while a larger scale of the South leads to a higher share of products produced in the South, we can get a high share of products in the South (i.e. a high rate of transfer) only if the Southern wage is low enough relative to the North.7 If there is an explicit cost of technology transfer in the model, having a high share of products in the South can also raise the productivity of the transfer process. In that case, a higher share of products in the South in steady-state can also be associated with higher wages in the South over some range. Then, accumulation in the South can be associated with a higher Southern relative wage, because accumulation increases the share of products produced in the South, which in turn improves the productivity (reduces the costs) of technology transfer. However, even in this case, continued accumulation in the South will eventually cause the relative wage of the South to fall.


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