F4. Know-how/Technology

There is strong empirical evidence that OFDI can increase know-how and technologies in the home country. This makes the promotion of this home-country effect a particularly promising strategy, especially as the transfer and absorption of foreign technologies and know-how are important elements in the economic development and catch-up processes of many countries.

A starting point for such promotion would be to reduce any regulatory hurdles on OFDI in those industries where the home country has strong potential to develop its technologies and would benefit from the inflow of know-how. Such regulatory easing could focus on manufacturing sectors, where gains in know-how and technologies from OFDI have been empirically detected.

Moreover, the Toolkit suggests focusing on those companies, industries, investment motivations, entry modes and destination countries that promise to support the enhancement of know-how and technologies in the home country. Accordingly, the companies to focus on are those that have strong prior capabilities, which increases their ability to acquire, absorb and transfer know-how from abroad. The industries to focus on should be knowledge intensive as that is where know-how is created, shared and transferred the most. Focus should also be on strategic asset-seeking investments, which often aim to acquire know-how and technologies abroad. M&As and the establishment of R&D centres are entry modes that tend to aim at acquiring or creating know-how, and should therefore be an area of focus. Finally, the focus should be on investments in more advanced economies, where advanced know-how and technologies are often located, rather than in less advanced or developing countries. There is particularly strong evidence that strategic asset-seeking investments, M&As and investments in more advanced economies are associated with enhancements in home-country know-how and technologies.

All of these can be supported by financial support measures, although this is not common for investments in more advanced economies and R&D centres. The Toolkit also suggests that fiscal support measures could be targeted at strategic asset-seeking investments, M&As and knowledge-intensive sectors.

Moreover, efforts should be made to improve the absorptive capacity of the home economy and its firms, as well as facilitate the transmission channels through which know-how and technologies are transferred to the home country. Absorptive capacity could be strengthened by establishing institutions whose objective would be to build up and enhance domestic competitiveness and skills, which could then help maximise the know-how and technological gains from OFDI. Improvements to transmission channels should focus on facilitating indirect transfers, which for example involves the transfer of know-how from subsidiary to parent, and labour mobility as company employees are important actors involved in the creation and transfer of know-how and technologies. Labour mobility could, for example, be supported through appropriate employment and visa regulations. These and other efforts to maximise the know-how and technology benefits for the home country could be targeted at knowledge-intensive sectors.

The know-how and technology gains are likely to accrue in the long term. Thus, financial support measures should have long durations, and efforts to maximise benefits from OFDI should be made with a long-term perspective. Operational support on the ground should also be offered to investments over long periods of time.

Key insights

• The enhancement of home-country know-how and technologies can be promoted especially by targeting financial support measures at those companies, industries, investment motivations, entry modes and destination countries that promise to enhance know-how and technologies in the home country, most notably strategic asset-seeking investments, R&D centres and investments in more advanced economies.
• To benefit effectively from know-how and technology transfers, efforts should be made to strengthen the absorptive capacity of the home economy and its firms as well as strengthen associated transmission channels. Both can be achieved especially through efforts at maximising the benefits from OFDI and the establishment of institutions aimed at promoting the build-up of domestic absorptive capacity.
• To facilitate that OFDI leads to better know-how and technologies in the home country, financial and operational support measures should, in particular, be introduced in a way so they support OFDI over long periods of time.