World Bank Reprint Series: Number 217 Carl J. Dahlman and Larry E. Westphal The Meaning of Technological Mastery in Relation to Transfer of Technology Reprinted with permission from Annals of the American Academy of Political and Social 'cience, vol. 458 (November 1981), pp. 12-26. Copyrighted by the American Academy of Political and Social Science, with permission of Sage Publications, Inc. ANNALS, AAPSS, 458, November 1981 The Meaning of Technological Mastery in Relation to Transfer of Technology By CARL J. DAHLMAN and LARRY E. WESTPHAL ABSTRACT: The acquisition of technological mastery-that is, of the ability to make effective use of technological knowledge-is critical to the achievement of self-sustaining development. Transfers of technology are substitutes for, local mastery rather than sources of it. Consequently, the part played by transfers of technology in the process of development, while important, is none- theless limited. This article considers the role of technology transfer with specific reference to industrial technology, and places it in the broader context of the relationship between the acquisition of tech- nological mastery and the development of an efficiently functioning economy. Based on a review of what is known about technical change in industrial enterprises in less-developed economies and on a case study of one economy's experience, it demonstrates that indigenous effort to assimilate technological knowledge is of over- riding importance in the achievement of technological mastery. Various types of technological mastery are distinguished together with the different categories of effort associated with their acquisi- tion. The consequences of increased mastery are also discussed, together with the factors that determine when it is appropriate to rely on transfers. Finally, the authors suggest that further research is needed to determine how technological mastery ought to evolve in relation to industrial development. Carl J. Dahlman received a Ph.D. in economics from Yale University in 1979. Prior to joining the World Bank in the same year, he spent two years in Brazil studying technological change in the steel industry. Larry E. Westphal received a Ph.D. in economics from Harvard University in 1969. Before joining the World Bank in 1974, he served on the faculties of Northwest- ern and Princeton universities, and for a time as resident advisor to the Economic Planning Board of the Republic of Korea. He has written extensively on industrial policy and development, on investment analysis under increasing returns, and on empirical analysis of production relationships and technological choice. NOTE: The views and interpretations expressed here are the authors' and should not be attributed to the World Bank, its affiliated organizations, or any individual acting on behalf of these organizations. 12 TECHNOLOGICAL MASTERY 13 T HE exDloitation of technologi- Technology is the translation into T cal knowledge is central to practice of technological knowl- the development process. Less- edge. When technology is acquired developed economies typically by transfer, however, this procens of obtain this knowledge from more translation is undertaken by for- advanced ones rather than by creat- eigners. Transfers of technology ing it themselves. This is to be thus substitute for indigenous tech- expected, given the vast pool of for- nological mastery and make it possi- eign technological knowledge avail- ble to acquire technology without able to them for exploitation. indigenous technological effort. Transfers of technology are one Recognition of this fact leads to a means of acquiring foreign techno- question of central importance to logical knowledge and can conse- less-developed countries: to what quently playr an important part in extent can effective use be made of the development process. Neverthe- available knowledge without indi- less, their nature is such that genousefforttomasterit?Thisisthe transfers of technology can repre- question dealt with in this article. sent no more than an initial step in In order to give the discussion a the exploitation of available knowl- manageable focus, our primary con- edge. cern is with technological effort and Following are some important mastery as they relate to physical definitions. processes.1 This is not to deny the -Technological Knowledge: In- fact that these physical processes formation about physical processes are undertaken within a framework which underlies and is given opera- of social arrangements-organiza- tional expression in technology. tional modes and procedural -Technology: a collection of methods-that condition their oper- physical processes which transforms ation.2 Similarly, we deal only with inputs into outputs, together with industrial technology. But it should the social arrangements-that is, be understood that the relationship organizational modes and proce- of technology transfers to the acqui- dural methods-which structure the sition of technological mastery is the activities involved in carrying out same in all important respects for these transformations. all sectors. -Technological Effort: the use of The sections that follow treat the technological knowledge together transfer of technology in the context with other resources to assimilate or of a broader evaluation of the rela- adapt existing technology, and/or tionship between the acquisition of create new technology. technological mastery and the -Technological Mastery: opera- development of an efficient indus- tional command over technological knowledge, manifested in the ability 1. Under this narrow definition, a firm to use this knowledge effectively and or an economy could have a great deal of tech- achieved by the application of tech- nological mastery and yet not deploy it effec- tively, owing to inappropriate organizational nological effort. or procedural arrangements. -Interrelationship of the Terms: 2. Harvey Brooks, "Technology, Evolu- technological mastery is the effec- tion, and Purpose," Daedalus, 109 (1): 65-81 tive use of technological knowledge (Winter 1980); N. Bruce Hannay and Robert through continuing technological E. McGinn, "The Anatomy of Modern Tech- nology: Prolegomenon to an Improved Public effort to assimilate, adapt, and/or Policy for the Social Management of Technol- create technology. ogy," Daedalus, 109 (1): 25-53 (Winter 1980). I 14 THE ANNALS OF TEE AMERICAN ACADEMY trial sector. The first section dis- evidence, however, belies this view cusses what is meant by technologi- in that ostensibly identical technolo- cal mastery and considers how it is gies are employed with vastly related to transfer of technology and unequal levels of technical effi- to technological effort. The empiri- ciency, or productivity, in different cal evidence for local technological economies and even by different effort and experience as sources of firms within a particluar one.3 increased mastery and of the asso- Capital goods can be transferred, ciated gains in industrial productiv- but capital goods alone do not consti- ity is then summarized in the second tute a technology; they represent section. Based on the perspective only that part of the technology established in the preceding discus- embodied in hardware. The sion, the third section outlines the remainder is comprised of disem- factors that determine when it may bodied knowledge-and although nevertheless be appropriate to rely knowledge can be transferred, the on transfers of technology rather ability to make effective use of it than indigenous technological effort cannot be. This ability can only be and indicates the various forms that acquired through indigenous tech- transfers can take. nological effort, leading to techno- The evolution of technological logical mastery through human mastery in relation to one country's capital formation. industrial development is reviewed The application of technological in section four. The case study is of knowledge within industry can use- the Republic of Korea, which has fully be broken down into four been chosen because of our compar- broadly defined categories of activi- ative ignorance of other economies ties. In the order in which mastery is and-more important-because of typically thought to be achieved in the interest that attaches to under- the development of particular standing the sources of its rapid and industrial processes, they are as fol- highly successful industrialization. lows: Finally, the concluding section highlights several important issues -production engineering, which that have not yet received adequate relates to the operation of exist- attention in empirical research. ing plants; These issues concern the relative -project execution, which per- efficacy of the alternative technolog- tains to the establishment of ical strategies that can be followed new production capacity; by less-developed economies. -capital goods manufacture, which consists of the embodi- MASTERY RESULTS FROM EFFORT, ment of technological knowl- NOT TRANSFER edge in physical facilities and Industrial technology is some- equipment; and times misunderstood as being thor- -research and development oughly documented in codified (R&D), which consists of spe- form-in "blueprints," as one pre- cialized activity to generate valent metaphor would have it. If new technological knowledge. this simplistic view were valid, tech- 3 Harv nologies could be transferred and ciency vs. 'X-Efficiency'," American Eco- assimilated effortlessly. Available nomic Review, 56: 392-415 (1966). TECHNOLOGICAL MASTERY 15 More will be said later about the to permit the use of locally available acquisition of mastery in these materials and resources. activities. Several general observa- In addition, even if an entity's tions are nonetheless in order at this overall level of mastery could be point. measured, the separate contributions In the process of undertaking the of the various types of mastery-cor- first three activities, those carry- responding to the categories of ing them out often find themselves activity listed above-cannot be, involved in the solution of techni- because it is difficult to be precise cal problems not previously en- about the interrelationships between countered. Such problem solving them. This is particularly unfortu- represents an exercise of technologi- nate, because many of the questions cal effort-that is, the use of techno- about technological mastery concern logical knowledge to adapt tech- the relative importance of different nology-and may lead to a higher types of mastery. For example, up to level of technological mastery. More what point in a particular industry's generally, technological effort is also development is mastery of produc- used in the assimilation or genera- tion engineering sufficient? What is tion of new technological knowledge the relationship between mastery in and hence in the invention of new production engineering and mastery technologies, which may be either in project execution? Is local capacity adaptations of known technologies in capital goods manufacturing, or or radically new ones. Seen in this in R&D, necessary before socially light, R&D is merely an extreme warranted adaptations of technology case, with respect to its degree of can be made? These and similar specialization, of the acquisition of questions can all be subsumed under new technological knowledge, a more general one: how should tech- Technological mastery is a rela- nological mastery in its various tive concept. Thus the extent of a manifestations evolve in relation to firm's or an economy's mastery can industrial development? In addition be gauged only in relation to that of to this question, the ensuing discus- other entities. Moreover, mastery is sion deals with the question of how not something that can be fully technological mastery is acquired. quantified. For one thing, it is possi- ble to make unambiguous measure- EXPERIENCE AS A STIMULUS ments of comparative technicalTOEFR efficiency only between entities that o EFFORT use ostensibly identical technolo- Technological mastery is not gies. But-as we hope to make achieved by passively importing for- clear-technological mastery, even eign technology. The extent of indi- narrowly defined, involves far more genous effort required for the than technical efficiency as conven- successful assimilation of technol- tionally understood. For example, ogy is most clearly demonstrated by an important aspect of mastery is case studies of technological the ability to adapt technologies so changes that have occurred over as to make them better suited to time in individual firms. Much of local circumstances-either by this research has been prompted by altering output characteristics to dissatisfaction with a simplistic reflect local needs and preferences view of technology, which excludes or by modifying input specifications the possibility that indigenous effort 16 THE ANNALS OF THE AMERICAN ACADEMY directed toward technological producer whose first plant was change in less-developed economies established with the help of Japa- is an important part of the indus- nese steel makers.5 In order subse- trialization process. quently to increase the plant's The simplistic view holds that annual production capacity, the technology is something absolute firm gradually built up its techno- and static: knowledge of a particu- logical mastery through a carefully lar production technology either managed process of selectively exists or it does not. A more realistic importing technical assistance perception is that "manufacturing where needed to supplement its own technology is characterized by a engineering efforts. As a result, the considerable element of tacitness, plant's capacity was more than difficulties in imitation and teach- doubled from its initial nominal rat- ing, and uncertainty regarding ing by means of a sequence of what modifications will work and capacity-stretching technological what will not."4 In other words, changes implemented over seven important elements of the technol- years, Because these changes ogy appropriate to a particular required very little additional cap- situation can be acquired only ital investment and no additions to through efforts to adapt existing the work force, they more than technological knowledge. Any doubled the plant's productivity. venture-for instance, the initiation Moreover, as a result of the of a new production activity- increased technological mastery requires a great deal of iterative this process stimulated, the firm problem solving and experimenta- was subsequently able to design and tion as the original concept is execute further additions to its refined and given practical expres- capacity and to sell technical assist- sion. This sequential process lasts as ance to other steel producers, princi- long as changes continue to be made pally in Brazil, but elsewhere in in the operation of the venture. Latin America as well. Research on technological change at More generally, firms in less- the firm level has demonstrated that developed economies have been this process can continue indefi- found to undertake substantial tech- nitely, that it can produce technolog- nological efforts in order to achieve ical changes that greatly increase a wide variety of technological productivity, and that it can yield changes.6 These changes include, for substantially increased technologi- cal mastery. 5. Carl J. Dahlman and Fernando Vala- dares Fonseca, "From Technological Dependence to Technological Development: Case studies of The Case of the Usiminas Steel Plant in technological effort Brazil," IDB/ECLA/UNDP/IDRC Regional Program of Studies on Scientific and Techni- Dahlman and Fonseca, for exam- cal Development in Latin America Working ple, examined the technological his- Paper, No. 21 (Buenos Aires: Economic Com- mission for Latin America, 1978). tory of an integrated Brazilian steel 6. The largest block of case-study research has been carried out under the aus- 4. Richard R. Nelson "Innovation and pices of the Regional Program of Studies on Economic Development: Theoretical Retro- Scientific and Technical Development in spect and Prospect," IDB/ECLA/UNDP/ Latin America, jointly sponsored by the IDRC Regional Program of Studies on Scien- Inter-American Development Bank, the Uni- tific and Technical Development in Latin ted Nations Economic Commission for Latin America Working Paper, No. 31 (Buenos America, the United Nations Development Aires: Economic Commission for Latin Program, and the International Develop- America, 1979), p. 18. ment Research C enter in Canada, and under TECHNOLOGICAL MASTERY 17 example, stretching the capacity ian steel plant, a sequence of miror of existing plants through various technological cha>res can have a adaptations, as in the case just cited, pronounced cumulati-ye effect on breaking bottlenecks in particular productivity. In fact, the cumulative processes within existing plants, sequence of technological changes improving the use of byproducts, following the initiation of a new extending the life of equipment, activity may have a greater impact adjusting to changes in raw mate- on the productivity of employed rial sources, and altering the product resources than that produced by its mix. Some of the firms studied ap- initial establishment.8 This possibil- pear to have followed explicit tech- ity has not, to our knowledge, been nological strategies aimed at specific explored, but it is consistent with long-term objectives. Others seem what has been learned about the merely to have reacted defensively process of technological change in to changes in their circumstances the industrialized countries. or to obvious needs to adapt im- Studies of major technological ported technology. On the other changes in developed countries have hand, some firms have undertaken found it useful to distinguish no appreciable technological ef- between what Enos refers to as the fort and have consequently experi- alpha and beta stages.9 The former enced no technological change.7 includes all efforts leading to and Significance of including the introduction of a radi- Sinificneoeffort cally new technology. The latter cov- ers all of the subsequent minor Most of the technological changes technological changes undertaken uncovered in existing research can to modify and adapt it. In his own be characterized as minor, in the analysis of the development and dif- sense that they do not create radi- fusion of six new petrochemical pro- cally new technologies, but rather cesses between 1913 and 1943, Enos adapt existing ones. Nonetheless, as found that the cumulative reduction shown by the example of the Brazil- achieved in production cost per unit during the beta stage was greater than the initial reduction obtained the direction of Jorge Katz. For a summary of in the alpha stage. Studies show that the research so far, see Jorge Katz, "Techno- other major technological changes logical Change, Economic Development and Intra and Extra Regional Relations in Latin have followed the same pattern. America," IDB/ECLA/UNDP/IDRC From the standpoint of a develop- Regional Program of Studies on Scientific ing economy, the assimilation of a and Technical Development in Latin Amer- technology newly imported from ica Working Paper, No. 30 (Buenos Aires: Economic Commission for Latin America, abroad is a major technological 1978). change. The initial transfer is paral- 7. Martin Bell, Don Scott-Kemmis, and lel to Enos's alpha stage. The com- Wit Satyarakwit, "Learning and Technical parable beta stage is the subsequent, Change in the Development of Manufaivtur- ing Industry: A Case Study of a Permanently 8. The reference here is to technological Infant Enterprise," Science Policy Research changes that occur after the achievement of Unit Working Paper (Brighton, Great Bri- predetermined project-specific norms-for tain: University of Sussex, 1980); Ruth Pear- example, the nominal capacity rating. son, "The Mexican Cement Industry: 9. John L. Enos, "Invention and Innova- Technology, Market Structure and Growth," tion in the Petroleum Refining Industry," in IDB/ECLA/UNDP/IDRC Regional Pro- The Rate and Direction of Inventive Activity: gram of Studies on Scientific and Technical Economic and Social Factors, ed. Richard R. Development in Latin America Working Nelson (Princeton: Princeton University Paper, No. 11 (Buenos Aires: E',onomic Com- Press, for the National Bureau of Economic mission for Latin America, 1977). Research, 1962), pp. 299-321. 18 THE ANNALS OF THE AMERICAN ACADEMY gradual improvement in the terized as having been derived from productivity with which the technol- plant operating expei ience. Even ogy is used. The relative signifi- within the confines of an existing cance of the beta stage for a plant, production processes do not developing economy's assimilation remain static, certainly not if the of a new technology appears to be firm is able to prosper within a rela- much greater than the analogy sug- tively competitive environment. gests, however. To introduce a radi- Production experience provides cally new technology into the insight into how the operation of a world-as in Enos's alpha stage- plant can be altered to improve its requires mastery of that technology; performance. Tn addition, circum- by contrast, to import a technology stances vary constantly over the life -as in the technology transfer of a plant: input prices change, analogy-does not require ma -ery demand patterns shift, new compet- of it, at least not at the outset. itors emerge, and so on. Rather, the case study research sug- TVIs process of capitalizing on gests that it is in the beta stage that experience and reacting to varying most of the increase in developing circumstances requires continued economies' technological mastery is technological effort to modify exist- achieved. ing processes, which in turn repre- Only part of the impact of this sents an important source of increase is reflected in higher pro- increased mastery in production ductivity using that particular tech- engineering-the first category of nology; much of the impact spills technological activity distinguished over into related activities. For in the first section. Moreover, this example, the mastery gained in form of technological effort often assimilating one technology enables extends to changing the basic design greater indigenous participation in of a plant, as when capacity is subsequent transfers of related stretched or particular bottlenecks technologies, thereby increasing the are broken. Thus it can also be a effectiveness with which they are source of mastery in project assimilated. A number of semiin- execution-the second category in dustrial economies have even ex- the typology provided in the first ploited their mastery to export section. Nevertheless, although the technologies on a continually type of technological mastery expanding scale to other developing acquired through plant operating economies.10 In more general terms, experience may overlap somewhat the increased mastery that results with that exemplified in project from experience with previously execution, the overlap can never be established technologies contributes complete. to an economy's capacity to under- Mastery of almost all the tasks take independent technological involved in project execution (see efforts, including replication or Table 1 for stages of project execu- adaptation of foreign technologies tion) requires extensive "learning as well as creation oL new technolo- by doing." Only for preinvest- gies. ment feasibility studies does formal education alone suffice to impart Types of mastery acquired the skills required. For the other Most of the technological changes tasks, the attainment of tech- so far uncovered can also be charac- The Annals of the American Academy of 10. See Sanjaya Lall, "Indian Technology Political and Social Science, vol. 458 (Nov. Exports and Technological Development," in 1981). TECHNOLOGICAL MASTERY 19 TABLE 1 STAGES OF PROJECT EXECUTION 1. Preinvestment Feasibility Studies, technical and economic, using readily available informa- tion to ascertain the viability of a project by examining alternative product mixes, input sources and specifications, plant scales and locations, and choices of production technology 2. Detailed Studies, following estabilshment of viability, using rrmore specific engineering norms obtained from prospective sources of technology, leading to tentative choices among the alternatives considered previously and to refined estimates of capital requirements, per- sonnel needs, cost and mode of financing construction timetable, and the like 3. Basic Engineering, following confirmation of viability, to supply the core process technology by establishing the process flow through the plant and the associated material and energy balances, as well as designing specifications and layouts for major items of equipment and machinery 4. Detailed Engineering, to supply the peripheral technology, by providing complete specifica- tions of equipment and materials, detailed architectural and civil engineering plans, construc- tion specifications, installation specifications for all equipment, and the like 5. Procurement, which includes the choice of equipment suppliers and firms to construct and assemble the plant, coordination and control of the verious subcontractors activities and inspection of work in progress 6. Training of the plant's prospective personnel at all levels in various aspects of the plant's operation and maintenance, often through experience gained by working temporarily in a similar plant elsewhere 7. Construction and Assembly of the plant 8. Startup of operation, to attain predetermined project-specific norms and to complete the pro- vision of training in the plant's operation 9. Trouble-Shooting, to overcome the various design problems encountered during the early years of the project's life nological mastery requires previous detailed engineering tasks-for experience in the same or closely example, providing architectural related activities. Basic engineer- and civil engineering plans that con- ing, for example, calls for highly form to requirements deterrmlined in specialized knowledge of the core the basic engineering stage- processes, which can frequently require no specialized knowledge be gotten only through applied whatsoever of the particular indus- R&D, including pilot plant experi- try, but instead require other forms mentation. Startup of operation of specialized knowledge such as often demands less familiarity ability to design structures and civil with the principles underlying the works. core processes, but entails knowl- Production engineering and pro- edge that can come only from pre- ject ex'ecution are not the only vious production engineering broadly defined uses of technologi- experience in operating similar cal knowledge, or types of technolog- plants. Post-startup trouble- ical mastery. Although they are not shooting calls for somewhat more well incorporated into the existing knowledge of the principles, but not research on technological change in necessarily as much as is involved in developing countries, the two other basic engineering. Detailed categories of activity distinguished studies-the second stage of project in the first section should not be execution-do not demand precise overlooked. One is capital goods knowledge of individual core pro- manufacture, which consists of cesses but do call for rather sophisti- embodying technology' in machines. cated knowledge of the industry. In The other is specialized R&D to turn, many of the individual develop new products or processes. 20 THE ANNALS OF THE AMERICAN ACADEMY These activities have strong links to countries comes via one or the other production engineering and project of them. By contrast, transfers of execution, because to some degree technology constitute a crucially dif- they are prompted and given direc- ferent class of activities, in that the tion by the problems and opportuni- translation of technological knowl- ties that arise in connection with edge into operational form is made production and investment. Indeed, by foreigners. the kinds of technological effort Whether technology should be associated with production engi- obtained locally or fromn abroad neering and project execution are should depend on the relative costs frequently indistinguishable in con- and benefits to the recipient of cept from those involved in R&D. acquiring it from different sources. Likewise, these efforts often involve In this connection, the degree of changes in the design of capital local mastery in the various uses of goods. Relatively little is known, the underlying technological knowl- however, about capital goods pro- edge is of critical importance. If lit- ducers and specialized R&D per- tle previous effort has been made to formers as initiators of technologi- acquire mastery of the specific tech- cal change, or about their roles in nology, reliance on domesticssources successful industrialization." will entail either the replication- and perhaps also the adaptation-of RELIANCE ON TRANSFERS foreign technology or the creation of OF TECHNOLOGY new technology through indigenous effort. Local development, however, There are many means whereby is rarely the most effective way of less-developed economies can have initially obtaining all of the neces- access to foreign technological sary elements of a technology. More knowledge. Among them are var- generally, an economy's capacity to ious activities in which foreigners provide the various elements de- play a passive role, with the subse- pends on the stage of development of quent translation of this knowledge the relevant sector and those closely into technology being done indigen- related to it. ously. These activities include send- Firms starting up or already ing nationals abroad for education, engaged in traditional or well- training, and work experience; con- established activities may often be sulting technical and other journals; able to acquire additional elements and copying foreign products. As of technology relatively easily- Korean experience indicates-see either through their own develop- the following section-these kinds of mental efforts or through the activities are tremendously impor- diffusion of expertise from other tant channels of information; almost domestic firms. The hiring of per- invariably, some of the technologi- sonnel with previous work expe- cal knowledge underlying new rience elsewhere plays an extremely industrial initiatives in developing important part in the diffusion of expertise among firms, as does the 11. For surveys of what is known, see interchange of information among Howard Pack, "Fostering the Capital Goods suppliers and users of individual Sector in LDCs: A Survey of Evidence and products, especially in the case of Requirements," World Bank Staff Working intermediate products and capital Paper, No. 376 (Washington, DC: The World goods. Firms engaged in newly or Bank, 1980); Diana Crane, "Tcnlgclrcnl ntae ciiistypi- Innovation in Developing C"euntries:cA recently initiated activitiesA Review of the Literature," Research Policy, cally have much less opportunity to 6:374-95 (1917). take advantage of previous ex- TECHNOLOGICAL MASTrERY 21 perience-if any-or of diffusion or tions and the achievement of explicit transfers from other domes- improved quality control-see the tic firms.12 Firms in such a position following section outlining Korea's are likely to find it more cost-effec- experience. tive to rely heavily on foreign sup- Explicit transactions to transfer pliers of technology. Even in rela- technology without any other ele- tively highly developed sectors, ments also take many forms. Among selective transfers from abroad may the simplest forms of transaction be equally cost-effective as aids in are contracts for the services of indi- the process of increasing produc- viduals or consulting companies to tivity. provide individual elements of technology-for example, to under- Modes of transfer take specific design or process engi- neering tasks, to give technical Transfers of technology take assistance during various phases of place in a large number of ways and the establishment and operation of a often incorporate not only the trans- plant, or to provide technical infor- lation of technological knowledge mation services. Other transactions into information about operational include licensing and trademark processes but other elements as well. agreements that transfer particular Imports of machinery-an ex- proprietary product and process tremely important mode of technol- designs. ogy transfer-represent a case in The most all-inclusive form of point, in which the additional ele- transaction is a turnkey contract ment is the embodiment of the tech- under which a general contractor is nology in hardware. Another hired to assume complete responsi- example is direct foreign invest- bility for project execution, with the ment when used as a means to obligation to deliver an operating acquire technology, with the addi- plant. Turnkey contracts, together tional elements typically being with their counterpart in the form of financial capital, management, and direct foreign investment, are per- marketing. haps the most frequent mode of Many modes of transfer do not transferring technology for activi- involve explicit and separate pay- ties that are entirely new to an ment for the transfer. This is fre- economy. quently the case in the kinds of Turnkey contracts often deliver a transactions instanced previously plant together with instructions for that incorporate additional ele- operating it under the conditions ments, as it is with indirect technol- assumed in its design, but they may ogy transfers. As an example of the fail to provide the recipient with an latter, exporting firms often receive understanding of the full details of valuable free technical assistance as how the plant operates or of why it a result of their dealings with for- operates as it does. This hampers the eign buyers; in the conduct of their recipient entity's ability to improve normal business operations, these plant operating productivity or to buyers frequently provide various adapt to changes that may occur forms of assistance in such areas as over time in the circumstances that the upgrading of product specifica- affect how the plant is best operated. 12. The opportunity is least when new As a result, the plant is likely to process technologies must be mastered. It is operate at lower productivity than much greater if the new activity simply could optimally have been achieved, involves applying known process technolo- with the entity probably also contin- gies to the production of a new product. uing to depend excessively on for- 22 THE ANNALS OF THE AMERICAN ACADEMY eign mastery for technical are what Korea's technological mas- assistance in trouble-shooting. tery consists of and how it was Alternatively, the entity will need to acquired. Available evidence on make greater efforts to achieve these points is summarized below internal mastery than would have for the period from the end of the been needed if more complete infor- Korean war through approxi- mation had initially been provided. mately 1978.13 These outcomes can be avoided by The fundamental elements of having the entity's personnel partic- Korea's industrialization have been ipate in every phase of project exe- directed and controlled by nation- cution, even if only as intelligent als. Foreign resources have made observers who merely follow the substantial contributions, but the work in progress and learn which transactions involved have typically are the relevant questions in gaining been at arm's length. Thus, although mastery of the "hows" and "whys." Korea has relied quite heavily on The foregoing discussion points to capital inflows, these have over- the possibility that government whelmingly been in the form of intervention might be warranted to debt, not equity, and technology has ensure that transfers of technology been acquired from abroad largely contrilbute appropriately to the through means other than direct development of indigenous techno- foreign investment. The purchase of logical mastery. This possibility technology through licensing agree- raises a variety of issues, many of ments has been of modest impor- which are dealt with in the other tance as the initial source of process articles in this issue. For the pur- technology. Machinery imports and pose of the present discussion, how- turnkey contracts have been of ever, it is relevant to examine one much greater consequence in the important component of the knowl- transfer of technology, and a tre- edge required to design effective mendous amount of expertise has policies-the question of how been obtained as a result of the technological mastery should evolve return of Koreans from study or in relation to industrial develop- work abroad. Moreover, in only a ment. It is to this issue that we now few sectors-such as electronics- turn. have Korean exports depended criti- cally on transactions between re- KOREAN TECHNOLOGICAL lated affiliates of multinational MASTERY corporations or on international sub- contracting."4 Historical evidence forms the principal basis for considering the Nature of the technologies relationship of technological mas- mastered tery to industrial development. The Republic of Korea-often referred Korea's success in assimilating to as South Korea and hereafter technologies acquiired through simply as Korea-provides an 13. The following discussion is based on instructive example. The broad out- detailed evidence given in Larry E. West- lines of Korea's remarkably success- phal, Yung W. Rhee, and Garry Pursell, ful achievement of semiindustrial "Foreign Influences on Korean Industrial status are well known and need not Development," Oxford Bulletin of Economics strepeatus arere.Less well known an1and Statistics, u 41: 359-88 (1979). be repeated here. Less well known 14. International subcontractingrefersto TECHNOLOGICAL MASTERY 23 arm's-length transactions is in part export, and has so far failed to gain explained by the nature of technol- local mastery of many key aspects of ogy and product differentiation in production engineering. It should be the industries on which its growth noted, however, that the electronics has crucially depended. Many of and certain chemicals industries are these industries-such as plywood unique in Korea in their almost or textiles and apparel-use rela- exclusive reliance on direct foreign tively mature technologies; in such investment for acquiring the very cases, mastery of well-established latest technology and market access. and conventional methods, embod- In other industries; where tech- ied in equipment readily available nology is similarly proprietary, a from foreign suppliers, is sufficient number of examples attest to the to permit efficient production.'5 The fact that Korean industry has man- products of many of these industries aged to initiate-and in most cases are either quite highly standard- to operate successfully-a variety of ized, plywood, for example, or dif- "high technology" industrial activi- ferentiated in technologically minor ties by means of licensing and turn- respects and not greatly dependent key arrangements. To cite two cases: on brand recognition for purchaser Korea used arrangements of this acceptance, for example, textiles kind to acquire the most modern and apparel. Thus, in most of the shipbuilding technology in the industries that have been intensively world and to incorporate the most developed, few advantages are to be recent technological advances in its gained from licensing or direct for- integrated steel mill. More gener- eign investment as far as technology ally, Korea's recent experience in acquisition and overseas marketing promoting technologically sophisti- are concerned. cated industries indicates that their Nonetheless, exceptions exist, of development may involve greater which electronics is perhaps the reliance on licensing as a way of most notable. This is an industry in acquiring technology. which technology is changing rapidly worldwide, product differ- Activities leading to mastery entiation is based on sophisticated technological expertise, and pur- Korea's past strategy for gaining chasers' brand preferences are evi- technological mastery has relied dent. Given these characteristics, it heavily on indigenous effort through is not surprising to find that in this capitalizing on experience and case Korea has relied extensively on emphasizing the selective use of direct foreign investment to estab- technology transfers. In industries lish production, particularly for for which process technology is not product-specific, the initial achieve- exportactivity that is wholly organizedbyan ment of mastery has frequently per- overseas firm; thedomestic,exportingfirm is mitted the copying of foreign responsible only for overseeing production. product as a means of enlarging 15. This does not imply the absence of pout samaso nagn rapid technological changeintheindustryin technological capacity. The developed countries. It simply means that mechanical engineering industries, developing countries can-at least for a among others, afford many exam- while-maintain a comparative advantage, ples; such processes as machining once estpblished, based on mastery of conven- and casting, once learned by produc- tional methods more appropriate to their fac- tor endowments. ing one item, can readily be applied 24 THE ANNALS OF THE AMERICAN ACADEMY in the production of others. One case countries foflowing an export-led that has been closely studied is tex- strategy have experienced such tile machinery, in particular remarkable success in their indus- semiautomatic looms for weaving trialization efforts. fabric.16 In this as in some other In addition, the fast pace of cases, Korean manufacturers not Korea's industrial growth has per- only have been able to produce a cap- mitted rapid rates of technological ital good that meets world stand- learning because of the short inter- ards, albeit of an older vintage, but vals between the construction of suc- have, in addition, adapted the pro- cessive plants in many industries. In duct design to make it more approp- some industries, including synthetic riate to Korean circumstances; the resins and fibers, the first plants adapted semiautomatic looms fall were often built on a turnkey basis between ordinary semiautomatic and on a scale much smatler than and fully automatic looms in terms either that warranted by the size of of the labor intensity of the weaving the market or that which would technology they embody. In other exhaust economies of scale. Con- industries in which technology is struction of the second and subse- more product-specific, such as quent plants-at scales much closer chemicals, mastery of the underly- or equal to world scale-followed ing principles has permitted quickly, with Korean engineers and greater local participation in the technicians assuming a gradually subsequent establishment of closely increasing role in project execu- allied lines of production. tion.17 Export activity has proved to be a very important means of acquiring Significance of the technological mastery. As a result of Korean experience exporting, Korean firms have en- joyed virtually costless access to a Korea's experience demonstrates tremendous range of information, that a high level of technological diffused to them in various ways by mastery in all aspects of the uses the buyers of their exports. The re- of technological knowledge is not sulting minor technological changes required for sustained industrial have significantly increased produc- development. This is evident from tion efficiency, changed product the fact that its mastery has pro- designs, upgraded quality, and im- gressed much further in produc- proved management practices. Ex- tion engineering than in project exe- porting thus appears to have offered cution. In addition, Korea has relied a direct means of improving produc- on foreign suppliers for necessary tivity, in addition to the indirect capital equipment and has only stimulus derived from trying to recently embarked on a concerted maintain and increase penetration program of import substitution in in overseas markets. The Korean experience also suggests that this 17. The observed pattern of time-phased beneficial externality of export plant construction in these industries might actiity ay artl exlainwhy be an optimal strategy, with small scales activity may partly explain why chosen for the first plants to minimize the costs and risks entailed in learning the tech- 16. Yung W. Rhee and Larry E. West- nology. It is not known, however, whether phal, "A Micro, Econometric Investigation of these or other considerations were the con- Choice of Technology," Journal of Develop- trolling ones at the time the first plants were ment Economics, 4: 205-38 (1977). constructed. TECHNOLOGICAL MASTERY 25 the capital goods sector. N onethe- But transfers have been no more less, Korean industry has acquired than an initial step in the exploita- and exercised the capacity to choose tion of available knowledge. Assimi- the technologies to be imported, .and lation has been achieved through a Koreans have become increasingly succession of technological efforts involved in other phases of project over time, largely undertaken by execution. Fundamentally, how- domestic firms to extend their tech- ever, Korea has become a significant nological mastery and to accomplish industrial power mainly as a result minor technological changes. These of its proficiency in production. It efforts have resulted in continual thus appears that mastery of pro- and significant increases in the pro- duction engineering alone is nearly ductivity of resources employed in sufficient for the attainment of an the industrial sector and have been advanced stage of industrial reflected in Korea's sustained rapid development. industrial growth. Korea's expe- Contemporary pronouncements rience thus supports the argument about the nature of, and the con- that indigenous effort is of overrid- straints imposed by, the existing ing importance in the achievement international economic order are of technological mastery, but the contradicted by Korea's experience. causal forces that contribute both to In the context of calls for a "new the presence and to the effectiveness international economic order," it is of indigenous effort have yet to be frequently alleged that existing uncovered. international markets are noncom- petitive and that developing coun- CONCLUSION: ISSUES OF tries are either denied access to TECHNOLOGICAL STRATEGY technology and overseas markets or are granted it only on highly unfa- The dependence of an economy's vorable terms. It is further asserted fund of technological expertise on that foreigners exercise the initia- the mastery of previously intro- tive in transfers of technology and in duced technologies has important the organization of export activity, implications. It means that initial If true, these assertions would imply decisions about choices of technol- a severe constraint on industrial ogy and degrees of local involvement development. Far from supporting in investments to implement them them, Korea's experience shows are critical determinants of the them to be false for many important directions in which an economy's industries. technological mastery will develop. To summarize, in the course of its Although the empirical evidence industrialization, Korea has effec- derived from research is not yet tively assimilated various ele- comprehensive enough to provide a ments of foreign technology. clear basis on whiclh to make pre- Transfers of technology have con- scriptions about how an economy's tributed importantly to this process. technological mastery ought to A wide variety of transfer modes has evolve in relation to its industrial been used, with machinery imports development, it seems clear that a and turnkey contracts predominat- synergistic relationship can develop ing over licensing agreements and between them, with advances in direct foreign investment in the each prompting new gains in the initial acquisition of technology. other. As Korean experience demon- 26 THE ANNALS OF THE AMERICAN ACADEMY strates, however, high indigenous present; equally, it is the ability to levels of all types of technological adapt technology and to anticipate mastery are not necessary for the changes in world and domestic initial stages of industrial develop- markets. Thus it is also necessary to ment; in the Korean case, a mastery develop the capacity to innovate in that has been mainly confined to various respects. It is unclear how production engineering has been far this capacity can be developed sufficient. The Korean example also solely on the basis of production suggests that by relying on foreign engineering or project execution sources of technology, it is possible experience. to choose a technology without hav- The effects of government policy ing first mastered its use. In the on the development of indigenous same way, it is also possible to use a technological mastery have yet to be technology without having the ascertained. Further research to mastery required to replicate it uncover historical evidence from through project execution or to different countries' cases is neces- manufacture the capital goods sary to reach any soundly based gen- involved. eralizations about the determinants Nevertheless, it should be of the extent and appropriateness of remembered that, just as the initial technological effort in different choice of production method may directions. Such generalizations are greatly constrain the direction of needed to formulate policies that technical change, so the kinds of will direct the attainment of technological effort in which an increased technological mastery in economy acquires experience may ways in line with social objectives. constrain the type of technological In particular, much remains to be mastery it can develop. Further- learned about the appropriate phas- more, there is an important differ- ing of the replacement of technology ence between attaining mastery in transfers by indigenous technologi- relation to given circumstances and cal effort and about the impact of in attaining the capacity to adapt to different policies on the develop- changing circumstances. The objec- ment of the various types of techno- tive of acquiring technological mas- logical mastery. tery is not simply to produce in the World Bank Headquiarters: 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. 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