Technology Licensing and Productivity Growth: Evidence from Manufacturing Firms in Developing Economies

Abstract

(1) Problem Definition: In recent years, manufacturing firms in developing economies have made significant efforts to move up the production value chain by adopting foreign technology through licensing. However, there is negligible empirical evidence of the relationship between technology licensing and productivity growth in developing economy manufacturing firms (licensee firms), the focal relationship of interest in this study. We examine whether and how the relationship between technology licensing and productivity growth in the short run is affected by the challenges and constraints inherent in the contexts developing economy firms operate in. We do so by investigating the moderating role of formal workforce training program in a firm, and the corruption level and the infrastructural constraint level in the firm’s external environment. (2) Academic/Practical Relevance: Although the adoption of foreign technology by developing economy manufacturing firms is often driven by the goal to strengthen their capabilities in the long run, prior research provides a limited understanding of the performance consequences of technology licensing in the short run, which is an important business reality. Our study serves to address an important gap in research and practice by shedding light on some of the unique challenges and constraints that licensee firms in developing economies face as a consequence of foreign technology licensing. (3) Methodology: The empirical analyses are conducted using matching and fixed-effects regression on a multi-industry data set from the World Bank comprising detailed firm-level information from over 16,000 manufacturing firms across 25 developing economies in South Asia and East Asia. To strengthen the causal inference of the results and rule out alternative explanations, we use several alternative matching techniques and empirical methods addressing selection bias and unobserved heterogeneity. (4) Results: Our results indicate that the adoption of foreign technology by developing economy manufacturing firms has a substantial short-run disruptive effect on firm operations with productivity growth declining by 4.5 percentage points in these firms relative to comparable firms that do not use foreign technology licensing. Toward mitigating such disruptive effects, we find that formal workforce training programs attenuate the negative relationship between technology licensing and productivity growth. However, infrastructural constraints in the external business environment amplify this negative relationship. Intriguingly, our results suggest that corruption in the firm’s external environment acts as an “efficient grease,” attenuating the negative impact of technology licensing on productivity growth. (5) Managerial Implications: Our results provide compelling evidence on not only the presence of but also the large magnitude of the disruptive effects of technology licensing on productivity growth. The findings offer important insights for manufacturing firms and policymakers in developing economies on how to mitigate these negative effects. The results highlight opportunities for policymakers to (a) encourage firms to have formal workforce training programs, (b) reduce infrastructural constraints in the business environment, and (c) institute regulatory practices that can substitute for the effects of corruption.