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

Abstract

Problem Definition: This study examines 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 in which developing economy firms operate. 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. 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 this important gap in research and practice. Methodology: The empirical analyses are conducted using matching and fixed-effects regression on a multi-industry dataset from the World Bank. We analyze detailed firm-level information from over 16,000 manufacturing firms across 25 developing economies in South Asia and East Asia. To strengthen causal inference, our analyses address selection bias and unobserved heterogeneity. 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. 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. Managerial Implications: Our results provide compelling evidence regarding the disruptive effects of technology licensing on productivity growth in the short run. Furthermore, these results offer insights for manufacturing firms and policymakers in developing economies on how to mitigate these negative effects.