Technology Transfer, Foreign Direct Investment, Licensing and the Developing Countries’ Terms of Trade

Abstract

We reconsider technology transfer à la Kojima–Ozawa originating from a developed (North) country’s comparatively disadvantaged industry and going to developing (South) country’s comparatively advantaged industry. We study the effects of free technology transfer, technology transfer via licensing and foreign direct investment (FDI) on the North–South terms of trade and welfare in a two-good, two-country Ricardian model. We show that the developed country, which has an absolute advantage in production technology, gains by transferring its advanced technology to the developing country’s export sector. The developed country benefits from technology transfer regardless of the modes of transfer due to an improvement in its terms of trade. Licensing or FDI allows the North to further extract surplus from the South. However, we cast doubt on Kojima–Ozawa propositions about the mutual welfare gain and we show that while the technology transfer allows the South to improve its comparative advantage and production efficiency, its welfare gain depends on how much it needs to pay to the North via licensing or FDI. In our next step, we provide an empirical follow-up on the theoretical assessment. Our empirical analysis is based on panel data on the developing countries. We find a worsening terms of trade effect of FDI and royalties payment for the developing countries.