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Hong Kong
World Development, Vol 12, No 5/6, pp 481490, 1984. Planted in Great Britain
0305--750X/84 $3 00 + 0 00 © 1984 Pergamon Press Ltd
Hong Kong E D W A R D K. Y. CHEN
University of Hong Kong - - Hong Kong has been exporting technology to other developing countries through its foreign direct investment in manufacturing Although Hong Kong does not have a large capital goods sector, it does produce certain modern machinery for plastics production In addiuon, Hong Kong manufacturing firms act as an intermediary m the two-stage transfer of technology from developed to developing countries m the process of which adaptations are often made More importantly, product designs which are the great strength of many Hong Kong manufacturers are often passed on to the host countries wa forogn direct investment and the subsequent diffusion processes. Lastly, Hong Kong manufacturers also export 'software' technology such as management techniques, marketing connections and labour skills to the developing host countries.
Summary.
1 INTRODUCTION The export of technology from developing countries is a recent p h e n o m e n o n Nonetheless, there IS now a growing hterature on this subject The research work undertaken by Lall (1979, 1980a, b) is particularly worth noting Tmg and Schwe (1981) have cited examples of the export of technology from Talwan manufacturing, and Kumar (1981) has made some reference to the export of technology from Korean manufacturing.~ In the case of Latin American experience, Katz has done a great deal of work with reference to Argentina's technological capabilities, 2 and Cortez (1978) has specifically examined the export of technology by Argentina to other developing countries. Developing countries are clearly not major innovators of technology But in many fastgrowing developing countries the rate of technological progress has in fact been quite rapid ~ It Is also found that imported technology is a major source of rapid technological progress 4 Thus, while technological change in developing countries does not necessarily occur in foreign firms, the original source of technology m most cases is the developed countries H o w e v e r , foreign firms m developing countries very often undertake modifications and adaptations m the process of technology transfer, s and many local firms in developing countries do the same with the technology passed on to them Through a process of learmng, ~ firms (both foreign and local) in developing countries can very often arrive at important technological innovations which are more appropriate for their conditions ltence, 481
developing countries can emerge as important exporters of technology, especially to other developing countries, based on the international competitiveness they have developed m the production of modified and adapted technologies. This idea of certain countries acting as an intermediate agent in the process of technology transfer has in fact been formulated by Parry (1979) as a theory of two-stage technology transfer to developing countries, and has been discussed by Tlng (1980) in the context of Talwanese multinationals But the 'intermediate' countries Parry had in mind were Australia and Canada and he cited a number of examples of multinational affiliates in Australia which adapted their parent-firm technology to suit local conditions It was later found that the adapted technology was also suitable for some economies in South-east Asia and was eventually transferred to them It has become evident that a number of the more advanced developing countries, such as Argentina, Brazil, t t o n g Kong, Korea, Singapore, Talwan and India, can also act as the "intermediate' countries in this sort of two-stage technology transfer The export of technology to other countries can take many forms 7 First, It can be simply m the form of direct export of machinery, intermediate and end-use products with embodied technology Second, it can be associated with foreign direct investment Third, it can be m the form of turnkey projects, l.e the export of complete plants Fourth, the export ot technology can be in the form of various types of technical and management consultancy arrangements
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WORLD DEVELOPMEN l
Frith, the export of technology can be the result of training programmes undertaken for other developing countries Sixth, it can be m the form of hcensmg agreements The lmphcahon of the above classification ts that technology on the one hand includes process as well as product technology, and on the other includes both the "hardware' technology of machinery, production process and design, and the 'software" technology of management, marketing and other skills It should also be pointed out that while the export of technology from developing countries is mainly related to manufacturing and construction, there is an increasing importance of technology export m the service sector including banking, trade and tourism t t o n g Kong has experienced very fast economic growth in the past 20 years and the rate ot technological progress has also been very high t l o w e v e l , the role of t l o n g Kong m exporting technology to other developing countries has not been particularly noteworthy This is largely because Hong Kong's technological capabilities are limited by the small size ot its capital goods sector s The lack of a large and nnportant capital goods sector can be attributed to the traditional non-mterventlomst pollcms of the government which do not give direct support to industry There seems to be a wide agreement in the literature on the nnportance of estabhshmg a capital goods sector m the promotion ol technological capabilities m developing countries '~ Furthermore, it is usually argued that government assistance m R & D acnvltics and other back-up services, and the adoption ot some protectumist trade policies are nnportant m the establishment and subsequent growth o! a capital goods sector m It is said that technology export from India and Argentina is backed up by a relatwely advanced capital goods sector which has been set up with considerable assistance and protection The argument m faw)ur of assistance and protection is that the capmll goods sector is an mtant industry which must be gwen the opportunity to survive and undergo a lengthy learning process The industry may not be m hnc with the existing comparative advantage, but will he able to gain international competitiveness when the learning process begins to bear frtnt It is therefore understandable that Hong Kong firms do not export technoh)gy m the | o r m o | turnkey projects or even hcensulg agreements because ot the relatively unsophisticated technology that they have to sell Yet, it is beheved that the amount of relanvely unsophisticated technology which revolves major or minor changes to the original deveh)ped-country versum cxported trom flung Kong to other developing countries is
quite considerable M o r e o v e l , fllotlgh tile amount and range of R & D ,lctivlhe'> m process technology are very hmlted, the resotuces allocated to research on product technology arc significant t l o n g Kong has been
2 FOREIGN DIRECTINVESTMENTFROM 110NG K O N G M A N U F A C T U R I N G There has been by now a vast hterature, both theoretical and empirical, on multinationals lrom developing countries 11 Hong Kong has emerged as by far the largest exporter ot capital m the form of foreign direct investment among developing countries In 1981, a rough estimate of Hong Kong's toreign direct investment Is m the regum of US $1800 mflhon 12 The major host countr,es are Indonesia, Talwan, ( ' h m a and Malaysia, but Hong Kong hrms also invest in Sn Lanka, India, Pakistan, the Philippines, Thailand, Singapore, Nigeria, Ghana, the United Kingdom, the United States and Canada Manufacturing is still the most re)pot|ant sector in which Hong Kong multinationals operate, though increasingly Hong Kong multinationals also invest m banking, tourism, construction and real estate, and trade Tables 1-3 show Hong Kong's foreign direct investment m Indonesia, M,daysia and Taiwan respectively by industry or sector By t t o n g Kong's foreign direct investment we mean that made by Hong Kong residents who are largel 3, but not excluswely Chinese entrepreneurs First, nlany of the local Chinese companies ,ire lonlt ventures with overseas Chinese, South-east Asians, Japanese and even Westelners Second, some of the firms which have set up subsidiaries overseas ,ire m tact Brmsh hrms But these British flrlns such ,is Jardmes, Swlre and Wheelock Marden ha'~e been estabhshed m t l o n g Kong so long that most o! the directors
HONG KONG Table 1 Hong Kong's foreign direct investment m Indonesia (mtttal investment m approved prolects as of June 1980)
Sector
As % of total formgn direct Amount investment m (US $ mdhon) Indonesm
Agriculture Forestry Fishery Mmmg Manufacturing Constructmn Trade/hotel Transportation Servmes Total
63 77 11 0 1 26 5 78 12 76 -22 64 4
34 1 12 4 87 -76 30 5 51 2 -25 0 10 6
Source Capital Investment Co-ordmatmn Board, Government of Indonesm
Table 2 Hong Kong's foreign direct investment m Malaysia (as at 31 December 1979)
Sector Food Beverages and "tobacco Textiles Wood Paper and printing Chemicals Petroleum and coal Rubber Plastics Non-metallic minerals Basic metal Fabricated metal Machinery Electric and electronics Transport eqmpment ScmntfflC and measuring eqmpmcnt Hotel, tourism Total
As % of total formgn direct Amount investment m (M $1000) Malaysm 20,038 16,605 141,964 17,381 1046 26,722 24,400 8083 2465 2647 3668 8508 54 22,64/I 1126
52 97 32 7 14 8 36 11 1 22 8 80 65 l0 4 l) 10 3 0 1 10 6 08
3106 5798 281,898
85 11 0 10 9
Source Office of the Commissioner for Malaysia, Hong Kong
483
Table 3 Hong Kong's foreign direct investment m Tatwan (as at 31 December 1981)
Sector Agriculture and forestry Fishery and husbandry Mmlng Food and beverage Textdes Garment and footwear Lumber Pulp paper Leather Plastic and rubber Chemicals Non-metalhc minerals Basic metal and metal Machinery and eqmpment Electromc and electrical Construction Trade Banking and insurance Transportatmn Services Others Total
As % of total formgn &rect Amount investment m (US $1000) Tatwan 353 2895 49 3918 28,327 17,585 3862 9157 6912 18,031 21,546 8809 9238 8736 15,786 53,065 2904 6810 25,494 17,289 15,627 276,393
11 9 25 3 85 53 28 9 43 9 15 9 56 3 66 4 2l 1 6 1 26 42 43 17 51 5 36 4 63 64 3 47 22 3 89
Source Industrial Development and Investment Centre, Talwan
though of British o n g m are m fact H o n g K o n g belongers Since the H o n g K o n g g o v e r n m e n t does not collect statistics on the outflow of direct investment, there is no way to dffferentmte H o n g Kong's foreign d~rect i n v e s t m e n t b e t w e e n that of Chinese and o t h e r origins. The statlstms g w e n m Tables 1-3 are o b t a i n e d from the host countries of H o n g K o n g firms and t h e r e f o r e include all investment m a d e by investors, Chinese and n o n - C h i n e s e , who clmm themselves to be H o n g K o n g residents Table 1 indicates the a m o u n t of m~tlal investment only The total r e a h z e d i n v e s t m e n t of H o n g K o n g m Indonesia a m o u n t e d to US $370 m d h o n m June 1980 H o n g Kong is the second largest formgn investor in Indonesia, after J a p a n F r o m the point of vmw of H o n g K o n g investment m Indonesia, the manufacturing sector accounted for the greatest share But from the point of wew of Indonesia, H o n g K o n g investment ~s most slgmficant m agriculture (34% of all formgn investment), construction (30%), and trade and tourism (51%) Within the manufacturing sector, by far the largest investment of H o n g Kong is in
484
WORLD DEVELOPMENT
the textile industry (which includes garments), indeed, shghtly over 50% of Hong Kong's investment m Indonesian manufacturing is in textiles The other industries of importance are chemicals and metal products Hong Kong's foreign direct investment in Malaysm amounted to M $282 mflhon at the end of 1979 Eighty-rune per cent of Hong Kong's investment was in manufacturing while the remaining 11% was in tourism Hong Kong Is the fourth largest formgn investor In Malaysia, after Singapore, Japan and the United Kingdom. As in the case of Indonesia, by far the largest investment of Hong Kong in Malaysia is in the textile industry Indeed, Hong Kong's investment accounted for almost one-third of all foreign investment in the Malaysian textile industry The other industries m which Hong Kong investment Is also important are food, beverages and tobacco, wood, chemicals, petroleum and coal, and electronics and electrical At the end of 1981, Hong Kong's investment in Talwan amounted to US $276 mllhon and ranked as the third largest formgn Investor after Japan and the Umted States Unlike the cases of Indonesia and Malaysia, only 55% of Hong Kong's investment m Talwan is 111 manutacturmg. In the past few years, ttong Kong investors' involvement in Talwan's construction, banking, trade and transportation and communications has been increasing rapidly Specifically, in the cases ot construction and transportanon, over 50% of total foreign investment is accounted for by Hong Kong Within manufacturmg Hong Kong's investment concentrates on textiles, garments, plastics, chemicals and electronic and electrical While Hong Kong's investment in textiles and garments accounted for a high proportion of total foreign investment, ~t ~s of interest to note that Hong Kong firms do not play an important role in Tmwan's electronic and electrical industry relative to American and Japanese direct investments There are no systematic statistics on foreign investment in China From scattered sources, the realized investment m the Special Economic Zones at the end of 1981 amounted to US $250 mdhon, of which about 94°/,, came from Hong Kong In addition, of the 29 projects set up under the joint-venture laws promulgated in 1979, 16 have Hong Kong participation But many ot the Hong K o n ~ C h m a joint ventures are relatively small, the investment ol which Is usually below US$1 mllhon There a r e m a d d l t l o n a n u m b e r o f cooperahon or co-producnon projects wHh Hong Kong partlclpahon i~ A reasonable estimate of
Hong Kong's total reahzed direct investment m China at the end of 1981 is US $280 mflhon, which Is incidentally about the same as l tong Kong's total investment in Talwan tlong Kong's investors in the manufacturing sector of China usually engage m small or medmm projects only, mainly in textiles, electronics and watches However. many of the large projects in construction and tourism lnw)lve Hong Kong participation It is appropriate to use the conventumal 'push" and "pull' factors to explam [long Kong's formgn &rect investment, drawing upon the findings of two surveys conducted to investigate the motivations ot those firms which have invested abroad and in China 1~ The "push' factors are such ownership-specific advantages as the possession of efficient and appropriate technology and country-specific ones like the lower costs of technical and managerial staff In terms of technology, the advantages of Hong Kong firms lie more in product technology and managerial and marketing skills than process technology The Hong Kong multmahonals lntervmwed clmmed that they can compete against the developed-country multinationals m the developmg host countries because (I) their costs |or managerial and technical start are lower, (2) they have a better understanding ot the conditions and people in the developmg countries and (3) they tend to introduce simpler, more labour-intensive and smaller scale, and therefore more appropriate, technology tor the conditions of developing host countries But the Hong Kong multinationals interviewed seem to believe that the 'pull' factors offered by the host countries such as cheaper land and labour costs fire even more unportant than the 'push" factors Foreign direct investment as a means of securing raw material supply and expanding the host country market is relatively ummportant 1~ The products oi ttong Kong multinationals in the host countries are mainly designed for export to other countries Somehmes part of the produchon processes takes place m the host countries find the mtermedmte products are shipped back to the Ilong Kong parent firms tor further processing This is largely the case with Hong Kong's investment m the manufacturing industries in C h u l a
3 T I l E E X P O R T OF T E C t | N O L O ( I Y The export ot industrial technology lrom I tong Kong is, ,is indicated above, mainly through tolelgn direct investment The capital goods
HONG KONG sector in Hong Kong is not large and welldeveloped enough to be able to export turnkey projects, or license its innovations, or even give technical aid and consultancy. Yet, there are many indications that a large number of Hong Kong firms through their foreign direct investment have transferred important technologies to the host countries. The major types of technology thus transferred can be conveniently divided into production technology, product technology and 'software' technology (a) Production technology This includes the improvements in the method of production with or without the use of new machinery, equipment, fuel and materials. The most remarkable achievement so far in Hong Kong's machine-tool industry is the manufacture of many types of blow moulding, injection moulding and extrusion machines for the plastics industry. Many of these machines are very advanced by world standards More importantly, these machines have been built to suit the conditions in Hong Kong and facilitate the production of the kinds of products that the Hong Kong plastics industry is producing For instance, many of these Hong Kong-deslgned machines are land-saving and fuel-saving, and suitable for the production of such plastic products as household goods, toys and dolls. Nonetheless, the technology embodied m these machines for the plastics industry is transferred to other countries almost exclusively through direct exporting Since these machines are relatively easy to operate, the exporting of these machines is as a rule not accompanied by technical aid or consultancy Only a few machine-tool firms in Hong Kong have set up subsidiaries abroad Nor are there many Hong Kong plastics firms which have undertaken foreign direct investment abroad and in China Under these circumstances, the important production technology developed m Hong Kong for the plastics industry has not been spreading out extensively to other developing countries It Is of interest to note that the development of this 'revealed comparative advantage' of Hong Kong in the production of machines for the plasUcs Industry has taken place in the absence of government assistance and protectionist pohcms. Such development Is basically the result of responses to the need of the industry in Hong Kong The machine-tool industry m Hong Kong has successfully undergone a learning process such that it has been able to produce machines which smt local conditions best
485
Lall (1980a) distinguished several levels of learning process in the technologmal development of developing countries. At the elementary level is simple 'learning by doing' whereby the utilization of imported technology is made more efficient through the experience of workers, and 'learning by adapting' whereby small changes are made within a plant to given technology by technicians, managers and engineers to meet particular needs At the intermediate level is 'learning by design' whereby imported equipment and processes are replicated and knowledge is gained by design engineers and capital-equipment manufacturers, and 'learning by improved design' whereby imported technology is adapted to suit local conditions It is necessary to undertake some R & D activities to support the design engineers at this stage At the advanced level is 'learning by setting up complete production systems' whereby the capital goods sector is able not only to produce items of equipment, but to engineer and tailor entire factories or plants to specific needs. At this stage the country acquires the capacity to provide engineering consultancy services and undertake turnkey projects An even higher stage of the advanced level is 'learning by innovation' whereby basic research and development is undertaken to offer new processes and new products In terms of these levels, the machine-tool industry in ttong Kong has certainly reached the 'learning by improved design' stage, l e the second stage of the intermediate level. The industry has been able to produce specially designed machinery for the plastics industry to suit local conditions. This achievement is outstanding, considering the fact that the machinetool industry has not been assisted or protected However, owing to the lack of government support and perhaps to a lack of demand overseas, innovation in the capital goods sector in Hong Kong is so far confined to items of equipment for the plastics industry and not entire plants From the point of view of international technology transfer between developing countries, this is disappointing, considering the relatively high technological capability of the Hong Kong capital goods sector for the production of plastics products On the other hand, in the cases of textiles, garments and electronics, the export of production technology through formgn direct investment is considerable There are generally two types of technology transfer the transfer of innovations that are previously not in use in the host countries and the transfer of technologies that have been adopted and modified by the
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WORLD DEVELOPMENI
Hong Kong parent firms It is usually [ound that subs|dmrles of multm,monal corporations do not undertake extensive R & D in the developing host countries ~ Thus, very olten the technological capabihnes ot the host countries ,ue enhanced not by the m n o v a n v e ,letlVltles o[ the multlnanonal subs~dlar|es but by the transler ol new technologms through the subsidiaries in our survey of t l o n g Kong multmanonals, we found that having an outlet for used machinery is an important m o n v e for foreign d~rect investment ~7 Indeed, in many cases and parncularly m the case of textile firms, a high proportum of the investment in overseas subsidiaries consists of used machinery from the parent firms m Hong Kong The used machines may be outdatcd from the point of view of the industry m Hong Kong but can be the most appropriate technology fl>r other developing countries with lower wage rates and less-developed skills Many of the Hong Kongoperated textile firms m Indoneshi and Malaysia lind the used machinery shipped from their parent hrms efficmnt and econommal w~th reterence to thmr local c o n d m o n s The textile industry m [tong Kong, m the m e a t m m e , uscs the most sophlshcated state of the art and machinery imported from developed countries It the subsldmnes of Hong Kong firms used sml,lar technology, ~t Is certain that the host countries would find tt both uneconomical and techmcally dlthcult to cope with Many of the [tong Kong multmatmnals we interviewed clmmed that their subs|d|anes use technologms different trom those of the parent firms Sometimes the machinery used by the subsldmnes is simply a less complicated vers|on of that used by the parent firms, but very oftcn the parent firms undertake adaptanon and modfllcanon of the machinery and e q m p m e n t and methods of production before they are used by the subsldmnes There may not be a separate R & D department m the parent firms to look mto this Some[roles the job of adaptatum and modfflcanon ot technology is simply p e r t o n n e d by the general engineers and floor technlcmns Table 4 shows the results of two surveys conducted nr mid-1979 and early 1982 with regard to the adaptation of technology by Hong Kong multmahonals for thmr subsldmnes In the 1979 survey, 84% of the finns gave a poslnve answer to technology adaptahon, ot which 20% clam~ed that their adaptations were extensive In the 1982 survey an even h~gher percentage was obtained tor technology adaptahon being undertaken, and 25% of the hrms chumed that their adaptations were extens,ve Though the two samples ,ire not &rect/y comparable (as only 15 hrms m the 1982 survey were the same as m the 1979 survey), yet
lable 4 Adal~tatton ol lethmdo~,,~ bv Itong Kong multmaltonals (numhet o/ /ums wt/h pertenla~e o I lolal m parenlheses) Vc,,
Yc,lr Lxtcnslvcly Moderately
%hghtl',
No
1979
t (12%1 4 (12 5%)
3 (16%) q (12 5"o)
1982
5 (20%) 8 (25%)
13 (S2%) 10 (5(1%)
Sources Survc} results
it seems reasonable to assunle that there IS an increasing trend for Hong Kong multinationals to adapt and modify their technology to smt the con&[ions ot host countries The nature ot adaptanon vanes between technologms and between industries Most otten the machines imported from abroad and used m the Hong Kong parent firms are so modified that less skilled labour but nrore unskilled labour is required Sometimes, this means that the modffted machines are more sophlsncated than the original versions In many cases, the direction ot modfllcanon Is towards less skilled labourintensive rather than less capmfl-mtcnslve method of producnon. A popular typc o[ modfllcanon ts to convert the manually operated machmes into s e m > a u t o m a n c ones for use In the subsldiar|es These manual mach|nes have largely been replaced by fully automatic machines m the Hong Kong paient firms The fully automaUc machines are difficult for the subsidiaries to cope with and may not be economical for the subs|dmnes considering the prewuhng tactor prices m the host country On the other hand, the manual machines may be too inefficient even tor the subsl&anes It is there[ore often the case that sem|-automatlc kits are devised and fitted to the manual machines before transferring them to the subsidmnes In other cases,adaptat|ons and modff~catu)ns are made snnply to smt the chmanc situations, the work,ng c o n d m o n s and the workmg habits of the labour force m the host countries l h m g Kong investors like other developing countr|es' MNCs seldom go abroad and take up 100% ownersh@ even if this is permitted by the tormgn investment laws [long Kong MNCs in many cases enter into partnersh|ps w~th the local entrepreneurs some of whom ,ire ethmcally of Chinese origin Thus, betore thc t long Kong M N ( ' s make adaptations and modlhcatlons for their overseas subsidiaries, they ,ire supphed with the necessary mformatum on the condflums m the host countries
HONG KONG In hne with other findings, Hong Kong multinationals seldom undertake R & D actlvltms in the developing host countries. In all cases, the learning process involved m the export of industrial technology through Hong Kong's foreign direct investment does not go beyond the mtermedmte level as defined by Lall (1980a)
(b)
Product technology
This refers to product design and not major product innovations. It ~s now common practme to include product design m the dIscussmn of multinational corporation technology ~ In the development literature, the discussion on product technology concentrates on whether the products sold in developing counmes are appropriate for the given local conditions. Smce Hong Kong multinatmnals normally do not aim at the local market of the host countries, the consideration ot whether the subsidiaries produce appropriate products for the host countries is largely irrelevant Our major consideration is whether the new product designs worked out in the Hong Kong parent firms are transferred to the subsidiaries. If so, there is an export of product technology from Hong Kong to other developing host countries. Our intervmws with some multinationals reveal the fact that the export of new product designs is considered to be the most important export of technology from the parent firms. Many local firms in Hong Kong have R & D activities comparable to foreign firms in Hong Kong. Accordmg to Chen (1981b), while less than one-half of the foreign firms undertake R & D m Hong Kong, 75% of local firms are committed to R & D in one way or another It was.found, however, that for those foreign firms which undertake R & D, R & D expenditures on an average account for slightly over 1% of value-added, compared with a much smaller percentage of 0 6% for the local firms This can largely be explained by the fact that local firms tend to concentrate to a greater extent on research on product technology which requires, relatively speaking, a smaller amount of expenditure In fact, a fundamental reason for the success of Hong Kong's manufactured exports in the past 20 years is the rapid process of product diversification based on the technological capability of local mdustriahsts to introduce new product designs This explains the success of Hong Kong in the manufacture of fashion dresses, electromc products, and dolls and toys In making new product designs, Hong Kong mdusmahsts very often go beyond lm~tanon or
487
'learning by improved design' In many cases, they are genuine renovators which can offer entirely new product designs aimed at world markets There are many examples of product designs m electromcs goods and toys which have won international or national acclaim Most of the consumer electronics manufacturers conduct clrcmt and appearance designs in-house Thus, m terms of product technology, Hong Kong has to some extent attained the most advanced stage, ie 'learning by mnovatmn" m Lall's classlficatmn of technologmal capabflmes This export of product technology by Hong Kong firms through foreign d~rect investment is of considerable benefit to the host countries First of all, it is usually because of this rap~d change in product technology in the subsldmnes of Hong Kong multinationals that the host countries are able to maintain a rapid growth in their manufactured exports While there ts a considerable literature on the role of developed country multinationals in the manufactured exports of developing countries, ~9 multinationals from the advanced developing countries can play an important role in promoting manufactured exports of other developing countries. The role of multinationals from developing countries can in fact be even more important if the model of success in the advanced developing countries is transplanted to the host countries At a later stage, the new product designs which are not normally patented can be adopted by the local firms of the host countries. This has the effect of (1) raising the technological capablhty of the host countries In product design and (2) further promoting the manufactured exports of the host countries Product designs are usually easy to imitate and the rate of diffusion of product technology among the local firms of the host countries is therefore usually high.
(c)
'Software' technology
This includes management and marketing skills and training programmes offered to the local workers Some authors believe that multinationals from developing countries tend to employ a higher proportion of staff from the home country than multinationals from developed countries 20 This seems to be true m the case of Hong Kong multinationals. Th~s is not surprising, as the wage differentials between home country and host country are smaller m the case of multinationals from developing countries Because of the presence of a higher propomon of home-country employees in the overseas
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subsMmnes, it IS possxble that the export of management and marketing skill from developmg countries to other developing countries ~s more slgmflcant than that from developed countries Furthermore, the interaction between empk)yees from one developing country and those from another developing country is usually closer than that between employees from a developed country and those from a developing country The diffusion of 'software' technology to local employees is therefore more effectwe m the case of multinationals from developing countries The m a n a g e m e n t style ot H o n g Kong local firms is a u m q u e c o m b m a n o n ot western management methods with tradmonal Chinese practice In terms of LaWs classffmatmn ot the learning processes, the technological capablhty of Hong Kong industries with regard to m a n a g e m e n t ts at the ,ntermedmte level of 'learning by Improved design' Hong Kong firms also have very good connecnons with many overseas markets When subsMmnes are set up m other developing countries, these market connections are also exported to the host countries Better connections w~th exporting markets have been named as a very important factor for H o n g Kong multmatmnals to maintain a c o m p e t m v e edge over the local firms of host countries It is however possible that gwen rime these connecnons wdl be passed on to the local firms First, as much H o n g Kong's foreign d~rect investment is undertaken on a joint-venture basis with local firms, some of the h~gh level m a n a g e m e n t and marketing staff are hostcountry employees When these employees start
their own business or join other h)ca[ |lrnls, such market connecnons can be diffused lnt() the local sector of the industry Second, when demand grows to such an extent that the t t o n g Kong subsMmnes cannot cope alone, some of tile overflow wdl be Dcked up by local firms which, gwen rime, will be able to estabhsh good connections with exporting markets Although It Is rather unusual tor t t o n g Kong multmatmnals to undertake R & D m the host countries, it Js commonplace tor them to offer training facfllnes to the local workers Table 5 shows the extent to which [tong Kong multmanonals undertake R & D and offer training facthtles m thmr host countnes It ~s ot interest to note that a large percentage of firms clanned that they offered even more extenswe tralmng [or workers m the host eountrms than nl the home country This ts not unexpected, as m order to maintain product quahty and labour effiemney, the overseas substdmrles of t long Kong multinationals have to make sure that the workers they employ locally attain a certain minimum standard The training programmcs offered usually concentrate on the practical training for semt-skdled and skilled labour, though m-serwce training tor the local managerial staff Is also sometimes orgamzed
4
CONCLUSION
Th~s paper presents a case study ot [tong Kong's export of industrial technology through formgn d~rect investment A broad d e f m m o n of
Table 5 R & D and labour trammg by ttong Kong multmauonala (number o f firms with percentage o f total m parentheseQ Yes Year
More than PF
Same as PF
Less than PF
No
3 (12%) 4 (12 5%)
l (4%) 2 (6 25%)
2 (8%) 4 (12 5%)
19 (76%) 22 (686 75"/o)
14 (56%) 12 (37 5%)
3 (12%) 8 (25%)
5 (20%) 8 (25%)
3 (12%) 4 (12 5%)
R&D 1979
1982 Labour trammg 1979
1982
Source Survey results PF. Parent firm
HONG KONG technology is used to include p r o d u c t i o n technology, product technology and 'software' technology. Foreign direct i n v e s t m e n t IS found to be an e f f e c t w e m e a n s of exporting these different types of technology. In t e r m s of Lall's classification of learning processes, it s e e m s that H o n g K o n g has r e a c h e d the i n t e r m e d i a t e level with regard to p r o d u c t i o n technology and ' s o f t w a r e ' t e c h n o l o g y , and the advanced stage with regard to p r o d u c t technology It is argued that the high technologtcal capabihty of H o n g K o n g industry in introducing new product designs IS an i m p o r t a n t factor explaining the rapid growth of H o n g K o n g ' s m a n u f a c t u r e d
489
exports. It is of interest to note that the technological capability of H o n g K o n g industry has b e e n d e v e l o p e d largely in the absence of g o v e r n m e n t assistance and protectionist policies In fact, the capital goods sector of H o n g K o n g is still small and unsophisticated N o n e t h e l e s s , H o n g K o n g has b e e n able to m a k e i m p o r t a n t progress m the d e v e l o p m e n t of product technology and 'software' technology, m which case ~t s e e m s that g o v e r n m e n t assistance and protection are less crucial. O f course, ~t must be u n d e r s t o o d that the e c o n o m y of H o n g K o n g is u m q u e in many aspects and It ~s t h e r e f o r e difficult to generalize from its experience.
NOTES 1 Earher work on Korea was done by Rhee and Westphal (1978)
11 One of the most recent collections of studies is Kumar and McLeod (1981)
2 See the citatmn to Katz's work in Lall (1980a) and Fransman (1982-) -~
12 There are no official statistics on Hong Kong's investment abroad
3 See Chen (1979) in which rapid technological progress has been found to be a major cause of rapid growth in Hong Kong, Japan, Korea, Singapore and Talwan
13 A cooperation or co-productton differs from a Joint venture m that the finanoal and management responslbthtles and benefits of each party are based on agreements (which can change from year to year) instead of the amount of investment
4
See Chen (1976)
5 The empirical evidence on technology adaptations by foreign firms in developing countries are somewhat mixed For a review of the evidences and a case study of Hong Kong, see Chen (1983, Chapter 6) 6 See Cortez (1978) and Lall (1980a) for a detailed analysis of the v~rlous stages of the learning processes This idea of learning m the process of technological progress is in line with the earlier work of Rosenberg (1976) and Nelson and Winter (1974, 1977) on an evolutionary theory of technological progress The process of learning in these studies is related to a complex set of factors including the organization and management of the firm in general and the R & D activities in particular, and it is therefore different from Arrow's simple 'learning-by-doing' which is only related to the level of output or investment 7
See e g Mason (1978) and Lall (1980a)
8 For a study on the capital goods sector of Hong Kong, see Fransman (1982) 9 Rosenberg (1976), Stewart (1977), Lall (1980), Pack (1981) 10 Cortez (1978), Lall (1980a, b), Kumar (1981), Corden (1980)
14 The first survey was conducted in July/August 1979 and the second In January/February 1982 There were 25 firms in the first survey and 32 m the second Fifteen of the firms lntervtewed m 1979 were again interviewed m 1982 For a report on the 1979 survey, see Chen (1981a) 15 But one of the motwes of some firms for estabhshmg subsidiaries in Indonesia is to explore and expand the local market Also, many furniture manufacturers in Hong Kong set up subsidiaries in Indonesta and Thailand for the purpose of securing the supply of wood 16 See Chen (1981b) for a case study of multinational actlvmes m Hong Kong in terms of the production and transfer of technology 17 On a scale of 0 (of no importance) to 10 (of extreme importance), the average score of 25 firms which responded to a survey m 1979 was 4 4 which ranked sixth among 17 factors listed 18
See Maxon (1979)
19
See e g Hellelner (1973) and Nayyar (1978)
20
See e g Lecraw (1981)
490
WORLD DEVELOPMEN 1 REFERENCES
Chen. E K Y , 'The c m p m c a l relevance o1 the endogenous technical progress function'. KvMos. No 2 (1976) Chen. E K Y . ltyper-Growth m Asian Economies (London Macmillan. 19791 Chen. E K Y . ' H o n g Kong inultmattonaK m Asm characterlsncs and objecuves" (1981a). m K u m a r and McLeod (19811 Chen. E K Y . 'The role el MNCs m the producnon and transfer of technology in host countries . Development and ('hange ( D e c e m b e r 198117) Chen. E K Y . Mldtmattonal Corporattom. Tedmology and Employment (London Macmillan. 1983) Cordon W M . 'Trade pohcles', m I Cody et al ( e d s ) . Polute,s for Industrial Progre~ m Deveh)pmg ('otmtrles (l.ondon Oxlord U m v e r s n v Press, 198(I) Cortez, M , 'Argentina techmcal developmcnt and technology exports to other LI)Cs', mimed (Washington. D C Economics el Industry Dtvlsum, World Bank, 19781 Fransman. M , 'Learning and the capital goods sector under tree trade the case el Hong Kong'. World Development. Vol 111. No 11 (November 19821 "Hellcmer, G K , 'Manutacturcd exports from less developed countries and multinational h r m s ' . E~onomt( Journal (March 19731 Katz. J . 'Cre.lnon de teehnologla en el sector manulacturero Argentine'. El Trtmestre E~ otlomteo (JanuaryoMarch. 1978a) Katz, J . 'From infant industry to technology exports the Argentine experience in the international salc of industrial plants and engineering works'. IDB/ E C L A Research Programme m Science and Technology, Working Paper No 4 (1978b) Kumar, K . "The Korcan lnanufacturmg multinationals'. mimed (1981) Kumar. K and M G McLeod ( e d s ) . MultmattonaA from Developmg ('ountrtes (Lexington I) C Heath. 19811 Lall. S . ' D e v c l o p m g countries as exporters of technology a preliminary analysis', m H Gmrsch ( e d ) . International Economic Development and Resource Transfer ( T u b m g e n J & B Mohr. 19791 Lall. S . 'Developing countries as exporters of industrial technology'. Research Pohcy (1980a) Lall, S , "The export of capital from developing countries impressions of recent Indian perfl)rm-
ance', paper presented to thc International FconotalCS Study Group ('onlerent.e, n u m c o (Sct~tcml~cl 1980b) Lall, S , Developing (ountrte~ a~ FJtpoHers o/ l~e~hnologv (London Macmdl,ln, 19~2) LecraW, D J , "lnternatlonahsatlon el hrnls hen1 LO(-s cvldence trom the A S E A N region', in Kuinar and MeLcod (1981) Mason. R Hal. "Technology acquisition m the Paclhc Basra dircct loretgn investment versus unpack.lged technology', in R Hal Mason ( e d ) , lnternammal Bt~stne~s I n the Paetftt Basin (Lexington I) ( Heath. 1978) Maxon. R W . "The cost c o n d m o n s , and a d a p t a n o n el M N C technology m developing countries' m R I) llawkins ( e d ) . Re~earcl~ ill ]nterttallonal Bltsltte~s and Flnan(e The E
0305--750X/84 $3 00 + 0 00 © 1984 Pergamon Press Ltd
Hong Kong E D W A R D K. Y. CHEN
University of Hong Kong - - Hong Kong has been exporting technology to other developing countries through its foreign direct investment in manufacturing Although Hong Kong does not have a large capital goods sector, it does produce certain modern machinery for plastics production In addiuon, Hong Kong manufacturing firms act as an intermediary m the two-stage transfer of technology from developed to developing countries m the process of which adaptations are often made More importantly, product designs which are the great strength of many Hong Kong manufacturers are often passed on to the host countries wa forogn direct investment and the subsequent diffusion processes. Lastly, Hong Kong manufacturers also export 'software' technology such as management techniques, marketing connections and labour skills to the developing host countries.
Summary.
1 INTRODUCTION The export of technology from developing countries is a recent p h e n o m e n o n Nonetheless, there IS now a growing hterature on this subject The research work undertaken by Lall (1979, 1980a, b) is particularly worth noting Tmg and Schwe (1981) have cited examples of the export of technology from Talwan manufacturing, and Kumar (1981) has made some reference to the export of technology from Korean manufacturing.~ In the case of Latin American experience, Katz has done a great deal of work with reference to Argentina's technological capabilities, 2 and Cortez (1978) has specifically examined the export of technology by Argentina to other developing countries. Developing countries are clearly not major innovators of technology But in many fastgrowing developing countries the rate of technological progress has in fact been quite rapid ~ It Is also found that imported technology is a major source of rapid technological progress 4 Thus, while technological change in developing countries does not necessarily occur in foreign firms, the original source of technology m most cases is the developed countries H o w e v e r , foreign firms m developing countries very often undertake modifications and adaptations m the process of technology transfer, s and many local firms in developing countries do the same with the technology passed on to them Through a process of learmng, ~ firms (both foreign and local) in developing countries can very often arrive at important technological innovations which are more appropriate for their conditions ltence, 481
developing countries can emerge as important exporters of technology, especially to other developing countries, based on the international competitiveness they have developed m the production of modified and adapted technologies. This idea of certain countries acting as an intermediate agent in the process of technology transfer has in fact been formulated by Parry (1979) as a theory of two-stage technology transfer to developing countries, and has been discussed by Tlng (1980) in the context of Talwanese multinationals But the 'intermediate' countries Parry had in mind were Australia and Canada and he cited a number of examples of multinational affiliates in Australia which adapted their parent-firm technology to suit local conditions It was later found that the adapted technology was also suitable for some economies in South-east Asia and was eventually transferred to them It has become evident that a number of the more advanced developing countries, such as Argentina, Brazil, t t o n g Kong, Korea, Singapore, Talwan and India, can also act as the "intermediate' countries in this sort of two-stage technology transfer The export of technology to other countries can take many forms 7 First, It can be simply m the form of direct export of machinery, intermediate and end-use products with embodied technology Second, it can be associated with foreign direct investment Third, it can be m the form of turnkey projects, l.e the export of complete plants Fourth, the export ot technology can be in the form of various types of technical and management consultancy arrangements
482
WORLD DEVELOPMEN l
Frith, the export of technology can be the result of training programmes undertaken for other developing countries Sixth, it can be m the form of hcensmg agreements The lmphcahon of the above classification ts that technology on the one hand includes process as well as product technology, and on the other includes both the "hardware' technology of machinery, production process and design, and the 'software" technology of management, marketing and other skills It should also be pointed out that while the export of technology from developing countries is mainly related to manufacturing and construction, there is an increasing importance of technology export m the service sector including banking, trade and tourism t t o n g Kong has experienced very fast economic growth in the past 20 years and the rate ot technological progress has also been very high t l o w e v e l , the role of t l o n g Kong m exporting technology to other developing countries has not been particularly noteworthy This is largely because Hong Kong's technological capabilities are limited by the small size ot its capital goods sector s The lack of a large and nnportant capital goods sector can be attributed to the traditional non-mterventlomst pollcms of the government which do not give direct support to industry There seems to be a wide agreement in the literature on the nnportance of estabhshmg a capital goods sector m the promotion ol technological capabilities m developing countries '~ Furthermore, it is usually argued that government assistance m R & D acnvltics and other back-up services, and the adoption ot some protectumist trade policies are nnportant m the establishment and subsequent growth o! a capital goods sector m It is said that technology export from India and Argentina is backed up by a relatwely advanced capital goods sector which has been set up with considerable assistance and protection The argument m faw)ur of assistance and protection is that the capmll goods sector is an mtant industry which must be gwen the opportunity to survive and undergo a lengthy learning process The industry may not be m hnc with the existing comparative advantage, but will he able to gain international competitiveness when the learning process begins to bear frtnt It is therefore understandable that Hong Kong firms do not export technoh)gy m the | o r m o | turnkey projects or even hcensulg agreements because ot the relatively unsophisticated technology that they have to sell Yet, it is beheved that the amount of relanvely unsophisticated technology which revolves major or minor changes to the original deveh)ped-country versum cxported trom flung Kong to other developing countries is
quite considerable M o r e o v e l , fllotlgh tile amount and range of R & D ,lctivlhe'> m process technology are very hmlted, the resotuces allocated to research on product technology arc significant t l o n g Kong has been
2 FOREIGN DIRECTINVESTMENTFROM 110NG K O N G M A N U F A C T U R I N G There has been by now a vast hterature, both theoretical and empirical, on multinationals lrom developing countries 11 Hong Kong has emerged as by far the largest exporter ot capital m the form of foreign direct investment among developing countries In 1981, a rough estimate of Hong Kong's toreign direct investment Is m the regum of US $1800 mflhon 12 The major host countr,es are Indonesia, Talwan, ( ' h m a and Malaysia, but Hong Kong hrms also invest in Sn Lanka, India, Pakistan, the Philippines, Thailand, Singapore, Nigeria, Ghana, the United Kingdom, the United States and Canada Manufacturing is still the most re)pot|ant sector in which Hong Kong multinationals operate, though increasingly Hong Kong multinationals also invest m banking, tourism, construction and real estate, and trade Tables 1-3 show Hong Kong's foreign direct investment m Indonesia, M,daysia and Taiwan respectively by industry or sector By t t o n g Kong's foreign direct investment we mean that made by Hong Kong residents who are largel 3, but not excluswely Chinese entrepreneurs First, nlany of the local Chinese companies ,ire lonlt ventures with overseas Chinese, South-east Asians, Japanese and even Westelners Second, some of the firms which have set up subsidiaries overseas ,ire m tact Brmsh hrms But these British flrlns such ,is Jardmes, Swlre and Wheelock Marden ha'~e been estabhshed m t l o n g Kong so long that most o! the directors
HONG KONG Table 1 Hong Kong's foreign direct investment m Indonesia (mtttal investment m approved prolects as of June 1980)
Sector
As % of total formgn direct Amount investment m (US $ mdhon) Indonesm
Agriculture Forestry Fishery Mmmg Manufacturing Constructmn Trade/hotel Transportation Servmes Total
63 77 11 0 1 26 5 78 12 76 -22 64 4
34 1 12 4 87 -76 30 5 51 2 -25 0 10 6
Source Capital Investment Co-ordmatmn Board, Government of Indonesm
Table 2 Hong Kong's foreign direct investment m Malaysia (as at 31 December 1979)
Sector Food Beverages and "tobacco Textiles Wood Paper and printing Chemicals Petroleum and coal Rubber Plastics Non-metallic minerals Basic metal Fabricated metal Machinery Electric and electronics Transport eqmpment ScmntfflC and measuring eqmpmcnt Hotel, tourism Total
As % of total formgn direct Amount investment m (M $1000) Malaysm 20,038 16,605 141,964 17,381 1046 26,722 24,400 8083 2465 2647 3668 8508 54 22,64/I 1126
52 97 32 7 14 8 36 11 1 22 8 80 65 l0 4 l) 10 3 0 1 10 6 08
3106 5798 281,898
85 11 0 10 9
Source Office of the Commissioner for Malaysia, Hong Kong
483
Table 3 Hong Kong's foreign direct investment m Tatwan (as at 31 December 1981)
Sector Agriculture and forestry Fishery and husbandry Mmlng Food and beverage Textdes Garment and footwear Lumber Pulp paper Leather Plastic and rubber Chemicals Non-metalhc minerals Basic metal and metal Machinery and eqmpment Electromc and electrical Construction Trade Banking and insurance Transportatmn Services Others Total
As % of total formgn &rect Amount investment m (US $1000) Tatwan 353 2895 49 3918 28,327 17,585 3862 9157 6912 18,031 21,546 8809 9238 8736 15,786 53,065 2904 6810 25,494 17,289 15,627 276,393
11 9 25 3 85 53 28 9 43 9 15 9 56 3 66 4 2l 1 6 1 26 42 43 17 51 5 36 4 63 64 3 47 22 3 89
Source Industrial Development and Investment Centre, Talwan
though of British o n g m are m fact H o n g K o n g belongers Since the H o n g K o n g g o v e r n m e n t does not collect statistics on the outflow of direct investment, there is no way to dffferentmte H o n g Kong's foreign d~rect i n v e s t m e n t b e t w e e n that of Chinese and o t h e r origins. The statlstms g w e n m Tables 1-3 are o b t a i n e d from the host countries of H o n g K o n g firms and t h e r e f o r e include all investment m a d e by investors, Chinese and n o n - C h i n e s e , who clmm themselves to be H o n g K o n g residents Table 1 indicates the a m o u n t of m~tlal investment only The total r e a h z e d i n v e s t m e n t of H o n g K o n g m Indonesia a m o u n t e d to US $370 m d h o n m June 1980 H o n g Kong is the second largest formgn investor in Indonesia, after J a p a n F r o m the point of vmw of H o n g K o n g investment m Indonesia, the manufacturing sector accounted for the greatest share But from the point of wew of Indonesia, H o n g K o n g investment ~s most slgmficant m agriculture (34% of all formgn investment), construction (30%), and trade and tourism (51%) Within the manufacturing sector, by far the largest investment of H o n g Kong is in
484
WORLD DEVELOPMENT
the textile industry (which includes garments), indeed, shghtly over 50% of Hong Kong's investment m Indonesian manufacturing is in textiles The other industries of importance are chemicals and metal products Hong Kong's foreign direct investment in Malaysm amounted to M $282 mflhon at the end of 1979 Eighty-rune per cent of Hong Kong's investment was in manufacturing while the remaining 11% was in tourism Hong Kong Is the fourth largest formgn investor In Malaysia, after Singapore, Japan and the United Kingdom. As in the case of Indonesia, by far the largest investment of Hong Kong in Malaysia is in the textile industry Indeed, Hong Kong's investment accounted for almost one-third of all foreign investment in the Malaysian textile industry The other industries m which Hong Kong investment Is also important are food, beverages and tobacco, wood, chemicals, petroleum and coal, and electronics and electrical At the end of 1981, Hong Kong's investment in Talwan amounted to US $276 mllhon and ranked as the third largest formgn Investor after Japan and the Umted States Unlike the cases of Indonesia and Malaysia, only 55% of Hong Kong's investment m Talwan is 111 manutacturmg. In the past few years, ttong Kong investors' involvement in Talwan's construction, banking, trade and transportation and communications has been increasing rapidly Specifically, in the cases ot construction and transportanon, over 50% of total foreign investment is accounted for by Hong Kong Within manufacturmg Hong Kong's investment concentrates on textiles, garments, plastics, chemicals and electronic and electrical While Hong Kong's investment in textiles and garments accounted for a high proportion of total foreign investment, ~t ~s of interest to note that Hong Kong firms do not play an important role in Tmwan's electronic and electrical industry relative to American and Japanese direct investments There are no systematic statistics on foreign investment in China From scattered sources, the realized investment m the Special Economic Zones at the end of 1981 amounted to US $250 mdhon, of which about 94°/,, came from Hong Kong In addition, of the 29 projects set up under the joint-venture laws promulgated in 1979, 16 have Hong Kong participation But many ot the Hong K o n ~ C h m a joint ventures are relatively small, the investment ol which Is usually below US$1 mllhon There a r e m a d d l t l o n a n u m b e r o f cooperahon or co-producnon projects wHh Hong Kong partlclpahon i~ A reasonable estimate of
Hong Kong's total reahzed direct investment m China at the end of 1981 is US $280 mflhon, which Is incidentally about the same as l tong Kong's total investment in Talwan tlong Kong's investors in the manufacturing sector of China usually engage m small or medmm projects only, mainly in textiles, electronics and watches However. many of the large projects in construction and tourism lnw)lve Hong Kong participation It is appropriate to use the conventumal 'push" and "pull' factors to explam [long Kong's formgn &rect investment, drawing upon the findings of two surveys conducted to investigate the motivations ot those firms which have invested abroad and in China 1~ The "push' factors are such ownership-specific advantages as the possession of efficient and appropriate technology and country-specific ones like the lower costs of technical and managerial staff In terms of technology, the advantages of Hong Kong firms lie more in product technology and managerial and marketing skills than process technology The Hong Kong multmahonals lntervmwed clmmed that they can compete against the developed-country multinationals m the developmg host countries because (I) their costs |or managerial and technical start are lower, (2) they have a better understanding ot the conditions and people in the developmg countries and (3) they tend to introduce simpler, more labour-intensive and smaller scale, and therefore more appropriate, technology tor the conditions of developing host countries But the Hong Kong multinationals interviewed seem to believe that the 'pull' factors offered by the host countries such as cheaper land and labour costs fire even more unportant than the 'push" factors Foreign direct investment as a means of securing raw material supply and expanding the host country market is relatively ummportant 1~ The products oi ttong Kong multinationals in the host countries are mainly designed for export to other countries Somehmes part of the produchon processes takes place m the host countries find the mtermedmte products are shipped back to the Ilong Kong parent firms tor further processing This is largely the case with Hong Kong's investment m the manufacturing industries in C h u l a
3 T I l E E X P O R T OF T E C t | N O L O ( I Y The export ot industrial technology lrom I tong Kong is, ,is indicated above, mainly through tolelgn direct investment The capital goods
HONG KONG sector in Hong Kong is not large and welldeveloped enough to be able to export turnkey projects, or license its innovations, or even give technical aid and consultancy. Yet, there are many indications that a large number of Hong Kong firms through their foreign direct investment have transferred important technologies to the host countries. The major types of technology thus transferred can be conveniently divided into production technology, product technology and 'software' technology (a) Production technology This includes the improvements in the method of production with or without the use of new machinery, equipment, fuel and materials. The most remarkable achievement so far in Hong Kong's machine-tool industry is the manufacture of many types of blow moulding, injection moulding and extrusion machines for the plastics industry. Many of these machines are very advanced by world standards More importantly, these machines have been built to suit the conditions in Hong Kong and facilitate the production of the kinds of products that the Hong Kong plastics industry is producing For instance, many of these Hong Kong-deslgned machines are land-saving and fuel-saving, and suitable for the production of such plastic products as household goods, toys and dolls. Nonetheless, the technology embodied m these machines for the plastics industry is transferred to other countries almost exclusively through direct exporting Since these machines are relatively easy to operate, the exporting of these machines is as a rule not accompanied by technical aid or consultancy Only a few machine-tool firms in Hong Kong have set up subsidiaries abroad Nor are there many Hong Kong plastics firms which have undertaken foreign direct investment abroad and in China Under these circumstances, the important production technology developed m Hong Kong for the plastics industry has not been spreading out extensively to other developing countries It Is of interest to note that the development of this 'revealed comparative advantage' of Hong Kong in the production of machines for the plasUcs Industry has taken place in the absence of government assistance and protectionist pohcms. Such development Is basically the result of responses to the need of the industry in Hong Kong The machine-tool industry m Hong Kong has successfully undergone a learning process such that it has been able to produce machines which smt local conditions best
485
Lall (1980a) distinguished several levels of learning process in the technologmal development of developing countries. At the elementary level is simple 'learning by doing' whereby the utilization of imported technology is made more efficient through the experience of workers, and 'learning by adapting' whereby small changes are made within a plant to given technology by technicians, managers and engineers to meet particular needs At the intermediate level is 'learning by design' whereby imported equipment and processes are replicated and knowledge is gained by design engineers and capital-equipment manufacturers, and 'learning by improved design' whereby imported technology is adapted to suit local conditions It is necessary to undertake some R & D activities to support the design engineers at this stage At the advanced level is 'learning by setting up complete production systems' whereby the capital goods sector is able not only to produce items of equipment, but to engineer and tailor entire factories or plants to specific needs. At this stage the country acquires the capacity to provide engineering consultancy services and undertake turnkey projects An even higher stage of the advanced level is 'learning by innovation' whereby basic research and development is undertaken to offer new processes and new products In terms of these levels, the machine-tool industry in ttong Kong has certainly reached the 'learning by improved design' stage, l e the second stage of the intermediate level. The industry has been able to produce specially designed machinery for the plastics industry to suit local conditions. This achievement is outstanding, considering the fact that the machinetool industry has not been assisted or protected However, owing to the lack of government support and perhaps to a lack of demand overseas, innovation in the capital goods sector in Hong Kong is so far confined to items of equipment for the plastics industry and not entire plants From the point of view of international technology transfer between developing countries, this is disappointing, considering the relatively high technological capability of the Hong Kong capital goods sector for the production of plastics products On the other hand, in the cases of textiles, garments and electronics, the export of production technology through formgn direct investment is considerable There are generally two types of technology transfer the transfer of innovations that are previously not in use in the host countries and the transfer of technologies that have been adopted and modified by the
486
WORLD DEVELOPMENI
Hong Kong parent firms It is usually [ound that subs|dmrles of multm,monal corporations do not undertake extensive R & D in the developing host countries ~ Thus, very olten the technological capabihnes ot the host countries ,ue enhanced not by the m n o v a n v e ,letlVltles o[ the multlnanonal subs~dlar|es but by the transler ol new technologms through the subsidiaries in our survey of t l o n g Kong multmanonals, we found that having an outlet for used machinery is an important m o n v e for foreign d~rect investment ~7 Indeed, in many cases and parncularly m the case of textile firms, a high proportum of the investment in overseas subsidiaries consists of used machinery from the parent firms m Hong Kong The used machines may be outdatcd from the point of view of the industry m Hong Kong but can be the most appropriate technology fl>r other developing countries with lower wage rates and less-developed skills Many of the Hong Kongoperated textile firms m Indoneshi and Malaysia lind the used machinery shipped from their parent hrms efficmnt and econommal w~th reterence to thmr local c o n d m o n s The textile industry m [tong Kong, m the m e a t m m e , uscs the most sophlshcated state of the art and machinery imported from developed countries It the subsldmnes of Hong Kong firms used sml,lar technology, ~t Is certain that the host countries would find tt both uneconomical and techmcally dlthcult to cope with Many of the [tong Kong multmatmnals we interviewed clmmed that their subs|d|anes use technologms different trom those of the parent firms Sometimes the machinery used by the subsldmnes is simply a less complicated vers|on of that used by the parent firms, but very oftcn the parent firms undertake adaptanon and modfllcanon of the machinery and e q m p m e n t and methods of production before they are used by the subsldmnes There may not be a separate R & D department m the parent firms to look mto this Some[roles the job of adaptatum and modfflcanon ot technology is simply p e r t o n n e d by the general engineers and floor technlcmns Table 4 shows the results of two surveys conducted nr mid-1979 and early 1982 with regard to the adaptation of technology by Hong Kong multmahonals for thmr subsldmnes In the 1979 survey, 84% of the finns gave a poslnve answer to technology adaptahon, ot which 20% clam~ed that their adaptations were extensive In the 1982 survey an even h~gher percentage was obtained tor technology adaptahon being undertaken, and 25% of the hrms chumed that their adaptations were extens,ve Though the two samples ,ire not &rect/y comparable (as only 15 hrms m the 1982 survey were the same as m the 1979 survey), yet
lable 4 Adal~tatton ol lethmdo~,,~ bv Itong Kong multmaltonals (numhet o/ /ums wt/h pertenla~e o I lolal m parenlheses) Vc,,
Yc,lr Lxtcnslvcly Moderately
%hghtl',
No
1979
t (12%1 4 (12 5%)
3 (16%) q (12 5"o)
1982
5 (20%) 8 (25%)
13 (S2%) 10 (5(1%)
Sources Survc} results
it seems reasonable to assunle that there IS an increasing trend for Hong Kong multinationals to adapt and modify their technology to smt the con&[ions ot host countries The nature ot adaptanon vanes between technologms and between industries Most otten the machines imported from abroad and used m the Hong Kong parent firms are so modified that less skilled labour but nrore unskilled labour is required Sometimes, this means that the modffted machines are more sophlsncated than the original versions In many cases, the direction ot modfllcanon Is towards less skilled labourintensive rather than less capmfl-mtcnslve method of producnon. A popular typc o[ modfllcanon ts to convert the manually operated machmes into s e m > a u t o m a n c ones for use In the subsldiar|es These manual mach|nes have largely been replaced by fully automatic machines m the Hong Kong paient firms The fully automaUc machines are difficult for the subsidiaries to cope with and may not be economical for the subs|dmnes considering the prewuhng tactor prices m the host country On the other hand, the manual machines may be too inefficient even tor the subsl&anes It is there[ore often the case that sem|-automatlc kits are devised and fitted to the manual machines before transferring them to the subsidmnes In other cases,adaptat|ons and modff~catu)ns are made snnply to smt the chmanc situations, the work,ng c o n d m o n s and the workmg habits of the labour force m the host countries l h m g Kong investors like other developing countr|es' MNCs seldom go abroad and take up 100% ownersh@ even if this is permitted by the tormgn investment laws [long Kong MNCs in many cases enter into partnersh|ps w~th the local entrepreneurs some of whom ,ire ethmcally of Chinese origin Thus, betore thc t long Kong M N ( ' s make adaptations and modlhcatlons for their overseas subsidiaries, they ,ire supphed with the necessary mformatum on the condflums m the host countries
HONG KONG In hne with other findings, Hong Kong multinationals seldom undertake R & D actlvltms in the developing host countries. In all cases, the learning process involved m the export of industrial technology through Hong Kong's foreign direct investment does not go beyond the mtermedmte level as defined by Lall (1980a)
(b)
Product technology
This refers to product design and not major product innovations. It ~s now common practme to include product design m the dIscussmn of multinational corporation technology ~ In the development literature, the discussion on product technology concentrates on whether the products sold in developing counmes are appropriate for the given local conditions. Smce Hong Kong multinatmnals normally do not aim at the local market of the host countries, the consideration ot whether the subsidiaries produce appropriate products for the host countries is largely irrelevant Our major consideration is whether the new product designs worked out in the Hong Kong parent firms are transferred to the subsidiaries. If so, there is an export of product technology from Hong Kong to other developing host countries. Our intervmws with some multinationals reveal the fact that the export of new product designs is considered to be the most important export of technology from the parent firms. Many local firms in Hong Kong have R & D activities comparable to foreign firms in Hong Kong. Accordmg to Chen (1981b), while less than one-half of the foreign firms undertake R & D m Hong Kong, 75% of local firms are committed to R & D in one way or another It was.found, however, that for those foreign firms which undertake R & D, R & D expenditures on an average account for slightly over 1% of value-added, compared with a much smaller percentage of 0 6% for the local firms This can largely be explained by the fact that local firms tend to concentrate to a greater extent on research on product technology which requires, relatively speaking, a smaller amount of expenditure In fact, a fundamental reason for the success of Hong Kong's manufactured exports in the past 20 years is the rapid process of product diversification based on the technological capability of local mdustriahsts to introduce new product designs This explains the success of Hong Kong in the manufacture of fashion dresses, electromc products, and dolls and toys In making new product designs, Hong Kong mdusmahsts very often go beyond lm~tanon or
487
'learning by improved design' In many cases, they are genuine renovators which can offer entirely new product designs aimed at world markets There are many examples of product designs m electromcs goods and toys which have won international or national acclaim Most of the consumer electronics manufacturers conduct clrcmt and appearance designs in-house Thus, m terms of product technology, Hong Kong has to some extent attained the most advanced stage, ie 'learning by mnovatmn" m Lall's classlficatmn of technologmal capabflmes This export of product technology by Hong Kong firms through foreign d~rect investment is of considerable benefit to the host countries First of all, it is usually because of this rap~d change in product technology in the subsldmnes of Hong Kong multinationals that the host countries are able to maintain a rapid growth in their manufactured exports While there ts a considerable literature on the role of developed country multinationals in the manufactured exports of developing countries, ~9 multinationals from the advanced developing countries can play an important role in promoting manufactured exports of other developing countries. The role of multinationals from developing countries can in fact be even more important if the model of success in the advanced developing countries is transplanted to the host countries At a later stage, the new product designs which are not normally patented can be adopted by the local firms of the host countries. This has the effect of (1) raising the technological capablhty of the host countries In product design and (2) further promoting the manufactured exports of the host countries Product designs are usually easy to imitate and the rate of diffusion of product technology among the local firms of the host countries is therefore usually high.
(c)
'Software' technology
This includes management and marketing skills and training programmes offered to the local workers Some authors believe that multinationals from developing countries tend to employ a higher proportion of staff from the home country than multinationals from developed countries 20 This seems to be true m the case of Hong Kong multinationals. Th~s is not surprising, as the wage differentials between home country and host country are smaller m the case of multinationals from developing countries Because of the presence of a higher propomon of home-country employees in the overseas
488
WORLD DEVELOPMEN~I
subsMmnes, it IS possxble that the export of management and marketing skill from developmg countries to other developing countries ~s more slgmflcant than that from developed countries Furthermore, the interaction between empk)yees from one developing country and those from another developing country is usually closer than that between employees from a developed country and those from a developing country The diffusion of 'software' technology to local employees is therefore more effectwe m the case of multinationals from developing countries The m a n a g e m e n t style ot H o n g Kong local firms is a u m q u e c o m b m a n o n ot western management methods with tradmonal Chinese practice In terms of LaWs classffmatmn ot the learning processes, the technological capablhty of Hong Kong industries with regard to m a n a g e m e n t ts at the ,ntermedmte level of 'learning by Improved design' Hong Kong firms also have very good connecnons with many overseas markets When subsMmnes are set up m other developing countries, these market connections are also exported to the host countries Better connections w~th exporting markets have been named as a very important factor for H o n g Kong multmatmnals to maintain a c o m p e t m v e edge over the local firms of host countries It is however possible that gwen rime these connecnons wdl be passed on to the local firms First, as much H o n g Kong's foreign d~rect investment is undertaken on a joint-venture basis with local firms, some of the h~gh level m a n a g e m e n t and marketing staff are hostcountry employees When these employees start
their own business or join other h)ca[ |lrnls, such market connecnons can be diffused lnt() the local sector of the industry Second, when demand grows to such an extent that the t t o n g Kong subsMmnes cannot cope alone, some of tile overflow wdl be Dcked up by local firms which, gwen rime, will be able to estabhsh good connections with exporting markets Although It Is rather unusual tor t t o n g Kong multmatmnals to undertake R & D m the host countries, it Js commonplace tor them to offer training facfllnes to the local workers Table 5 shows the extent to which [tong Kong multmanonals undertake R & D and offer training facthtles m thmr host countnes It ~s ot interest to note that a large percentage of firms clanned that they offered even more extenswe tralmng [or workers m the host eountrms than nl the home country This ts not unexpected, as m order to maintain product quahty and labour effiemney, the overseas substdmrles of t long Kong multinationals have to make sure that the workers they employ locally attain a certain minimum standard The training programmcs offered usually concentrate on the practical training for semt-skdled and skilled labour, though m-serwce training tor the local managerial staff Is also sometimes orgamzed
4
CONCLUSION
Th~s paper presents a case study ot [tong Kong's export of industrial technology through formgn d~rect investment A broad d e f m m o n of
Table 5 R & D and labour trammg by ttong Kong multmauonala (number o f firms with percentage o f total m parentheseQ Yes Year
More than PF
Same as PF
Less than PF
No
3 (12%) 4 (12 5%)
l (4%) 2 (6 25%)
2 (8%) 4 (12 5%)
19 (76%) 22 (686 75"/o)
14 (56%) 12 (37 5%)
3 (12%) 8 (25%)
5 (20%) 8 (25%)
3 (12%) 4 (12 5%)
R&D 1979
1982 Labour trammg 1979
1982
Source Survey results PF. Parent firm
HONG KONG technology is used to include p r o d u c t i o n technology, product technology and 'software' technology. Foreign direct i n v e s t m e n t IS found to be an e f f e c t w e m e a n s of exporting these different types of technology. In t e r m s of Lall's classification of learning processes, it s e e m s that H o n g K o n g has r e a c h e d the i n t e r m e d i a t e level with regard to p r o d u c t i o n technology and ' s o f t w a r e ' t e c h n o l o g y , and the advanced stage with regard to p r o d u c t technology It is argued that the high technologtcal capabihty of H o n g K o n g industry in introducing new product designs IS an i m p o r t a n t factor explaining the rapid growth of H o n g K o n g ' s m a n u f a c t u r e d
489
exports. It is of interest to note that the technological capability of H o n g K o n g industry has b e e n d e v e l o p e d largely in the absence of g o v e r n m e n t assistance and protectionist policies In fact, the capital goods sector of H o n g K o n g is still small and unsophisticated N o n e t h e l e s s , H o n g K o n g has b e e n able to m a k e i m p o r t a n t progress m the d e v e l o p m e n t of product technology and 'software' technology, m which case ~t s e e m s that g o v e r n m e n t assistance and protection are less crucial. O f course, ~t must be u n d e r s t o o d that the e c o n o m y of H o n g K o n g is u m q u e in many aspects and It ~s t h e r e f o r e difficult to generalize from its experience.
NOTES 1 Earher work on Korea was done by Rhee and Westphal (1978)
11 One of the most recent collections of studies is Kumar and McLeod (1981)
2 See the citatmn to Katz's work in Lall (1980a) and Fransman (1982-) -~
12 There are no official statistics on Hong Kong's investment abroad
3 See Chen (1979) in which rapid technological progress has been found to be a major cause of rapid growth in Hong Kong, Japan, Korea, Singapore and Talwan
13 A cooperation or co-productton differs from a Joint venture m that the finanoal and management responslbthtles and benefits of each party are based on agreements (which can change from year to year) instead of the amount of investment
4
See Chen (1976)
5 The empirical evidence on technology adaptations by foreign firms in developing countries are somewhat mixed For a review of the evidences and a case study of Hong Kong, see Chen (1983, Chapter 6) 6 See Cortez (1978) and Lall (1980a) for a detailed analysis of the v~rlous stages of the learning processes This idea of learning m the process of technological progress is in line with the earlier work of Rosenberg (1976) and Nelson and Winter (1974, 1977) on an evolutionary theory of technological progress The process of learning in these studies is related to a complex set of factors including the organization and management of the firm in general and the R & D activities in particular, and it is therefore different from Arrow's simple 'learning-by-doing' which is only related to the level of output or investment 7
See e g Mason (1978) and Lall (1980a)
8 For a study on the capital goods sector of Hong Kong, see Fransman (1982) 9 Rosenberg (1976), Stewart (1977), Lall (1980), Pack (1981) 10 Cortez (1978), Lall (1980a, b), Kumar (1981), Corden (1980)
14 The first survey was conducted in July/August 1979 and the second In January/February 1982 There were 25 firms in the first survey and 32 m the second Fifteen of the firms lntervtewed m 1979 were again interviewed m 1982 For a report on the 1979 survey, see Chen (1981a) 15 But one of the motwes of some firms for estabhshmg subsidiaries in Indonesia is to explore and expand the local market Also, many furniture manufacturers in Hong Kong set up subsidiaries in Indonesta and Thailand for the purpose of securing the supply of wood 16 See Chen (1981b) for a case study of multinational actlvmes m Hong Kong in terms of the production and transfer of technology 17 On a scale of 0 (of no importance) to 10 (of extreme importance), the average score of 25 firms which responded to a survey m 1979 was 4 4 which ranked sixth among 17 factors listed 18
See Maxon (1979)
19
See e g Hellelner (1973) and Nayyar (1978)
20
See e g Lecraw (1981)
490
WORLD DEVELOPMEN 1 REFERENCES
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