International Technology Transfer and Welfare

• Author: Ping‐Sing Kuo,Yan‐Shu Lin,Cheng‐Hau Peng
• DOI: http://doi.org/10.1111/rode.12212
• Date: 01 February 2016
• Published date: 01 February 2016

International Technology Transfer and Welfare

Ping-Sing Kuo, Yan-Shu Lin, and Cheng-Hau Peng*

Abstract

We investigate the welfare effect of international technology transfer in a quality model. A foreign

innovator with a new quality product can license its innovation to the domestic firm(s) via a fixed fee.

Findings show that the foreign innovator will license exclusively to the high-quality firm under Bertrand

competition, whereas it may exclusively license to the high-quality firm, the low-quality firm, or non-

exclusively to both firms under Cournot competition. Non-exclusive licensing is necessarily welfare-

enhancing whereas exclusive licensing is welfare-reducing if the quality of the new technology is not

sufficiently superior to that of the domestic ones.

1. Introduction

International technology transfer (ITT) is the process of transferring a new

technology from a firm in one country to a firm in another country. The transferred

technology can be a new design or a new manufacturing process for products. The

importance of ITT for economic development can thus hardly be overstated.

1

Most

developing countries must rely largely on imported technologies as sources of new

productive knowledge, therefore resulting in considerable amounts of technology

licensing and adaptation in such countries.

2

A good example is that the China

government encourages its car industry to acquire new technologies from other

developed countries such as Japan, Sweden and the USA (Nguyen et al., 2014).

The main purpose of this paper is to investigate the welfare effect of ITT.

The channels of ITT and their importance for growth have been studied

extensively in the trade literature. Three principal channels of ITT are identified.

The first one is transfer of technology via international licensing (Kabiraj and

Marjit, 2003; Eaton and Kortum, 1996). The second is foreign direct investment

(FDI, see Blomstr€

om and Kokko, 1997). The third one is through international

trade (see Markusen, 1989; Grossman and Helpman, 1991; Feenstra et al., 1992,

Clerides et al., 1998).

3

International technology licensing probably is the most important source of ITT

for developing countries. Many firms in developing countries endeavor to catch up

the technology ladder via technology transfer from developed countries. It has been

argued that a government can use a trade protection policy to induce foreign firms

to transfer their superior technology to domestic firms (e.g. Kabiraj and Marjit,

2003; Mukherjee and Pennings, 2006; Horiuchi and Ishikawa, 2009). Kabiraj and

Marjit (2003) show that a tariff policy may induce ITT from the foreign firm to the

domestic firm, thereby making consumers in the domestic country better off.

*Peng: Department of Economics, Fu Jen Catholic University, No. 510, Zhongzheng Road, Xinzhuang

District, New Taipei City, 24205, Taiwan. Tel: +886-2-2905-2876; Fax: +886-2-2905-2811; E-mail:

chpon@mail.fju.edu.tw. Kuo and Lin: Department of Economics, National Dong Hwa University,

Taiwan. The authors would like to thank two anonymous referees for their valuable comments. The

usual disclaimer applies.

Review of Development Economics, 20(1), 214–227, 2016

DOI:10.1111/rode.12212

©2016 John Wiley & Sons Ltd