|Technological Independence The Asian experience (UNU, 1994, 372 pages)|
A survey conducted in 1985 by the Japanese Institute of Labour discloses the following results about the performance of Japanese affiliates in ASEAN countries: 23.3 per cent of the total affiliates surveyed replied that they had been enjoying a stable amount of profit; 52.5 per cent said they were making a profit, but this was unstable; and 23.3 per cent were unable as yet to realize a profit.
It is noticeable that the earlier the operation is started, the more stable the profits become. On average, companies began to realize a profit after 5½ years of operation. For example, 44 7 per cent of affiliates that started operation after 1976 have recorded no profits as yet.
Similar results were obtained by the Japan Overseas Enterprises Association survey, which shows that 61 per cent of sample enterprises in ASEAN countries are making a profit, while 23.6 per cent report no profit.
Three main factors are responsible for this less than satisfactory performance.
The first is the high rate of defective products turned out in various production processes If the level of Japanese enterprises is put at 100, the level of about half the affiliates ranges from 110 to 120. Twenty per cent of affiliates are said to be at the same level as Japan, and 16.6 per cent are assessed as better than Japanese enterprises.
The second factor is the low labour productivity. 76.7 per cent of affiliates surveyed are considered to be inferior to the Japanese standard in the matter of labour productivity. Of them, 40 per cent reported that their labour productivity was lower by 30 per cent than the Japanese standard.
The third element for the rather unsatisfactory performance of Asian affiliates is the compulsory local content requirement imposed by the host country government, of which mention has already been made. The demand for hasty localization in terms of procurement of raw materials and parts can affect the quality of products and/or increase the price and decrease competitiveness in the market. This will in fact be detrimental to the interests of the host country.
Assessment of the performance of Japanese affiliates
How do the Japanese enterprises view their business activities in Asian countries? In what respects do they think they are able to contribute to the interests of the host county? The MITI survey gave the following results:24
1. Creation of employment opportunities (42.8 per cent).
2. Improvement of the balance of payments position of the host country by expanding exports (11.8 per cent).
3. Encouragement of local industries (9.9 per cent).
4. Education and training of skilled labourers and managers (9.7 per cent).
5. Promotion of the diffusion of technology (especially hardware) (8.5 per cent).
6. Improvement of the balance of payments position of host country by import substitution (7.4 per cent).
7. Development of natural resources (0.6 per cent).
This result is quite understandable if we recall that many of the enterprises which ventured into Asian countries are labour-intensive industries, such as textiles, electricals, etc., and that a fair number of them have taken advantage of favourable measures offered by the host country, like the right to operate in free export-processing zones.
It should be emphasized that matters relating to technology transfer (nos. 3, 4, 5, and 7 above) are recognized to be important contributions towards the interests of the host country.
Unfortunately, there is no detailed study on how local partners view their affiliation with Japanese enterprises. Though the number of samples is small, one such attempt has been made in the Institute of Developing Economies study on "Trade and Technology Transfer Frictions between Japan and Developing Countries." This study shows to what degree the partners of joint ventures are satisfied with the performance of their ventures.
From table 10, we can infer that the local partners feel more satisfaction with their joint ventures than the Japanese do. Evidence for satisfaction with the fairly successful transfer of technology (viewed from the point of the local partners) is the increasing international competitive power of such industries as textiles, electrical appliances iron and steel, shipbuilding, etc., in some of the Asian countries and regions, especially the Asian NICs. In the case of Taiwan out of 20 enterprises selected as ranking high in terms of export earnings 13 are electrical appliances and electronics companies and all 13 are either foreign subsidiaries or joint ventures. The purely local enterprises are prominent only in the light export industries such as textiles and apparel. Similarly in the electronics industry in the Republic of Korea, the foreign subsidiaries and joint ventures, which account for only 16 per cent of the total number of enterprises, share 36 per cent of production and over 65 per cent of total exports.25 The same tendency can be observed in the Hong Kong and Singaporean electrical and electronics industry, where the share of the US enterprises is bigger. Other evidence for the fairly successful transfer of technology is the rapid rise of the level of technology of the local industries, effected by the diffusion of technology from foreign enterprises and their affiliates. For example, in the electrical and electronics industry in Asian NICs, many of the local enterprises have made progress from simple production based on assembly to more technology-intensive fields such as VTR, computer software, and so on.
Similar results were obtained by the Japan Overseas Enterprises Association survey of 79 joint ventures. Twenty-two per cent reported that they were satisfied with their ventures, and only 9 per cent that they were dissatisfied. The rest replied that the performance of their joint ventures was neither good nor bad. It should be noticed that there is a discrepancy in the degree of satisfaction with joint ventures felt by the Japanese side and the local partners.
MNEs need more development of regional technology
In making direct investments abroad, MNEs have expressed little interest in developing "appropriate technology" or in supporting "indigenous technology development" when the needs of the business at hand have called for a significant departure.
Japanese MNEs are no exception. As mentioned above, Japanese MNEs prefer to decide technical matters in the parent companies, and are reluctant to allow localization of technological staff. However, they seem to have a different attitude to technology transfer and regional technology development. Three basic factors appear to adumbrate the future trend in the business strategy of MNEs.
The first factor is a licensing strategy. As Japanese MNEs move abroad, particularly to developing countries, they do not usually charge high royalty fees to partners. Sometimes they sell their kno-whow without fees. Because Japan is still a developing country in terms of technological development, it has only a limited amount of technology that it can charge for. Japan still has a big deficit in its technology trade balance.
The second factor is that the Japanese MNEs' superiority lies in process innovation. Because Japanese technology development is especially weak in basic technology, Japanese MNEs try to concentrate their efforts in local production by the transfer of process innovation.
Japanese manufacturing industries have earned a good reputation for the quality and reliability of their products. It has been shown that high productivity with high quality has enabled Japanese automobiles and electronics products to dominate the world market. Process innovation, such as the quality circles (QC) movements, has contributed to this success. The focus of Japanese MNEs' technology has shifted from new product development to process optimization and cost reduction.
In the American MNEs, R&D efforts centre on the exploration and development of new technologies and products. In Japanese MNEs, in contrast, the emphasis is on finding new ways to make products economical.
Process innovation, such as QC circle activities, needs more cooperation with workers and management and collaboration with local industries. These technological developments make it possible to use workers' suggestions and proposals from the shopfloor.
The third factor important to the regional development of technology is the intimate relationship between parts industries and subcontractors.
Japanese competitiveness in the world market is strong in specific manufacturing industries such as automobiles, TVs, cameras, and other electronics. These assembly-makers generally rely heavily on parts makers and subcontractors. MNEs that produce TV sets and automobiles buy and assemble their parts from local producers. To maintain high quality and high productivity in the final product, they have to utilize the same quality-control systems and highly organized delivery systems with subcontractors. MNEs that operate local plants need to develop more regional technology and help the parts makers by the rapid dissemination of technology.
Japanese MNEs have changed and are changing their policies towards better cooperation with local entities in terms of a global business strategy. However, at the same time, they are aware of the difficulties of transferring technology to Asian countries.
A Japan Overseas Enterprises Association survey provides a fairly comprehensive list of factors which are considered to obstruct the smooth transfer of technology, from both the Japanese side and the local side.
The factors from the Japanese side, in descending order of importance, are as follows:
1. Low level of technology in general.
2. Shortage of managerial staff.
3. Low quality and high price of parts locally procured.
4. Insufficient recognition of the importance of quality control.
5. Insufficient qualification of technicians and engineers.
6. An unwillingness to share the acquired knowledge of technology with others.
7. Insufficient recognition of the importance of maintenance of equipment and machinery.
8. Low quality and high price of equipment and machinery locally procured.
9. Low quality and high price of raw materials locally procured.
10. Insufficient financial capacity of partners.
11. High turnover rate of local employees, especially engineers and technicians who have been to Japan for training.
The factors from the local side, again in descending order of importance, are:
1. Lack of communication due to insufficient knowledge of languages, both English and local.
2. Slow speed of technology transfer (e.g. localization).
3. Shortage of appropriate textbooks and manuals.
4. Unreasonably high cost of technology.
5. Inadequate system of education and training.
6. Too narrow specialization of the Japanese staff sent from parent company.
7. Period of stay of the Japanese staff dispatched from parent company too short.
8. No provision of latest technology.
9. Limitation of sales area.
10. Lack of leadership among the Japanese staff sent from parent company.
11. Insufficient effort made by the Japanese staff.
12. Calculating nature of the Japanese.
13. Technology transfer often accompanied by supply of high-priced equipment and parts.
14. Slow decision-making on the Japanese side.
If we compare carefully the complaints put forward by both parties about the seemingly unsatisfactory state of technology transfer, we notice one important difference of opinion. It is clear from the above list that almost all the complaints made by the Japanese are related mainly to the local culture in general or to the strict government regulations on localization of production which have direct implications for individual enterprises. As against this, the complaints put forward by the local partners are more specific, related to the actual process of technology transfer, and many could be solved at the level of ordinary operations if due consideration were given to them.
This discrepancy in the perception of the state of technology transfer is apparently caused by differing views on the concept of self-reliance in technology. This means that the complaints of both sides are not in the nature of a contradiction or confrontation, but in the nature of a misunderstanding, or rather an inadequate mutual understanding. To resolve this unhappy state of affairs, it is necessary for both sides to share a common perception about self-reliance in technology.
If self-reliance in technology in manufacturing industry means the attainment of the ability to produce standardized products designed by the parent enterprises, it can be asserted that many Asian countries have reached or nearly reached this stage in some fields of industry. But if we define self-reliance as the attainment of the ability to modify and improve standardized products to suit local conditions and, further, to design new products adaptable not only to the host country's conditions, but also to the conditions of the country for which exports are destined, then it becomes clear that only a few countries in Asia have achieved this. For this to be achieved, a huge amount of R&D expenditure is required, targeted at directly related production processes as well as at many ancillary fields and processes.
The problem does not end here. Localization of manpower (symbolic manifestation of the completion of technology transfer) has two aspects: one is related to production processes, and the other to management. Staffing the production processes with local technicians and engineers might be easier than entrusting management to local managers. The management know-how and information accumulated by several generations of able and forward-looking businessmen is indispensable to the nurturing and maintenance of an efficient cadre of managers who are capable of coping with the ever-changing world of business and of operating firms efficiently and profitably. If this aspect is forgotten, progress will stop at the stage of imitation or a little beyond, and will never reach the stage of creation.