7/28/2019 1999 Technology Transfer A Mode of Collaboration between the European Union and China http://slidepdf.com/reader/full/1999-technology-transfer-a-mode-of-collaboration-between-the-european-union 1/21 University of Glasgow Technology Transfer: A Mode of Collaboration between the European Union and China Author(s): Bernadette Andreosso-O'Callaghan and Wei Qian Source: Europe-Asia Studies, Vol. 51, No. 1 (Jan., 1999), pp. 123-142 Published by: Taylor & Francis, Ltd. Stable URL: http://www.jstor.org/stable/153549 . Accessed: 10/08/2011 17:27 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Taylor & Francis, Ltd. and University of Glasgow are collaborating with JSTOR to digitize, preserve and extend access to Europe-Asia Studies. http://www jstor org
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7/28/2019 1999 Technology Transfer A Mode of Collaboration between the European Union and China
Technology Transfer: A Mode of Collaboration between the European Union and ChinaAuthor(s): Bernadette Andreosso-O'Callaghan and Wei QianSource: Europe-Asia Studies, Vol. 51, No. 1 (Jan., 1999), pp. 123-142Published by: Taylor & Francis, Ltd.Stable URL: http://www.jstor.org/stable/153549 .
Accessed: 10/08/2011 17:27
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact [email protected].
Taylor & Francis, Ltd. and University of Glasgow are collaborating with JSTOR to digitize, preserve and
BEING ONE OF TIE EUROPEAN UNION'S MAIN TRADING PARTNERS-ranking fourth in
terms of both imports and exports expressed in value-China has emerged as an
indispensablemarket for any multinationalenterprise willing to avail itself of the
opportunitiesrepresentedby one of the fastest growing economies at the turnof the
century.In order to close the technologicalgap with the developedeconomies of the
world, China launched its open door policy in the late 1970s, the priorityof whichwas to acquire foreign technology, capital, skills and management,as well as to cut
dependenceon imports.Foreigndirect investment(FDI) and collaborativeventuresin
China, as importantchannels for technology transfer, have consequently grownmassively.
Owing to its size and developmentrequirements, he People's Republic of China
is one of the largest importersof technology in the world. Duringthe 1950s it usedto import technology from the former Soviet Union and from other East Europeancountries. Since the late 1960s the EU and Japanhave been the main sources ofChinesetechnologyimports.Today,the EU-15 is China'smajorsupplierof advanced
technology and equipment.The EU represents43.8% of China's total imports of
technology (US$764.4 million), a share which is well ahead of that of Japan (at25.5%) and of the United States (18.3%).1These figuresneed to be appraisedagainstthe backgroundof poor EU performancen terms of FDI in Chinacomparedwith its
Japaneseand Americancounterparts.Over the past 15 years total FDI from the EU
accounted for less than 5% of total direct investmentfrom overseas firms in China
(Qian, 1998). Nevertheless, in the recent past a greaterawarenessamong EU policy
makers and businesses of the potential represented by the Chinese market hasemerged.The Essen EuropeanCouncil of 1994 endorsed a 'new Asia strategy',which'called for a higher profileof the EU in Asia' (CEC, 1995, p. 17) and which broadlyinvolves developing a long-term relationshipwith China. A 'Technology Window'
programmewas emphasised in the policy, which encourages EU companies toembracebroadly the business opportunitieson offer, and to transfer much needed
technology to China.This article sees technology transfer(TT) as a practicaland strategic means of
increasedcollaboration between the EU and the Chinese economies. Research and
studies thathave touchedon this issue arerare,mainlybecause the demarcation ine
between technology transfer and technology importsis blurred.Technology transferdiffers from technology importsin conceptualas well as in real terms,as we discussin this article.It goes along with FDI which requiresa full involvement in occupyinga new market. After an attemptat defining technology transfer and clarifying the
optimal context in which TT can be performed,we shall briefly assess the positiveimpact of technology transferfrom the standpointof both the transferor and thereceiver. We then provide a concise review of Sino-EU relations, with a specificemphasis on technology transfer n two selected industries.
Modes, rationale and incentives for technology transfer
Definitions and modes of technology transfer
The work of Mansfield(1975) providesboth an early and comprehensivetaxonomy
of forms of TT. Accordingto his work,TT ought to be conceived at differentlevels.A first level allows the distinction between vertical TT (referring to a giveninformationflow from the basic to the production evels) and horizontalTT ('whena technology used in one place, organisation,or context is transferredand used inanother place, organisation or context' (p. 372)). Another distinction is betweenseveral phases of the process of TT. A first phase refers to what has been called'material ransfer',andinvolves the transferof a new materialor product o a country.A secondphasecorresponds o the transferof designs andblueprints hat facilitate the
manufacturingprocess of the new product or material. Finally, the last phase isreferred to as 'capacitytransfer'and involves adaptingthe new item to the specificconditions of the recipientcountry;this is much more difficult to achieve because of
differences in markets, quality, tastes etc. Adapting the new technology impliesconstantlearningefforts and large investments.
The first two phases of TT as outlined in Mansfield's work highlight the basicdifference between tangibleand intangibleTT. TangibleTT relates to the incorpora-tion of state-of-the-artoreigntechnologiesin a given productionprocessor industry,whereasintangibleTT canbe reducedto the introductionof know-how,expertiseetc.,at both the manufacturingand management evels.
In relation to the first two phases, a direct form or pathwayof spatial technologydiffusion is normallyrepresentedby the acquisitionof factories on a turnkeybasis.The indirect form of technology transfer includes licensing, co-production, jointventures (JVs) with
majority/minorityequity
participation,and
whollyor
partlyowned subsidiaries established through FDI. These direct or indirect forms are
expected to help create an indigenous technology base. From the standpointof a
developing country,the thirdphase as detectedby Mansfield(i.e. 'capacitytransfer')is of the utmostimportance.Ourdiscussionon technologytransferwill predominantlybe based on this phase. It is important o focus on the adaptationof the transferred
technology to the specific conditions of the recipient country.In this article,technol-
ogy transferwill thus refer broadlyto the spatialdiffusion of technology originatingfrom technologicallyadvancedcountries and its incorporationandadaptationnto the
production systems of less advanced countries(latecomers).On the otherhand,technologytrade refersto flows of technologicalproductsfrom
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one countryto another.What is normallymeantby technology exportsare (i) exportsof equipmentand machinerywhich are assumed to belong to the technology-drivenindustries(tangiblelevel), and (ii) design, patents,licensing agreements,know-how,
engineeringstudies and
manufacturingmethods with considerable
trainingand
consultingservices involved (intangiblelevel).
Although the definitions of both technology transfer and technology trade seem
clear, at least at the tangible level, one is faced with uncertaintyas well as withstatistical anarchywhen trying to reconcile the statistical data with these distinctdefinitions. Because the definitions overlap at the intangible level, great cautionshould be exercised when interpretinghe data.Many studies simply equate technol-
ogy transfer with importsof technology embodied in productionfacilities (such as
complete plants)fromabroad.However, in the case of China,90%of importedplantsduringthe 1960s and 1970s failed to yield reasonableproduction evels, and lots ofthem were closed even before becoming fully operational.
A major problem in estimating technology transferper se exists in the case ofChina,since this countrytreats all technologyembodiedin trade flows as technologytransferalthoughthe technologycontent and adaptabilitycontainedin most contractsis extremelydifficult to isolate and measurequantitatively.Chinahas spentmuch timeand effort in definingwhat should be included under the term 'technology imports'but the publisheddata are still incomplete.However,a 1985 Chineseregulation2putsforward the following criteriathat help to define 'technology imports':
(a) Contracts or the transferor licensing of industrialpropertyrightsandtechnologyknow-how;
(b) Contracts or technicalservices including feasibility studies,engineering designs,
(c) Contracts for co-productionwhich involves the transfer of industrialpropertyrights and technology know-how;
(d) Contracts or the supplyof complete sets of equipmentsuch as plants, workshopsandproduction ines, the aim of which is to transfer ndustrialpropertyrightsandtechnical know-how as well as provision of technical services;
(e) Othercontracts or the purchaseof machinery,equipmentor goods which involvethe transferor licensing of industrialpropertyrights, technical know-how and
provisionof technical data, operatingmanuals and maintenanceor services.
The above definitiongiven by
the Chinesegovernment
mixestechnology
transferwith technology trade.In line with the definitionsuggested above, we will redefine
categories(a), (b) and (c) as technology transferper se, while categories (d) and (e)will fall mainly in the scope of technology trade since they may or may not beconnected with technology transfer.3 n this regard,the data for China's technologyimports, calculated by Chinese official sources, can be divided into two main
generally acceptedas being the most widely used method of technology transfer nChina (de Bruijn & Jia, 1993), reliable data on technology-embodied JVs are
unfortunatelynot easy to obtain. It is extremelydifficult to measurehow much of a
joint venture can be considered as technology transferper se in value terms.This is
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Note: -, not available;* dataonly for the period 1981-82. Data for technology importsare only availablein aggregate or most of the periodunderreview, except for theyears 1992 and 1993;thereforean aggregatefigureis chosen.Source:Compiledfrom Almanacof ChineseEconomy(1985-89, 1992-94) and Xu (1995).
why Table I exhibits only a very small fraction of joint ventures in China that are
actually involved in the transfer of technology.
Using the definitional split suggested above, it appears that during the period
1981-93 technology imports by China have far exceeded technology transfer in valueterms. Estimated at nearly US$17 billion, or two-thirds of technology imports,
technology transfer to China took mainly the form of co-production (i.e. intuitivelyFDI and JVs).
Evolving theoretical views on the rationale for technology transfer
The international diffusion of technology had been emphasised as representing a
'short cut to development' from the standpoint of a developing nation (Emmanuel,
1982).4 In a more recent contribution, and writing from a different perspective, Shin
(1996)summarises the essence of
technologytransfer as a
learning process thatallows the latecomer to narrow the technology gap by shifting the emphasis towards
innovation, and ultimately to catch up. It is expected that technology transfer will
infuse new manufacturing methods at some point in time in the developing country.On the other hand, it can easily be argued that, because of the specific characteristics
of China, a positive outcome is also expected for the transferor.
A developing economy which is open to foreign technology is expected to
experience a big push in terms of economic growth. Although since the work of
Kuznets (1930), who spelled out clearly a relationship between technology and
economic growth, and that of Solow (1957), it has become clear that technical
progress explains more than 60% of economic growth in the OECD area, the link
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between technology and economic growth is not as clear cut in the case of a
developingnation.The lack of consensus has been epitomised by a lastingdebate that
traditionallyopposedtwo schools: the marxistdependencytheorists,on the one hand,dealt with technology in the context of capitalaccumulationandarguedthat much ofthe technologytransferred o developingeconomies was inappropriate.5hey empha-sised the weak bargainingposition of developingnations when confrontedwith largeMNEs, and their inevitablepolitical subjugationto the bourgeoisie of the capitalistcountries. On the otherhand,the conventional school of FDI contendedthat inflowsof investment and technology contributed to economic growth in developing host
nations,and that the bargainingpositionof the recipient countrywould improveovertime. The work of Quinn (1969) presentsa synthesisof the main elements containedin this line of thinking. Technology transfer through the entry of MNEs' fullyintegratedproductionfacilities contributes o higher growthrates of productivity,to
higher competitivenesslevels, and to higher living standards n the less developed
host countries.The theoretical contributions made since the 1970s and 1980s by a number ofeconomists writing in the neo-Schumpeteriantraditionon technology transfer to
developing countries have helped to put an end to this dialectic confrontation.
Buildingon Schumpeter's deas of 'creative destruction'and of the capitalist processas an evolutionary process (Schumpeter,1942, Part I, Chapter7)-an idea alreadypresent in the writings of Marx-these economists investigate the relationshipbetweentechnologytransferandtechnologyprogress.Forexample, Rosenberg(1982,p. 272) stresses the importanceof the 'domestic capacityto alter, modify and adapt[the transplantedechnology] in a thousanddifferentways'. This view helps to refinethe notion of technological capability, or the ability to use efficiently and in an
appropriatemanner the imported technological knowledge. Central to the viewsespousedby the neo-Schumpeterian conomists are thus the notions of technologicalmastery,technological capability, technological learning,etc. (see also for exampleSyrquin& Teitel, 1982; Bell, 1984; Bell & Pavitt, 1997).6The neo-Schumpeterianschool puts the emphasis on the strategic role played by the acquisition of a
technology capability in the latecomer.Two majorelements are thereforecrucial for the understanding f the 'technology-
growth' link in the case of a developing nation: (i) first, the technology transferredmust be appropriate;ii) second, the technologymustproducepositive externalitiesor
increasingreturns(spin-off and growth effects), throughits diffusion, adoptionand
improvementwithin the boundariesof the recipient country.It has thus become clear that the propensityof the host nation to use efficiently,
absorb,adapt(and improve)the new technology dependsupon a number of support-ive factors that the conceptof a national(or local) system of innovationencapsulates.
The institutional framework: the Chinese National System of Innovation (NSI)
Althoughit is clear why EU labour-intensiveproductionoperationswould set up in
China, it is less clear why high-tech, skill-intensive and knowledge-intensivefirms
would, unless there are strong incentives emanating from the central and localinstitutions of the Chinese economy. A brief overview of two case studies in
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Central and local actors(Socio-Cultural milieu)- Industrial Policy- Research Centres andEducational sphere- Banking sphere
FIRMSAbsorption, Adaptation,Imitation and Modification
I
I 1-- 1'
Development of a National l
Technological Capability(Innovation)
LSpin-off Effects -------
FIGURE 1. A SIMPLIFIEDEIRESENTAION FTIIENSI INA LESS-DEVIELOPEIr)OUNTRY--TIECASEOI CIIINA.
science-based industries will provide some evidence that the host country's low
labour costs are not the main reason for investing in China.7
Developed on the basis of the work done by one of the majorprotagonistsof the
German Historical School, Friedrich List (1841), the concept of NSI links theeducational,political and financial institutionsof a country (at the central and local
levels) to the technologicalperformanceof the country.In the contextof a developing
country,the purposeof this concept is to explain how a set of domestic institutions,
learningmechanismsandpolicies can facilitatetechnologicalcapability.8Because of
tle vastness of the country, the large regional disparities making the country a
heterogeneouseconomic entity,9the different levels of opacity of decision making,and the less advanced stage of economic development, the task of isolating and
explicating the majorcomponentsof the Chinese NSI is a complex one.
An attempt o delineate the ChineseNSI can howeverbe madeby drawinga simple
diagram(Figure1).For a
typical developing countrysuch as
China,the NSI consists
of three major levels: (i) the technology is externally sourced from the rest of the
world, either through imports or TT; technology transfer is however the liost
country's preferred option; (ii) the central and local socio-political, financial and
educationalactors, as well as the business community, are major elements in the
system; (iii) their interactionleads to the development of a national technological
capability.Because of the immaturityof its science-based industries and of its national
research and educational spheres, the major ingredientof the Chinese NSI is the
government's industrialpolicy. This policy is designed to influence the rate of
technological upgradingand to facilitate technology transfer n designated geograph-
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ical areas,namely the coastal provinces and large cities of every province. Throughits various institutionalactors, i.e. the centraltechnology governingbodies and theirlocal bureaux,Chinastrongly encouragestechnology-advanced oreign companies toset
up whollyor
partlyowned subsidiaries.The
policyis also aimed at
dispellingthe
foreign companies' reluctanceto establish a subsidiary n Chinabecause of the fearof leaking technology, copying or stealing by Chinese rival firms in the short term.
The Chinese industrialpolicy is articulatedaround three majorelements: (i) tax
exemptions for technologically advanced foreign investment and high-technologydevelopmentzones; (ii) the establishmentof a legal framework o encourage, protectand govern FDI (however, the legal structure is still viewed as insufficiently
developed, a factor which favoursthe developmentof corruptionandfraud);(iii) the
upgradingof technical skills.The Chinesegovernment s keen on technologytransfer, n both a subtle and more
coercive manner.AlthoughChina's investmentlaws andregulationsdo not explicitly
require technology transfer, TT in foreign invested projects has been stronglyencouraged n practice.Foreigninvestors arelikely to encounterpressuresto agreetothis de facto policy, both at the negotiatingtable and in any futureexpansion plan.The policy of attractingtechnology-embodiedinward investment has been activelyimplemented n the SEZs (Special EconomicZones) andin the Pudong DevelopmentZone of Shanghai. Helped by an increasing degree of autonomy, the various
provinceshave been progressingat very differentrates of economic development.For
example, the Shenzhenand Xiamen Special Economic Zones are moving away fromlabour-intensive industries to capital and knowledge-intensive industries. In 1993
exports by technology-based ndustries accounted for more than half of total exportsin value terms in these two SEZs (Qian, 1998). In the very recentpast, the issue of
increasing regional divergence has been acknowledgedby the Chinese authoritiesasan essential problem to tackle, and a trend towards a harmonised approach is
perceptible. For example, as an integral part of the 1994 fiscal reform, the firstnation-wide Chinese enterprise aw went into effect on 1 July 1994. It allows foreigncompaniesto do business directlyin China,withouthaving to incorporatea Chinese
entity. Limited to certain high-technology sectors in which domestic productionis
particularlydeficient, it is aimed at fostering technology penetration n the Chinese
economy, and can thus be regarded as the first importantnational incentive to
technology transfer.With the last two five-year economic plans, the policy has shifted from being
geographicallybased towards
providing industry-basedincentives. As
partof its
eighth five-yearplan(1991-95), a project ist of 12 priority ndustries n termsof FDIand technology transfer was published by the State Council via the Ministry of
ForeignTrade and Economic Co-operation(MOFTEC).These were: motor vehicles,telecommunications, omputersandmicroelectronics,household electricalappliances,machineryand electricalproducts, nstruments,medicine, food processing, garments,new buildingmaterials,new types of chemicals and special-purposemetal materials.China's ninth five-year plan (1996-2000) articulates a series of new incentives for
attracting echnology transfer.A greaternumberof industries are gradually openingto technology-embodiedFDI, such as biochemical and waste water control.Another
ambitioustargetfor China is to spend 2.0% of its GDP on R&D by the year 2000,
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TABLE 2TECHNOLOGY TRANSFER WITHIN CHINA'S RESEARCH INSTITUTIONSAND MANUFACTURERS
Other irms: collective-owned,IT contractvalue Stale-owned irms TVEsand privatelyowned (in billion
(in billion yuan) (in billion yuan) yuan)
1985 0.78 na na
1986 0.71 0.52 0.101987 1.67 1.29 0.201988 2.24 1.70 0.241992 4.83 na na
Source: IIe, Gu & Yan (1996).
while its R&D spending accounted for only 0.64% of GDP in 1988 and 0.71% in1992 (SSTC, 1995).
Since tariff barriersare possible on the groundsof the 'infant industry' principle,importsof finishedproductsarestrongly discouragedby the impositionof high tariffs.For example, in the motor vehicle industry,tariffs on cars are three to four times
higherthanthose imposedon importsof parts.This tariff structure learlyencourageslocal assemblyand local production.In a more coercive way, the centralgovernmentinsists thatlocal contentrulesbe obeyed, especially for certain ndustrial ectors, suchas motor vehicles and machinery.
In spite of the great emphasis placed on technology-embodiedcapital imports,on
technology transfer,on the need to develop the science-basedindustries,and on the
necessity to adapt, improveand develop the acquired echnology, the Chinese NSI is
very much at an embryonic stage. Its majorweaknesses are a relative absence of R&D
in foreign affiliates,the problemof skill shortages(in technical and marketingareas),and the lack of coordinationat two levels: first, between the various governmentdepartmentsdealingwith technology transfer-including the Departmentof Technol-
ogy Transfer,which is partof the MOFTEC,and the State IndustrialBureau-and
second, among local and central authorities.In addition,the Chinese R&D institutesare somewhat remote from FDI activity, and although state funding for R&Dincreasedmarkedlyover the past years, from Y10.76 billion in 1986 to 19.4 billionin 1992, the amount of spill-over from technology transfer into the domestic
manufacturingsector is far from being sufficient (He, Gu & Yan, 1996). Limitedinnovation and technology developmentsemanatingfrom the country'sR&D institu-tions are far from
satisfyingthe demand of the whole industrial
spectrum.This is
largely explained by the amountof technology going to state-ownedenterprises,theso-called 'back-bone' enterprisesof China (Table 2). China's immense thirst for
technology modernisations sufferingenormous shortfalls.Most of the 1065 univer-
sities, 1819 research-affiliated odies and 4871 science-basedR&D institutions istedin 1994 suffer from chronically inadequatefunding.
The model of technology acquisition, adaptation,mprovementanddevelopment-a technological development path successfully followed by a number of Asianeconomies'? and resultingin the creationof new comparative advantages-is beingreplicated n the case of China.Given the currentweaknesses of the ChineseNSI, in
particular he very modest level of R&D performedat the countrylevel, and limited
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backwardlinkages (Lardy, 1995), the Chinese economy is in general terms goingthrough the absorption stage of the technology transfer cycle. The technologicalcapability of Chinese industry is very modest, with the exception of a few firmslocated in the SEZs and a
verysmall number of
projectsin the science-based
industries (for example in the nuclear energy sector). This is why the followingsections will deal exclusively with the immediateimpactof technology transfer(i.e.its absorptionand adaptation).
Mutual benefits arising from technology transfer: trends in EU-China economic and
technological collaboration
Benefits for China
From the brief theoreticaldiscussionabove it follows that a well-managedtechnology
transferprocess leads to the following benefits:
e Upgrading the industrial structure: before 1979 China's industrial structure was
biasedtowardsheavy andobsolete industries,and its light andtechnology-intensiveindustries were very underdeveloped.Since 1980 a large amount of importedtechnologyas well as technologytransferhave helpedChina rebalance ts industrialstructuren favour of market-orientatedight andtechnology-advanced ectors suchas telecommunications,chemicals, electronics and machinery.
* Restructuring of large and medium-sized enterprises: a large amount of technology,eitherimportedor transferred,went to the technologicalrenovationof China's largeand medium-sizedenterprises.Two commonmethodswereused for the technologi-
cal restructuring f these enterprises.The first consistedof importingcomplete setsof equipment or productionlines. The second involved co-productionor jointventures,in orderto acquiremuch needed technology and equipment. Enterprisesin the energy, petrochemicaland machinerysectors were the most active in theseventures.They accountedfor more than 56%of such imports n value termsduring1986-90 (Xu, 1995).
* Increasing total export volumes: in 1995 foreign-invested enterprises in China
contributed 38% of the country's total trade (i.e. imports+ exports); this shareamountedto US$ 109.82 billion. Industrial manufacturedgoods accounted forabout 90%of the FIEs' totalexportsin volume terms,or US$43.88 billion in valueterms
(China Customs, 1996, 2).* Diffusing advanced management and know-how: there is little doubt that FDI alongwith technology transfer has helped China improve its management systems.WhereasChinarecentlyannounced hatall Chinesefirms should reformthemselves
accordingto moder Westernmanagementsystems, the roots of this idea are to befound in foreign-investedenterprise(FIE) models, such as Motorola and ABB.
* Lifting quality standard: quality control in FIEs has been greatly enhanced bymeans of technology transfer.Because the majorityof FIEs were export-oriented,the quality of productsin these firms had to comply with international tandards.The IS09000 series internationalquality standard s widely recognised and pro-moted in China.
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In short, the positive outcomes of a well-managedtransferof technology appearon
two frontsfor China:first,increasedtechnologycontentin the restructured ompaniesyields efficiency gains; second, technology transferthroughjoint ventures is veryoften associated with trainingof labourand managementskills upgrading,a factorwhich enhances productivity n the host country.
Beyond these direct effects, China may play a significantrole in the process of
economic integration n the region." Today, China's large cities (e.g. Shanghaiand
Hong Kong) are regarded as the headquartersof other developing East Asian
economies. As economicrelationsbetweenChinaandthe ASEAN gradually ncrease,in the frameworkof ASEM (Asia-EuropeMeetings) a greater Sino-EU economic
collaborationwill producepositive trickle-downeffects for EU firmswilling to extendtheir collaborationbeyond the boundariesof China.
Positive outcome for EU firms
Fromthe standpointof the EU, the optimal type of technologicalcollaborationwithChina is one thatallows the differentcountries to maximise theirgains in theirstrongscience-based industrialsectors. Using the standard erminologyassociatedwith FDI
theory,industryandfirm-specificassets (ownership)as well as intemalisationexplainwhy and how a firm invests abroad (Buckley & Casson, 1976; Rugman, 1980).Accumulated technological competence in the various EU countries will prompttechnology transfer.Therefore,EU-China collaboration n the mechanicalengineer-ing sector should theoretically nvolve German,Italian and Swedish firms;Franceis
expectedto buildup partnershipsn the telecommunications, nergy andenvironmen-tal technologyareas; he Germanand Britishstrengths n the chemical industrywould
be reflectedthroughthis collaboration.'2For EU firms the positive outcomes derived from TT are manifold. Beyond its
ownershipand intemalisationadvantages,any firmwould be sensitive to the location
advantagesof Chinaconveyed by rapideconomic growthrates, by the potentialsizeof the market, by the availability of local resources, and also by a myriad of
incentives aimed at promotingtechnology-embodiedFDI.The different types of advantages on offer to European science-based firms
engaging in technology transferwith China can be grouped into short-term and
long-term advantages. In the short term, the advantages are of a business andeconomic nature. Given the fact that some technology productsare in high demandin China,and in excess supply in the EU, technologicalcollaborationbetween Chinaand the EU can bringshort-term emediesto the problemof saturatedmarkets n theEU (e.g. the nuclear energy industry). In the long term, some of the advantagestranscend he boundariesof economics. Assumingthat the experienceof the SEZs canbe repeatedacross most of the provincesof the country,'3 oreign firms are enabledto enjoy massive economies of scale due to the size of the market. Technologytransfer will be a stimulus to the Western, and in particularEU, industry itself.
Indeed,if some EU firms are able to compete in China,one of the largestmarkets nthe world,this will boost theirglobal competitiveness n relationto that of their rivals.
Moreover,a strongerSino-EU relationshipmay help create a new balance of powerin the region. For example, the need to avoid total economic dominance by the
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7/28/2019 1999 Technology Transfer A Mode of Collaboration between the European Union and China
Japanesein the electronics industrywas a strategicconsideration aken into account
by Philipswhen it was contemplating etting up an industrialbase in China(de Bruijn& Jia, 1994). Peace, worldsecurity,and humanrights,which have always been at the
heart of EU policy world-wide (CEC, 1995), stand a much better chance in aneconomy open to free trade,investmentand ideas. Finally, there is a common terrainbetweenthe EuropeanandChinese cultures.14 ynergetic relationships,as opposedto
individualism,are the basis of organisational elations n Asian businessentities.Also
importantare the concepts of interrelatednessand relativityas one of the pillars ofTaoistthinking.Equally,Asian business systemsform a 'fiduciary'community n thata strongcommitment to shareablevalues in society and a basic trust are emphasised
(Chen, 1995). As a result, the typical Asian management style is one in which acommoncorporategoal is sharedamong employees, so thateveryonein the companyfeels that s/he is an integralcomponentof the whole, andviews the company'saffairsas her/his own. Asian industrialsystems aim for total efficiency rather than for the
individual unit profits. Because they are fiduciary systems, the interventionof thegovernment n industrialaffairsis well accepted.Similarly,industrial ystems in some
parts of Europe present characteristics amiliar to the Asian systems. Probablythemost advanced form of industrial systems in Europe, where a socioeconomic
concensus, synergies, sharedvalues and goals are the most developed, is representedby the industrialdistrictof the 'thirdItaly' (Becattini, 1987; Bagnasco, 1988). Thiscommon terrain s deemed eventuallyto make people more familiarwith each otherand each other's way of conductingbusiness.
All the elements describedabove suggest that the EU and China would mutuallybenefit from economic and technological collaboration.However, what is not clearfrom all the reasons stated above is why Europeanfirms need to engage in FDI, and
beyond that in technology transfer, thus surrenderingpart of their technologicalsovereignty, in order to conquer the Chinese market. Whereas it is possible toascertainthat any EU firm wantingto bypass trade barrierssuch as high tariffs and
exchange controls would need to set up a foothold in the Chinese market,the majoranswer to the questionwhy this should take the form of technology transfermay bebest summarisedby a Peugeot-SA-Asie French executive's formula: 'in order to
conquerthe Chinesemarket, he essential rule is to ensure the transferof technology'(La Chine en Marche, 1993, 4).
Sino-EU trade and technological relations: the case of the motor vehicle and
chemical industries
Althoughdiplomaticrelations between the EU as a whole and China were restored
only in 1975, the PRC startedtradingwith modern WesternEurope as far back as
1953, when it negotiateda ?30 million tradearrangementwith the UK (Qian, 1998).However,bilateraltradebetween the EU and Chinadid not grow substantiallyduringthe period 1953-75. Following the visit of the vice-president of the then EC
Commission, a first Sino-EEC tradeAgreementwas signed in April 1978 (OJEC,L123, 5 November 1978) which accorded mutual most favoured nation treatment
(MFN)."5 n 1985, in the midst of adjustingto a market forces-dominatedeconomy,Chinasigned anotheragreementwith the EU, the Trade and Economic Co-operation
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Source: CompiledfromAlmanacof Chinese Economy(1985-89, 1993-94) and Xu (1995).
Agreement, which laid down the principles for EU-China industrial and technical
co-operation.EU-China trade increased in excess of 14 times between 1978 and 1993. Imports
from China increased much faster than exports to China. Consequently, according to
figures released by both the Eurostat office and the OECD, the EU moved to a trade
deficit position in the late 1980s vis-d-vis China. Reaching only ecu 1.2 billion in
1988, the trade deficit increased to ecu 10.3 billion in 1994.16 It should be noted that
this figure for 1994 corresponds to a 23% increase compared with the previous year.
According to Chinese customs statistics, Sino-EU trade increased by another 15.9%
in 1995, reaching US$50.8 billion. However, the EU has managed to increase its
share in China's total imports. During the first half of the 1990s the share of the EUin total Chinese imports rose from 11% to 15%, a better performance than that
achieved by the USA but not as laudable as that of Japan.From a Chinese perspective, trade with the EU is of crucial importance, if one
refers to the supply of industrial plants and machinery. Since the 1960s the EU has
been China's most important supplier of these items (Qian, 1998). In 1992 65% of all
EU exports to China were industrial plants and machinery, against 40% in 1979.
Moreover, trade in these areas is vital for China in the context of restrictions on such
exports imposed by the USA, and a reluctant engagement on the part of Japan. From
1979 to 1994 the EU provided US$11 billion in government loans to China,
representingone-third of what China received from
foreigncountries and
organisa-tions. China also imported US$20.2 billion worth of high-tech items and equipmentfrom the EU from 1979 to June 1995, more than from the United States and Japan.17
Today, the EU is China's major supplier of advanced technology and equipment; it
accounts for 43.8% of China's total imports in this field. In terms of technologytransfer and exports, the EU provides the most generous government loans and
enables China to import much needed technology and equipment. Among the EU
countries, France takes the lead, closely followed by the UK, Germany, Italy and
Sweden.18
Table 3 depicts the comparative performance of the EU, USA and Japan in terms
of technology exports and transfer to China over the 1980s and early 1990s. The EU
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has taken the lead in both value and volume terms.However, the performanceof EUfirmsin termsof direct investmentin the Chinese marketis not as satisfactoryas in
the case of TT andtechnology exports.FDI in Chinaliterally 'exploded' in 1992 and
1993, when US$111 billion worth of contracts were agreed and US$25.8 billionactuallydisbursed,involving some 83 000 new JVs (CEC, 1995).Of all the groups of countries investing over the period under review, overseas
Chinese19have been by farthe biggest, representing hree-quartersf total FDI. Theirinvestments have been mainly concentratedin the so-called 'cash cow' industrialsectors which frequently yield a fast financial return,such as textiles and clothing,toys, fast food and other light industries. With 12019 projects over the 1979-93
period and US$5.3 billion actuallydisbursed,US firms are the next major group ofinvestors. Japanesefirms have been involved in 7182 projects, for a total value of
US$5.2 billion. The EU-15, with 3070 projectsvaluedat US$2.5 billion, has been thesmallest group of investors in China since the beginning of the economic reforms
(CEC, 1995). Over the 1979-93 period, both Japanand the USA invested twice asmuch as the EU-15, in spite of some restrictions mposed by the US governmentinsome industries. Even taking into account the fact that the average size of an EU
projectis bigger than thatof its competitors,the performanceachievedby the EU is
clearly feeble. The EU share of total FDI received by China is less than 4% (CEC,1995). In terms of FDI, the EU has performedpoorly when comparedwith others;some trends in the recent past suggest, however, that the EU is catching up slowly(EC-UNCTAD, 1996).
This is most surprising,given the number of specific and perceivedassets held bythe EU, other than its reputationin high-tech sectors such as telecommunications,
pharmaceuticalsand nuclearenergy, in particular:
(i) The ability of many EU firms to be easily identified in China by a specificbrandedor high-tech (perhapsboth) product.This considerationclearly explainsthe first EU involvement in China which was epitomised by the Sino-French
Remy Martin JV in 1980 (Hu, 1991),(ii) The fact that EU companiestend to commit themselves for the long term in the
Chinesemarket.The averagesize of an EU investmentprojectis high, and mostFDI from the EU takes the form of equity joint ventures.
Motorvehicles, chemicals and energy are some selected industrial sectors in whichEU firms have already a competitive edge over their American and Japanese
counterparts n the Chinese market.These sectors are characterisedby a large degreeof involvement by EU firms and by an important ncidence of technology transfer.
Motor vehicles. The motor vehicles industry is one of China's twelve priorityindustries as stipulatedin the country's industrialdevelopment plan for the 1990s.Chinaplansto manufacture hreemillion motor vehicles perannumby the year2000,and up to 4.2 million units by 2010. In 1995 the total productionof motor vehiclesin the countrywas 1.44 million, of which 315 872 were cars. Culrently,China's carmarkethas become a hot spot for world manufacturers ecause of its greatpotential,rapid development and improved investment climate. China's annual car salesincreasedby 30-40% duringthe early 1990s, reaching350 000 units in 1995. Most
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of China's demandfor motorvehicles, andespecially cars, is not met by importsbutis provided by its domestic motor vehicles industry.The Chinese government is
willing to co-operatewith foreign companies in the developmentand productionofmotorvehicles, and especially of components.It also encouragesforeign companiesto transfercertaintechnologies such as energy-saving technology, pollutionreductionand safety devices to China.
Europeanmotormanufacturers,ed by VolkswagenwerkAG, Citroen,Peugeot and
Iveco, have secured a strong foothold in China. Among the 12 majorjoint venturesin the Chinese motor vehicle industry,eight involve European irms,andoutputfromJVs representedmore than 70% of China's total car productionin 1995. ShanghaiVolkswagen Automobile Corporationhas become the largest joint venture of allrecordedJVs in any industrial ectorsince 1990. The earlysuccess of Europeanmotorfirms in China owes much to the following strategiesand tactics:
o
Pathbreaking strategyand
risk-taking management:the JV founded
byVolkswa-
genwerkAG and the ShanghaiAutomobileCorporationwas set up in 1984 when
major motor vehicle manufacturersdid not seriously contemplate the Chinese
CompanyLtd-was created.AlthoughChina madeevery effort to improvethe FDIenvironmentin the mid-1980s, investment in such an industrial sector involved
high risks. Both joint ventures suffered drawbacks n the late-1980s due to a tightcontrol of foreign exchange.Productionwas stoppedandany planned expansionofinvestment was suspended.The difficulties were overcome thanks to the partners'ability to cooperate, and thanks also to the risk-taking attitude of European
management.* Broadening technology transfer and complying with local content rules; this
strategyhas been followed by Europeanmotorvehicle joint ventures involved in
manufacturing, ssemblyandtesting of finalproducts.EU joint ventures were alsoleaders in trainingand technical supervising.For example, in its second phase of
development,GuangzhouPeugeot procured1549 sets of equipment, including689
importedsets from France and other EU states. It has been a leaderon the Chinesemarketin technologies such as punching, welding, painting,machine processing,thermaltreatment,general assembly andtesting.The engine productionequipmentimportedfrom France and Germanycan meet the needs of productionof various
engines with its flexible processingcapabilities.The cylinderblock production ine
introducedby the FrenchRenaultis the first of this kind in China. Both ShanghaiVW andGuangzhouPeugeothave achievedhigh local contentratios,at 85.8% and60% respectively in 1994 (Table 4).
Chemicals.The chemical industry s one of China's pillar sectors. Its petrochemicaland pharmaceutical ub-sectorsare of vital importanceto China's advance towardseconomic modernisation.Entry competitionon the Chinese markethas been fierce.
By the end of 1994 there were 5450 foreign-fundedchemical industryventuresin the
country, involving a combined foreign direct investment of US$5.62 billion, which
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Source: China Automotive ndustryYearbook 1995) (in Chinese).
made up 4.7% of the nation's total. These firms contributed one-third to the total
exports of the chemical industry. Among them, there were more than 400 Sino-for-
eign pharmaceutical joint ventures, with the top six reporting an average annual
growth of 130% in sales in recent years. The US companies were the leaders in the
pharmaceutical sub-sector. In the petrochemical sub-sector, EU firms have been
edging slightly ahead of their US counterparts thanks to their earlier entry, while in
the fine chemicals sub-sector, EU companies have been in a leading position both in
terms of FDI and technology transfer (Table 5).The characteristics of the EU's FDI in the Chinese chemical industry can be
summarised as follows:
? Large-scale nature of investment: the first ever recorded FDI flows in the petro-chemical sub-sector were in the late 1970s. The scale of investment from the then
EC firms was two or three times larger than that of other investors in China. Some
recent FDI flows, for example from Royal Dutch Shell Group in the petrochemicalsub-sector, have shown this consistency. The latest planned investment from Shell
is aimed at building a large top-level comprehensive oil refining and petrochemi-cals joint venture in Huizhou, Guangdong Province. According to the plan, the new
joint venture will be capable of refining eight million tons of crude oil and
producing 450 000 tons of ethylene a year. Investment for the project is estimated
at US$6 billion. Another chemical giant, BASF AG of Germany, which has
established its Chinese headquarters in Shanghai, has invested US$400 million. It
has set up six joint ventures in China, three of them located in Shanghai. BASF's
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annual sales in China have topped US$440 million, and its products include
chemicals,fertilisers,chemical fibres andplastics.The companyhas alreadyset upoffices in Beijing and Guangzhou.
? Higher technological level: this appearsat two levels. First,EU firms have tended
to transfer heirstate-of-the-artechnologyto theirown joint ventures.Royal DutchShell Group expanded its operationsin China by introducingits state-of-the-art
gasification technology, participating n oil and gas exploitation and establishingethylenefacilities in the country.The Europeanchemicalcompanieslisted in Table5 were mostly involvedin high-technologytransferwith theirChinesecounterparts.Second, a numberof EU companies have established their technology centres inChinain orderto support heirFDI. Companiessuch as BASF AG, and the British
Henry Glendinning Group,have invested a considerable amountof funds in thesecentres. Henry Glendinningtakes the lead in producingcoatings, dynamites andindustrial chemicals in the world, with annual sales in China exceeding US$1
billion.
Conclusions
Narrowlydefined,technologytransferrefers to the transfer,absorptionandadaptationof technology, including technology know-how and technology services. In the caseof China,most of the technologyhas been, and still is, transferred ia FDI, and more
specificallywith the help of joint ventures.Indeed,in the case of China,TT is better
performedwhen involving a joint venture.Through ts technologyimportprogramme,China has demonstrateda real commitment to TT. This has been facilitated by itseconomic reforms,and has been implementedwithin the framework of a strict and
selective industrialpolicy. Priority industries are defined within the ambit of thefive-year planning system. Chinese industrialpolicy is largely concentratedon the
necessity of insertingmuch needed, appropriate nd state-of-the-art echnology in its
indigenousindustrialstructure.However, the currentChineseNSI, characterisedby a
poor investmentrecordin scientific and skilled labour,weakens the developmentofthe country's technological capability.
EU firms possess a number of specific assets-such as an establishedreputationand performancein some science-based industries, in particularin the energy,chemicals,motorvehicles, telecommunicationsandmechanicalengineeringsectors-thatexplainoutward nvestmentin science-basedindustries.EU-Chinese technologi-cal collaborationwill translate nto substantialgains for both the transfereeand the
transferor.Whereas the gains for China are obvious and indisputable, he advantagesfor the EU are also numerous and substantial,and transcend the boundaries ofeconomics. Much has been written about the lack of competitivenessof EU industrydomesticallyand world-wide;increasedpenetrationby EU firmson the Chinese andother Asian markets is a prerequisite or the improvementof the EU's competitive-ness.
Because of the coercive nature of Chinese industrialpolicy, TT-as opposed to
technology imports-is seen as the superior form of this collaboration. For the
transferee,TT is a preferredoption to technology importsin that it leads more easilyto absorption,adaptationanddevelopmentof the new technology. Although,from the
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7/28/2019 1999 Technology Transfer A Mode of Collaboration between the European Union and China
standpoint of EU firms, TT may appear as only a second-best option, it should be
borne in mind that the Chinese market has been notorious for its many barriers to
technology trade. In the future, all technology transfers that match exactly the
Chinese priority list will be promoted by facilitating financing, guarantees, and
insurance procedures. TT is a superior form of technological collaboration in that
it allows EU high-technology companies to build up a long-term relationship with
a Chinese counterpart, and to minimise risks, when compared with direct invest-
ment.
The fact that the EU is China's major supplier of advanced technology and
equipment is reflected by the strengths of EU firms in the motor vehicles and
chemicals industries on the Chinese market. Evidence suggests that firms in these
industries owe their success partly to their technological superiority and partly to their
willingness to respond adequately to the increasingly selective Chinese industrial
policy, embodied for example in the existence of local content ratios, and to their
co-operation with their Chinese business counterparts.
University of Limerick
Fundingfrom the Universityof Limerick Foundation s greatly acknowledged.An earlierversion of this paperwas presentedat an InternationalConferenceon 'EconomicIntegrationnTransition',AthensUniversityof Economics,August 1996. The authors hank the editor and theanonymous eferees or theirhelp and valuablecomments.l
1994 figures,Ministryof ForeignTradeand EconomicCo-operation f China.2 Forthe full set of regulations, ee ChinaEconomicNews (CEN),1985, 38, p. 1.3Indeed,importsof plants and machinerymay or may not lead to the adaptation f the
technology o thespecificconditionsof therecipient ountry, ndto thedevelopment f the 'national
absorptive apacity'.Material ransfer e.g. machinery ndplants)channeled hroughoint venturesstandsa betterchanceof beingabsorbedby andadapted o the recipient'sproductive ystem.4Emmanuel1982)goes beyond hatwhenhe writes hat'in order o emerge romunderdevel-
opment, he"technologicalhortcut"s notenough. t is stillnecessary o finda "financialhortcut";a pointthat we will not develophere.
5 By expanding n RosaLuxemburg'sworkrelating o the imperialistic atureof capitalismnsearchof new markets Luxemburg, 913),Emmanuelbecameone of the majorproponents f thisschool.See also the very criticalcontributionsmadeby Lall & Streeten 1977).
6 Technological apabilities re definedby Bell & Pavitt 1997,p. 89) as 'the resourcesneededto generate ndmanage echnical hange, ncluding kills,knowledgeandexperience nd nstitutionalstructures nd linkages'.For a syntheticdiscussionon technologicaland social capabilityat bothindividualand institutionalevels, see Jang-SupShin (1996), chapter2.
7The succinctanalysisof foreignfirms' motives for investingandtransferringechnology nDalianby Lan & Young(1996) concurswith this view. According o theforeignfirmsperceivedas
having hehighest echnology ransfer otential,abour osts arenot theprimarymotiveforinvestingin China.8The conceptof NSI has been developedand enrichedduringthe 1980s (see for example
Freeman,1987;Lundvall,1988, Nelson, 1988).9Witha risk of endangeringocial cohesion(Fabre,1995).10See Mowery& Oxley (1995) for the case of Japanandothereconomicallymoreadvanced
Asiancountries,Shin(1996) forJapanand SouthKorea,and Bell & Pavitt 1997) for a North-Southcontrast.
1Duringthe recentAsian crisis, China has demonstrated n ability to providecushioningmechanismsn order o preventan escalationof the financialdisarray.
12For a more thoroughpresentation f EU countries'strengths n the variousscience-basedindustries, ee for exampleJacobson& Andre6osso-O'Callaghan1996, Chapter ).
13 Whichcalls forhomogeneity r littlemarket egmentationhroughoutChina.Movestowardsharmonisationt a pan-nationalevel are on theirway.
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14 ndeed,culture xplains o a largeextentthe variouswaysof conductingbusiness n differentsocieties.
lSTextiles andclothingwere not coveredby this agreement.16Figures romEurostat,Luxembourg.17All statisticswerereleasedby MOFTEC,Beijing,December1995.
18Amongthe 15member tates,France,UK,Germany ndItalyrepresentmorethan80%of allEU-15 FDI in China.Sweden s another elatively mportantnvestor. n 1995,72 major echnologyandequipmenttems were imported rom Sweden.
This groupstill includesHIongKong,as well as Macauand Taiwan.
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