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Is foreign investment in the U.S. transferring U.S. technology abroad?

As measured by royalties and license fees, transfers of foreign technologies into the U. S. through U. S. affiliates have been more than five times larger than technology transfers out by them. The largest proportion of technology transfers from the U. S. was accounted for by U. S. parents of foreign affiliates. No country has used foreign direct investment in the U. S. as an important means of acquiring U.S. technology.

BECAUSE OF THE rapid growth of foreign direct investment in the U.S. in recent years, the following question is often asked: Has increasing foreign control of U. S. companies adversely affected the U. S. economy? More specifically, has foreign direct investment caused the transfer of a significant amount of U.S. technology abroad? This paper reviews the evidence available in an attempt to answer this question.

OVERVIEW OF FOREIGN DIRECT INVESTMENT IN THE U.S.

By convention, foreign direct investment in the U.S. (FDIUS) is defined as an investment that results in a single foreign entity owning or controlling, directly or indirectly, 10 percent or more of the voting securities of an incorporated business enterprise (or the equivalent interest in an unincorporated business enterprise). Purchases of U.S. Treasury securities as well as U.S. liabilities reported by U.S. banks and nonbanks are not included.

Table 1 shows foreign direct investment flows into the United States by country for 1980 and for 198588. From 1980 to 1988, such investment grew at an annual rate of 15.2 percent. For the 1985-88 period, this rate accelerated to 36.9 percent. By country, the United Kingdom has been dominant, although investment by japan has grown somewhat more rapidly and is clearly in second place. By industry, the most important sectors of foreign direct investment were manufacturing (most prominently the chemical industry), petroleum and wholesale trade in the early 1980s. By 1988, of the $58.4 billion of foreign direct investment, manufacturing accounted for $28.2 billion (48.3 percent), of which $15.1 billion (25.8 percent) was "other" manufacturing. Other major sectors were wholesale trade ($10.4 billion), and chemicals and real estate ($4.5 billion each).

FDIUS IN HIGH TECH INDUSTRIES

With this background, has FDIUS grown more rapidly in high tech industries? (High tech industries are defined as those with a higher-than-average proportion of technology-oriented workers and of R&D to sales).

FDIUS in high tech industries fell from $1.9 billion in 1980 to $1.7 billion in 1985 but then quadrupled to $6.5 billion in 1988. Nevertheless, the proportion of high tech investment to total investment was 11.5 percent in 1980, 9.0 percent in 1985 and 11.1 percent in 1988. By industry, the fastest growth rates of high tech investment were in medical instruments and supplies, and scientific and measuring instruments. Special industrial machinery and various chemical industries also grew rapidly. In many high tech industries, such as communications equipment, capital inflows were very low, and in many service industries, hardly high tech, investment grew rapidly. From this evidence, it does not appear that FDIUS has been increasingly motivated by technology acquisitions.

TECHNOLOGY TRANSFERS FROM THE U.S.

International technology transfers may take place in different ways, such as licensing agreements, joint ventures, "reverse engineering, and even industrial espionage. Direct measures of technology flows are not available, but data on royalties and license fees provide a proxy, although they do not fully represent all technology transfers. These data have been collected by various surveys of the Bureau of Economic Analysis of the U.S. Department of Commerce. Limitations of the data are that they rely exclusively on reported payments for intangible property rights and may not reflect arm's length transaction value, especially when a parent company and its subsidiary are involved.

Table 2 indicates U. S. receipts and payments of royalties and license fees by all U. S. companies from 1980 to 1988. Total receipts, reflecting transfer of technology abroad, more than doubled during this period to $11.1 billion. By contrast, technology transfers into the U.S., as measured by payments, tripled to $2.4 billion but still were quite small in comparison with outward transfers.

Reviewing the components of receipts of royalties and license fees in the U. S., the largest proportion (more than 70 percent) is to U. S. parent companies from their subsidiaries abroad. Payments by non-affiliated foreign companies is second largest, while payments to U.S. affiliates from their parent companies abroad is of minor significance. In 1988, total receipts of royalties and license fees of U. S. affiliates from their foreign parent companies were only $238 million, compared with total payments to the parent companies of $1.2 billion.

The role of U.S. affiliates in transferring technology abroad does not appear to be substantial, even if the receipts are significantly underreported. It is difficult to determine the degree of underreporting. Lack of arm's length transactions may result in underestimation of the value of transferred technology, but not all receipts represent technology transfer.

Table 3 indicates U.S. receipts of royalties and license fees by country. Technology transfers to the rest of the world were largely limited to major industrial countries, who were the main foreign direct investors in the U.S. In addition, they probably were the only countries to have the capabilities to use the acquired technologies.

In the early 1980s, Canada and the U.K. were the main destinations of U.S. technology transferred abroad through U.S. affiliates. More recently, the Netherlands, France and japan have become increasingly important.

Technology transfers by U.S. companies to their foreign affiliates were largest to japanese affiliates, $1.4 billion in 1988. The figures for U.K. and West Germany were $1.2 billion and $1.1 billion, respectively. These figures are at least twenty times larger than outward technology transfers by U.S. affiliates to their parents abroad.

CONCLUSIONS

FDIUS has been growing rapidly in recent years, with the japanese investing in the U.S. at a faster rate than any other country. Total receipts of royalties and license fees of U.S. affiliates of foreign companies, however, did not increase significantly faster than FDIUS during 1980-88. japan substantially increased its FDIUS during this period, but the rate of growth in receipts of royalties and license fees by its U. S. affiliates did not increase as rapidly.

More importantly, as measured by royalties and license fees, transfers of foreign technologies into the U.S. through U.S. affiliates have been more than five times larger than technology transfers out by them. By far the largest proportion of technology transfers from the U.S. was accounted for by U.S. parents of foreign affiliates, which in 1988 accounted for more than three-quarters of the total outward technology transfers.

The international transfer of technology is pandemic. As the nation with the most technology, the United States is the source of a large proportion of such transfers. The evidence reviewed in this Study, however, makes it clear that neither the japanese nor any other nationality has used foreign direct investment as an important means of acquiring U. S. technology.

* Kan H. Young and Charles E. Steigerwald are economists with the Office of Business Analysis, Economic Affairs, U.S. Department of Commerce. This paper is abridged from a more complete paper, Technology Transfers and Foreign Direct Investment in the United States. It does not represent the views or opinions of the U.S. Department of Commerce or any of its agencies.
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Author:Young, Kan H.; Steigerwald, Charles E.
Publication:Business Economics
Date:Oct 1, 1990
Words:1257
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