Foreign direct investment and technology transfer: The case of the UAE

Abstract

Throughout the 1960s and the early 1970s, almost all developing countries pursued an import substitution policy that sought to develop a domestic manufacturing sector. At the same time, these governments carried out nationalisation programmes based on the view that foreign ownership of industry and assets was a drain on their wealth and hindered the economic development of the nation. Some developing countries saw foreign investment as a continuation of their colonial past and wanted to move away from it. As a result, there was a natural dislike and distrust of foreign investment. However, in the last three decades there has been a sea change in government opinions regarding foreign investment, and now many countries are actively encouraging it. In fact, some governments have paid financial incentives reaching as much as US$150,000 per employee to foreign companies to attract them to their country. These financial incentives are paid on the basis that governments believe that inward investment has positive effects on the economy, the most important of which is transfer of technology. Through improved technology a country can significantly enhance its competitiveness in the global marketplace leading to increased economic growth. With economic growth countries can also improve their social indicators such as education, health etc. Therefore, technology transfer from inward investment is viewed as the catalyst to change within a country. Despite the widespread popularity of governments seeking to attract inward investment there is no conclusive evidence that it leads to positive spillover effects in the form of technology transfer. This study seeks to fill this gap in the current body of academic knowledge, using the case of a small resource abundant country with a low population, such as the UAE, using both qualitative and quantitative research methods. The primary data was obtained through a detailed questionnaire, and provides an in depth approach to understanding the issue of technology transfer for the UAE; while the secondary data, obtained from UNCTAD and the World Bank, is more macro level in nature. The macro level data indicate that certain factors in the UAE are conducive to technology transfer taking place. The primary data seek to interrogate this for the case study presented in this study. In doing so, the primary and secondary data sets are connected in so far as to provide cross reliability through the identification of commonalities and differences of results. This study aims to provide understanding on whether FDI does indeed lead to a transfer of technology from the overseas firm into the host country economy. Understanding such a link within an academic framework allows this study to arrive at relevant policy recommendations that can be taken up by policy makers in similar contexts. The prior literature has shown that FDI both flows into countries that have proven economic growth and that FDI leads to economic growth, and therefore these factors are interrelated. This study has found that FDI can play an important role in filling domestic gaps in investment and also spur economic growth. This study develops a simultaneous regression to test the existence of a joint relationship between economic growth, which is a proxy for technology transfer, and FDI. In the case of host country factors a linear regression model is developed and tested. At a more micro level this study examined the case of Tawazun Economic Council, a high technology organisation that operates within the aerospace and defence industry cluster, in order to understand whether its investments have led to any real impact as far as technology transfer is concerned. The Tawazun Economic Council is a project with a total investment of US$60 billion, and as such allows this research to capture the impact of technology transfer in an enhanced cluster that has aerospace and defence as its core theme. The aerospace and defence sectors have leading edge technology, and therefore a high probability of technology transfer taking place. Through a survey of senior managers within the organisation responsible for strategy development, this study also found that technology transfer has taken place due to the very sophisticated off-take contracts that have been negotiated with buyers and technology suppliers. However, none of these technologies have been applied outside their narrow aerospace and defence usage. In addition, if capital abundant countries wish to capitalise on the technology transfer benefits from FDI then, future government policies should seek to protect intellectual property rights. The novel contribution of this study is that it has identified factors that are important for technology transfer from FDI to take place in capital abundant countries that have a small population. As such, the research has not only increased the current body of knowledge in this area, but has sought to provide policy recommendations that could help in increasing the level of FDI-based technology transfer in developing countries, with a particular emphasis on capital abundant and low population countries.