Management contracts Essay
On the one hand, codified knowledge can be transmitted easily across distance, due to transportation and communication developments which have permitted to increasingly reduce distances. On the other hand, “tacit knowledge has a very steep distance-decay curve”, and so is quite difficult to communicate and to share. (P. Dicken, 2003). Moreover, MNCs have two ways for the transfer and the diffusion of their technologies from one country to another.
First, the transfer can be internalised to affiliates under their ownership and control. Second, it can be externalised to other firms (UNCTAD, 1999a, pp. 203). The former mode of transfer takes the form of direct investments, usually foreign direct investments (FDI), and the latter one takes a variety of forms, such as joint ventures, licensing, franchising, sub-contracting or management contracts (UNCTAD, 2001).
Not only do the multinational companies transfer and diffuse the technology, but also they provide some organisational changes and methods in other fields as management, marketing and others that can improve the efficiency of the technology in order to work to its best limits (UNCTAD, 1999a). In order to understand how and why MNCs are responsible in the international diffusion of technological expertise, two main empirical studies of technological diffusion can
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John Cantwell tried in his study to bring to the fore the relationship existing between the location of the parent company and the research, this in order to explain how MNCs have contributed, and are still doing so now, to transfer complex elements of technology between locations. This analysis emphasizes on the relationship between the diversification and internationalisation of MNC’s technological activities which seems to increasingly imply for location issues associated with the access of capabilities and locally specific sources of innovation, external to the firm.
As a result, the firm can gain competitive advantage by integrating “a complementary stream of innovations [… ] through a combination of research and related skills and routines in production. By this means it is better able to integrate its own unique technological characteristics with local systems and to transfer more effectively the fruits of this combination to other parts of its international network” (Howard Cox, 1993, pp. 26).
Thus, through the integration, not only the firm but also its affiliates have a role in the international diffusion of technological abilities, and can then absorb and exploit in their favour of the specific advantages found in the local environment (Howard Cox, 1993). One of Cantwell’s main conclusion is that foreign direct investments (FDI) have led to the internationalisation of the markets and to a greater rapid diffusion of new products and technologies.
Referring to John Dunning (1993), MNCs’ preferred mode of technology transfer is FDI because it ensures a greater rent-extracting potential of the technology and distinctive opportunities transferred with it, thus enabling them to maintain and improve their competitiveness. The opportunities “include not only the profits earned on the capital invested but also all the other benefits that arise from foreign production, including the securing of new markets which help spread the R&D and other overhead costs of the parent company” (John Dunning, 1993, pp.
335). But the diffusion of technology has also become increasingly widespread through other means, such as joint-ventures, licensing, franchising, management contracts or sub-contracting, allowing MNCs “to gain access to new technologies and exploit efficiently and speedily the latest technological advances” and so to accelerate technological developments. (John Dunning, 1993, pp. 291).