Methodological and Technological issues in Technology Transfer

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4.6 Macroeconomic Policy Framework

Barriers to technology transfer resulting from macroeconomic conditions include lack of access to capital, a poorly developed banking sector, lack of available long-term capital, high or uncertain inflation or interest rates, subsidised or average-cost (rather than marginal-cost) prices for energy, high import duties, uncertain stability of tax and tariff policies, investment risk (real and perceived), and risk of expropriation. Policy tools related to macroeconomic conditions to encourage foreign direct investment (FDI) and access to technology can include:

• Macroeconomic stability, such as low inflation and stable and realistic currency
• Deregulation of the investment regime, and free movement of private capital
• Foreign exchange convertibility and liberalisation of exchange restrictions
• Removal of (often prohibitive) restrictions on repatriation of profits and of capital
• Reduction of risk of expropriation
• Reduction of the role of the public sector in directly productive sectors, through privatisation of state enterprises and overall reduction of the share of stateenterprises in total investment, by opening up the public utility sector and other public monopolies to private sector participation and foreign investment
• Provisions for the settlement of disputes ranging from direct negotiation among the disputing parties to third party arbitration (World Bank, 1997a)
• Removal of mandated local ownership requirements
• Promotion of the development of domestic institutional investors to assuage public fears about excessive foreign presence and to reduce the vulnerability of domestic capital markets to foreign investor herding. The presence of domestic institutional investors also reassures foreign investors about the host country's respect for corporate governance and property rights (World Bank 1997a)
  
• Reform of opaque regulations that leave much administrative discretion and scope for corruption which discourages investment flows (Shang-Jin Wei 1997).
• Streamlining and reduction of tax rates to competitive levels. Low tax rates have been found associated with high levels of direct foreign investment (Hines and Rice, 1994).
• Mobilisation of domestic resources through the gradual reduction of environmentally damaging subsidies (Panayotou, 1997).

For the buildings, industrial, and energy sectors, the low price of conventional energy is a barrier that deters investment in alternatives. Different forms of levy to 'internalise' the environmental costs of fossil fuel use are now being tried to improve the competitiveness of the cleaner energy sources (Dale 1995), but this may increase perceived policy vulnerability. If the new technology is saving on scarce inputs or substitutes for dirty fuels which are subsidised, the technology may not be locally attractive even if it is globally preferable. Pricing of both the new technology and its complements and substitutes is just as important . The channels may be open but effective demand may be lacking because of inefficient pricing or other domestic distortions (Dale 1995).

The lack of financing for technology transfer can reflect the lack of capacity on the part of the financial sector in developing countries (Manas 1990). Further efforts are needed to convince banks and other lending institutions of the profitability of financing environmentally sound technologies and projects. Innovative financing mechanisms that allow reduced risks to lenders but allow profitable investments in environmentally sound technologies are one of the main impediments for greater energy efficiency in most of the developing countries (Pachauri and Bhandari, 1994). Most lending activities in developing countries are geared to corporate finance, not project finance.

The banking system plays a dominant role in the allocation of capital, and its health largely determines whether a country will be able to exploit the benefits of financial integration, including access to and transfer of technology. Banking systems in many countries exhibit characteristics that can adversely affect long-term investment, imports
of capital goods and technology transfer, such as:

• Excessive banking regulation or inadequate banking supervision
• Incentives for banks that are distorted against risk taking
• Banks that are poorly capitalised
• Inadequate regulation and oversight
• Incentive distortions (e.g. excessive insurance)
• Surges in capital flows that expose the banking system to risk and vulnerability

These problems can be addressed through macroeconomic policies, increased reserve requirements and/or adoption of risk-weighted capital adequacy requirements (World Bank 1997a). It is necessary to build shock absorbers into the financial system and develop mechanisms to respond to instability by:

• Maintaining international reserves at levels commensurate with the variation of capital account; the lower the confidence of foreign investors, the larger the reserves need to be; they could also be
• Buttressed through contingent lines of credit (e.g. Argentina)
• Maintaining fiscal flexibility
• Building cushions in the banking system by using periods of credit booms to increase bank capitalisation.

Most modern economies comprise a mix between government and private sector investments which varies according to the nature of the economic system and circumstances, and it has varied over time. Traditionally governments, as well as their role in social infrastructure (education, health) have dominated investment in physical infrastructure and large-scale technology development (Rama 1997). In mixed economies, government finance has dominated where the benefits are not readily in the form of financial returns, or where such returns are likely to be very long term (as with technology development) (World Bank 1997a). In addition governments have traditionally been heavily involved in sectors that are perceived as central to national economic security and development - such as the provision of energy. Private sector finance has been more readily involved in businesses and projects that provide a ready financial return over shorter timescales than would be required for government investment (Jacobson and Tarr, 1995).

The relationship between government and private finance has however changed considerably in recent years in many countries. Most relevant to climate change, this has been particularly clear in the energy sector. Faced with the rising costs and inadequate performance of state-funded energy developments, many governments around the world have privatised energy industries, are in the process of doing so, or are seeking to involve private finance even where energy systems remain primarily government owned (Dailami and Klein, 1998). For example, governments may set out terms of access to independent power generators. This has profound implications for financing the development and international transfer of clean energy technologies, and makes it all the more important to understand the operation of private finance and its relationship to the public sector in the funding of technology transfer (Blomstrom et al., 1995).