Methodological and Technological issues in Technology Transfer

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5.4.1 Multinational Corporations and Foreign Direct Investment

Concern has been expressed that multinational corporations' (MNCs) direct foreign direct investment gravitates toward countries with lower environmental standards or lax enforcement (pollution havens), as MNCs seek to avoid the high cost of environmental compliance in their original bases of operation. There is debate about differences between local and foreign firms with limited empirical evidence available (Jun and Brewer, 1997). However, according to some sources, there is growing evidence that foreign-owned or joint ventures tend to be cleaner ("halos") than local firms for the following reasons: they use the usually higher standards of the developed countries embedded in the overseas subsidiary; they export to environmentally sensitive markets, and the parent firms do not want their image to be tarnished by irresponsible overseas operations (as has happened) (Panayotou, 1997).

Multinational corporations (MNCs) have significantly expanded their environmental management capacity. In general the environmental effects on the host economy depend also on the policies of the host government as well as their practises. Domestic regulatory policies can increase the contribution of private capital flows to sustainable development (Jun and Brewer, 1997). Environmental sustainability, including mitigating and adapting to climate change, can then be seen not as a barrier to growth, but as a boundary condition that could stimulate the emergence of a sustainable industrial economy, a process in which technology transfer is likely to play a major role. Host governments can require enforcement of environmental regulations, transparency in reporting and pre-screening of projects before commencement. Home governments could potentially screen projects for their environmental effects before granting them political risk guarantees (see the discussion on ECAs, Section 5.2.3). MNCs themselves have in some cases assumed responsibilities to minimise the detrimental consequences of FDI projects and guidelines have been developed by both private-sector and public sector organisations, such as the Business Charter for Sustainable Development developed by the ICC (Jun and Brewer, 1997). Presently under discussion is a revision of the OECD Guidelines for Multinational Enterprises. Capacity building is required in developing countries to strengthen regulatory reform and monitoring.

Western multinational corporations are sometimes at the leading edge of lean production techniques and new ways of working with the community. Transfer of these approaches through foreign direct investment by MNCs can be a critical pathway for developing countries to acquire these essential building blocks for sustainable industrialisation. Today's dominant industrial paradigm - lean production - tends towards minimising raw material needs (by reducing waste and unwanted stock, Womack et al., 1990). It is associated with participation and individual responsibility of workers throughout the chain of production, and is, therefore, potentially a building block for an integrated system of industrial production within an environmentally sustainable economy (Wallace, 1996). At the same time, possible elements of a future sustainable industrial economy can be seen in developed economies. Some essential elements have already been suggested, including: new relationships with workers and the community (Hawken, 1993; Silverstein, 1993); decentralised production of a wide variety of goods (leading to greatly reduced pollution, lower costs with a transfer of wealth from large corporations to local communities; Hawken, 1993); and the integration of production, consumption and waste streams into a single "ecological" system (Socolow, 1994). In the real world, limited application of industrial ecology principles is being demonstrated in the Kalundborg, Denmark, eco-industrial site (Hawken, 1993).

However, barriers and obstacles do exist with modern multinational corporations to the transfer of technology and the reduction of GHG emissions. It is in the nature of such large organisations that they must be divided into semi-autonomous divisions, and that central coordination can only imperfectly control the actions of the far-flung branches. Even if the central headquarters of a MNC were to decide on a particular course of technology transfer or diffusion, it would require effort and management attention to make that decision happen. Control from the centre can be exercised only imperfectly, so it would be unusual if all branches performed up to the same standard in every dimension. Thus, there should be no reason to presume that all segments of a globally dispersed MNC have optimised their technological choices. Rather, there will always be opportunities for profitable transfers of knowledge and technique.4 A great deal of foreign direct investment takes the form of expansion of operations by MNCs, so internal or trans-divisional decisions regarding technology choices, in addition to decisions about the location and direction of capital flows, are important in determining the pace of transfer of ESTs.

Decisions within firms may not be made according to rational decision-making models, and a more open process can help the private sector decision-maker. Traditional economic theory would tend to predict that the choice of a technology would be chosen on the bases of cost minimisation and perfect information. Even where such adherence to theory would be expected to be most prevalent, such as in the choice of manufacturing methods, empirical studies have shown this to be inadequate to explain technology choice decisions actually made by managers. Observers have noted that firms in the same country use quite different technologies to manufacture ostensibly identical products. Flouting theory, labour-intensive and capital-intensive plants survive side by side (Stobaugh and Wells, 1984). Factors that do influence choice include the ratio of manufacturing costs to total costs, the price elasticity of demand, competition faced by the firm, flexibility in changing output, quality of the product, whether it was being produced for the domestic market or export, etc. Moreover, lack of information is an important determinant of choice (Stobaugh and Wells, 1984), and is often accompanied by a lack of initiative in searching for information other than that provided by existing suppliers of technology (Chantramonklasri, 1990).

It is also well known that the present configuration of technology choices depends to a significant degree on past choices (Arthur, 1994). This sort of "path dependence" of technological progress may result from economies of scale that cause technologies with larger market shares to exhibit lower costs than newer, potentially superior, technologies. Alternatively, path dependence can arise in the normal course of a firm's evolution, because it can be easier in the short run to make marginal changes in existing methods than to switch to an entirely new way of doing things. In the case of energy technologies, the past choices were made without taking account of the climate externality. Thus, existing technologies enjoy advantages over newer, lower-emission technologies, in terms of having learned by doing, having learned by using, having already realised scale economies, having established information channels and user confidence, and having established inter-related technologies. These factors can perpetuate continued "lock-in" of the fossil fuel technologies that have grown around the historic availability of cheap fossil fuels and historic neglect of the greenhouse gas externality. Policy intervention may be required to replace locked-in technological choices that are no longer globally optimal.

Probably the most general reason large firms fail to take advantage of opportunities to adopt profitable new technologies that would reduce GHG emissions is that doing so is not a strategic priority. Investment in energy technologies usually is not seen as central to the firm's growth and survival, so this type of decision receives a lower level of attention from top management than other concerns. The mechanisms and controls that serve to maintain accountability and control principal/agent problems across different layers in the organisation's hierarchy in relation to its mainstream activity can themselves become barriers to action in relation to energy efficiency. These considerations suggest that an effective way for a corporation to achieve emissions reductions would be an organisational change that would make a clearly identifiable person or group within the firm responsible for the monitoring and abatement of greenhouse gas emissions. Such an internal organisational unit could be charged with identifying and implementing profitable energy-saving investments (with the managers of the group rewarded accordingly), and could be self-financing to the degree that such opportunities exist. Other regulatory or policy regimes, such as carbon taxes, cap-and-trade systems, or proportional abatement obligations (PAOs) could play an important role in focusing the attention of management and making GHG emissions reductions a measurable objective for the firm.

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