Keeping in mind the earlier findings that knowledge creation requires accumulation of technology and protection of new ideas, we turn to foreign direct investment (FDI) to see if it can really transfer beneficial technology to the host country. FDI is investment in a foreign country where the investor retains both ownership and control of the resources transferred (O’Brien and Williams 2004: 169). Usually the investor is a transnational corporation (TNC), “a firm that owns and controls production (value-added) facilities in two or more countries” (O’Brien and Williams 2004: 171). TNCs and FDI have both grown tremendously over the past few decades. Whether FDI is overall a good thing for host countries is a highly contentious topic, which partly rests on the question of whether it transfers technology to domestic industries, thus improving the efficiency of production for the host country and making it more competitive in the world market. In theory, this transfer may take place via domestic companies simply observing nearby foreign firms (Aitken and Harrison 1999: 605) or via the turnover of employees from foreign to domestic firms. This latter method has the potential of transferring some of the “tacit knowledge” referred to earlier.

It is difficult to objectively measure the “spillover” of technology to domestic firms, so instead researchers follow firms’ productivity under the assumption that better technology enhances productivity (Kokko 1994: 280). These studies have often concluded with opposing results. For instance, a study in Mexico found that industries with the most foreign investment showed the most gains in productivity (Blomstrom 1986: 108), while a study in Venezuela found that the effect of foreign ownership was negligible (Aitken and Harrison 1999: 605). However, looking closer, even the study of Mexico admits that the “results do not support the hypothesis that foreign investment speeds up the transfer of any specific technology to Mexico” (Blomstrom 1986: 108). Aitken and Harrison (1999: 616-617) explain this seeming contradiction by showing that the correlation arises because transnational corporations tend to invest in the more productive industries. In fact, not only did the study of Venezuela find “no evidence supporting the existence of technology ‘spillovers’”, it also found that the productivity of domestic firms are negatively impacted by the presence of foreign investment in their industry (Aitken and Harrison 1999: 616-617). This was interpreted as a failure of economies of scale due to transnationals capturing more of the market (Aitken and Harrison 1999: 607). In sum, in many instances foreign direct investment does not lead to meaningful technology transfer.

To more deeply understand why this is the case we can analyse technology transfer from the innovation perspective. As discussed above, learning how to use new technology is a form of innovation. Thus, technology transfer requires that domestic firms have the ability to accumulate technological advances and that the government encourages and protects innovation. The widespread failure to meet these requirements underlines the consensus among political economists that learning via technological spillovers is anything but “automatic” (Cooper 1994: 19). But we can and should base recommendations for improving the system on the principles of innovation. The most obvious way to achieve the necessary accumulation is by investing in education and research (assuming that basic infrastructure like water and electricity has been established at least in certain areas). Along these lines, UNESC recommends “creating and/or strengthening local R&D units, linking them to commercialisation, and fostering collaboration” between them and TNCs (2003: 14).

However, one must assume that the transnational corporations doing the investing are acting in their own best interest according the innovation economy, which dictates that the creation of knowledge is where value is added. This implies that transnational corporations will work hard at creating knowledge, and will protect the resulting innovations as much as possible so as to prolong their temporary monopoly over the competition. Indeed, “there is compelling evidence to suggest that TNCs from the advanced industrial countries continue to exercise a tight rein over their technological knowledge” (O’Brien and Williams 2004: 189). In addition, these corporations tend to do their research and development work in their home countries (O’Brien and Williams 2004: 189), presumably because the advanced countries currently have a comparative advantage in innovation (Audretsch 2000: 65). This means that all of the profit will go to the transnational corporation rather than any host country. As Aitken and Harrison found, “the gains from foreign investment appear to be entirely captured by joint ventures” (1999: 605). In other words, there is no “right kind of FDI” (UNESC 2003: 13) if TNCs are left to their own devices.

This further illustrates that countries cannot expect to benefit significantly from technology spillovers unless they are able to use them as a basis for launching their own innovative path. Yet because transnational corporations are competing with domestic firms, as we saw above it is in their interest to let as little as possible of this technology “spill over.” Accordingly, most of the technology that makes it to domestic firms will be commoditized and “designed to maintain low-level productive activities” (O’Brien and Williams 2004: 188), at which point there is very little benefit for the receiving firm. (Inter-industry transfer does not necessarily suffer from competition with domestic firms and requires a different analysis; but this introduces many complications which are outside the scope of this paper.) The prospects for profitable technology transfers are better from other forms of foreign relationships. Perhaps the most promising is licensing relationships, where domestic companies pay a fee to the technology developer in return for using the technology in production (James 1994: 159). In this case the original innovator is still outside the host country, but the host country has access to cutting-edge technology which it can use as a basis for building its own innovations, most easily as basic improvements to enhance its own competitiveness in the market. A similar relationship is subcontracting, where the innovator pays a foreign subsidiary to produce its new technology.