Investment Agreements: A help or

hindrance to innovation and the

transfer of technology?
Padmashree Gehl Sampath
UNCTAD
 Impact of FDI on innovation
1. When there is FDI in productive sectors – increased productivity in the sectors,
and also has a chain effect resulting in productivity gains in other sectors.

2. The most important link is to technology diffusion and knowledge accumulation:

by linking local firms to global markets: Technology transfer
Venues include:
• Joint ventures with local participation
• Technology licensing to local subsidiary/ local partner
• Express ToT requirements
• R&D in host country (and related technology spillovers)
COMMON FACTORS ACROSS SECTORS AND COUNTRIES:
1. Learning and the formation of capabilities of domestic firms
follow some stages of learning
2. But in the same sector there are often cases of different
trajectories of capability development, because of
-the type of knowledge base and product niches
-the size element – employment, domestic market, etc.
-the presence of unique actors
- historical accidents (the case of software, or the
presence of natural resources)
 COMMON FACTORS (2)
1. Access to foreign knowledge and international
networking
2. Government policy:
• industrial and innovation policy providing the local
institutional set-up to promote linkages and learning.
- Presence of skills
- Investments to R&D
- Focus on interactive learning
- Supportive institutions and incentives

• Making strategic choices on how to interact with

external/ international opportunities
 Catch up experiences: FDI related trade offs
Foreign led
• Fast productivity improvements in
production (operations)
• Significant expansion in volume
• Quick international market and
production integration
vs.
• Reduced strategic autonomy
• Limited functional / technological
upgrading
• Unchanged subsidiary mandate
• Limited local networking
• Fast growth in short term but
potential structural weakness in a
long term
Domestic led
• Broad strategic autonomy
• Full functional autonomy
• Local networking
• ‘Preserved’ or ‘strengthened’ NIS
vs.
• Slow productivity improvements and
low efficiency
• Slow expansion in volume
• Poor operational performance
• Limited international market and
production integration
• Potentially high rent seeking costs
and ‘waste’
• Slow productivity growth in short
term but structurally potentially more
advantageous situation
5
 Catching up: complementarities between domestic
(DLM) and foregn led modernisation (FLM)
• DLM, which is based exclusively on domestic strategic
choices in industrial and innovation policies – focusing on
technologies and capabilities, has become increasingly
unviable as the sole option.
• FLM alone could ensure ‘spurts’ in growth but only coupling
between FLM/DLM could ensure ‘catching up’
• The critical issue is how the national industrial system
manages complementarity between FLM and DLM so that it
promotes rather than undermines endogenous technological
capability
• Why coupling is difficult? Matching different layers of
integration (finance, market, production, technology) does
not emerge automatically = network failures > network 6
alignment.
 Past and current experiences also show that:

• There has been a historical emphasis on ToT in

FDI, especially in the Andean region, which has
become eroded over time.
• Performance requirements are important and
support domestic development objectives:
– By helping countries develop and promote strategic
industries, with little or no foreign influence.
– By promoting access to technologies
• E.g., Quality Chemicals- Uganda
– Ensuring that FDI doesn’t crowd out local firms and
sectors.
 BIT restrictions that impact transfer of
technology
Direct

-Requirements to establish a joint venture with domestic participation

-Requirements to transfer technology, production processes or other proprietary knowledge
-Research and development requirements
-Employment requirements (which can help tacit know-how)
-procurement

Industrial policy-related
-Requirements for a minimum level of domestic equity participation
- Export requirements
- Restrictions on sales of goods/services in the territory where produced/supplied
- Requirements to supply goods produced or services provided to a specific region
exclusively from a given territory
- Requirements to locate headquarters for a specific region
- Requirements to be the sole supplier of goods produced/ services provided
 Assessment of some existing BITs that
Ecuador has:
Provision impact Agreements
Definition of investment Includes intangible assets All

General clauses Fair and equitable Fair and equitable

treatment treatment (UK)
Not impair by
unreasonable or
discriminatory measures
(UK)

Non-discrimination/ most- Prevents any provision for All

favoured nation performance that is
imposed just on the foreign
investor
 Assessment of some existing BITs on policy
space
Provision impact Agreements
Nationalisation and Prevents possession or All, except in the case of
expropiation control over the assets ‘public interest’.
temporarily or If done, then
permanently by the compensation at the
government marker value to be
provided
Additional caveats:
compensation within two
months, will include
interests calculated on the
EURIBOR basis (BIT Italy)
Explicit provision on certain Curtails policy space USA (Art. II, 6).
performance requirements furtuer
 Implications
• In most BITs, investment includes IPRs.
• This means that the protection granted
extends to IPRs, without much leverage on
ToT.
• State-state or state-individual arbitation can
be a recourse for violation of IPR issues.
• Issues of ToT are also related to the use of
TRIPS flexibilities as well.
Thank you