Globalization and Technology Absorption : Role of Trade, FDI and Cross-Border Knowledge Flows

Improving the ability of Europe and Central Asia (ECA) countries to tap into the global technology pool is an important mechanism for accelerating their industrial development, worker productivity and economic growth. Trade flows, foreign direct investment (FDI), research and development (R&D), and labor mobility and training, are widely accepted as key mechanisms for knowledge absorption. Absorption requires tough decisions and large investments, as firms need to spend resources on modifying imported equipment and technologies, and reorganizing production lines and organizational structures. Case studies of privatized enterprises in Serbia highlight the important role of foreign investors in knowledge absorption, whether acquired through capital goods imports, exporting, hiring consultants and other knowledge brokers, or from licensing technology. The Serbian case studies targeted FDI based on acquisition of existing assets from the government (privatization), or from private owners, rather than 'greenfield' FDI. The analyses suggested, in general, that companies sold to domestic investors were not able to increase exports in a significant way, while comparable firms receiving FDI did much better. In addition, more significant changes in product mix and manufacturing occurred in companies bought by foreign investors. New directors were brought in from the multinational enterprises (MNE), the domestic investors' holdings, from rival companies, or promoted from within. In companies acquired by foreign investors, the comparative advantage for R&D was in the adaptation of products and machinery to local conditions, rather than in innovation.