Multinational corporations as channels for international technology transfer: evidence from the South African innovation survey

In this article, we investigate the importance of South African subsidiaries of foreign multinationals as channels to introduce foreign innovations in the South African market. We use firm-level data from the 2008 wave of the South African Innovation Survey, which covers the period 2005-07. We find that subsidiaries of foreign multinationals are significantly more likely to introduce product and process innovations, as well as foreign new products and processes than domestic firms. However, we also find that they are not more likely to introduce foreign innovations developed in collaboration with or mostly by another firm outside their own multinational, or innovations that are new to the South African market.


Introduction
The introduction of new products and processes is an important source of welfare gains. New products bring about increases in consumer surplus through greater product variety, as argued theoretically in Dixit and Stiglitz (1977). Similarly, new processes imply access to superior technology, which is an engine for productivity growth. Indeed, Jones (1995) finds that cross-country differences in per capita incomes may be largely explained by differences in total factor productivity. In this line, Coe and Helpman (1995) link the international diffusion of technology with international trade, and Mendi (2007) finds evidenceof trade in disembodied technology positively affecting the importing country's total factor productivity. Thus, the process of technological diffusion has very relevant consequences for economic growth. In the particular case of less developed countries (LDCs), the effect may be one of abandoning a situation of underdevelopment and catching-up with more advanced economies.
In view of the positive effects of technological diffusion on growth, a recurrent question in the literature in Economics and Business is the study of the channels and the nature by which international technology diffusion takes place. Among these, transfers of knowledge within multinationals stand out as a potentially relevant candidate.In fact, in a similar way as trade in goods, most trade in disembodied technology takes place within multinational corporations (see BEA, 2013 for US data). Internal transfer of technology are considered to be less problematic than arm's-length transactions, since it is assumed that within a MNC the scope for opportunistic behavior is smaller, especially when knowledge has an important tacit component (Arora, 1996).This paper precisely takes this point andfocuses on the role of multinationals in the process of international technology transfer. Many contributions to the literature have regarded subsidiaries of foreign multinationals as key players in this process of technological diffusion, and for this reason there has been a constant search for evidence consistent with this claim. In a pioneering empirical study, Mansfield and Romeo (1980) analyze the transfer of technology from US-based MNCs to their overseas subsidiaries, focusing on the nature of the technology being transferred and the evaluation of the benefits to the host country. Later studies use survey-level data, typically from OECD countries, to analyze thedeterminants and consequences of firms' innovation activities. For instance, Veugelers (1997), and Veugelers and Cassiman (1999) study the determinants of firms' decisions whether to make or buy technology. In this line, Cassiman and Veugelers (2006) find evidence that there are complementarities between external and internally-developed knowledge.In a contribution closely related with ours, Veugelers and Cassiman (2004) analyze the role of subsidiaries of foreign MNCs as effective channels for the acquisition of foreign technology. They use survey data from the Belgian Community Innovation Survey, to test whether Belgian subsidiaries of foreign MNCs are more likely than domestic firms to transfer technology locally. The authors control for the fact that subsidiaries of foreign MNCs could more easily source technology from other countries, and they find that subsidiaries of foreign MNCs have an easier access to foreign sources of technology but, controlling for access to foreign technology, they are less likely to transfer it locally. Un and Cuervo-Cazurra (2008) compare the performance of Spanish firms and subsidiaries of foreign multinationals in terms of R&D expenditures to find that the latter invest less on R&D than Spanish firms, a result that is driven by lower expenditures on external R&D, not internal R&D.
Positive spillover effects of FDI are what would be expected in the "pipeline" model of technology diffusion most commonly used as a framework for understanding the process by which FDI has a positive effect on a host economy. This model posits that innovation capital and assets are produced at the headquarters of technologically advanced MNCs. The action of foreign subsidiaries of such MNCs is to take the knowledge capital and assets in a relatively unchanged form into the foreign environment. That environment is assumed to be sufficiently different to the more attractive technological culture of the MNC or its subsidiary to the extent that local firms would seek to draw value from interactions with the subsidiary. Such engagement would be successful in generating enhanced economic growth provided the local firms are receptive enough to technology transfer and have the ability to incorporate the enhanced capabilities brought on through its interactions with the foreign subsidiary of the MNC. In this way the foreign subsidiary is seen as a conduit for the transference of innovative capability produced by the head of the MNC. Another mechanism through which the presence of a subsidiary of a foreign MNC could generate economic growth is through a perturbative effect on local firms who would find it necessary to compete harder with the more technologically developed foreign subsidiary thus promoting knowledge growth in local firms that are sufficiently technologically astute. However, under some circumstances, Marin and Bell (2006) argue that evidence for positive effects on the local economy by the presence of foreign subsidiaries of advanced MNCs has not been conclusive and in particular for LDCs such evidence has not been forthcoming at all. Furthermore, studies conducted in a developing economy context have suggested that absorptive capabilities of local firms were not an important constraint on the extent of spillovers. More recently, Marin and Sasidharan (2010) argued for the importance of distinguishing subsidiaries according to their orientation to carry out creative versus exploitation activities in the economy of developing countries. They used an unbalanced panel data approach on manufacturing firm-level data in India to support their view that subsidiaries that are oriented to technologically creative activities have a significantlypositive effect on technology transfer, whereas those engaged in exploitation activities have none and even generate negative effects under some circumstances. Generally for countries outside the OECD, lack of data has been an impediment to the conduction of similar studies. One exception is Oerlemans and Pretorius (2006), which analyzes 2001 South African firm-level data to study the determinants of innovation outcomes. The authors stress the importance of an educated workforce for innovation, although R&D intensity seems not to have a significant impact on innovation, although the effect varies across industries. They also find evidence of foreign-owned firms generating better innovation outcomes. The characterization of innovation in South Africa is that of incremental innovators working in imitation mode. The South African economy has been described as mixed in that it has aspects of developed economies as well as those of less-developed economies, which creates an interesting backdrop for an investigation of the effect of FDI on the host economy.
The third edition of the Oslo manual considers not only technological product and process innovations as the means by which firms seek to gain economic success, but also marketing and organisational innovations. In this paper, we analyzesurvey data conducted according to the Oslo manual recommendations on such surveys from a sample of South African firms that includes local firms and subsidiaries of foreign multinational corporations (MNCs). We exploit the information in the questionnaire regarding the origin of innovations, whether domestic or foreign. We find that subsidiaries of foreign MNCs are indeed more likely than domestic firms not only to innovate but also to introduce innovations originally developed in foreign countries and to generate innovations that have a high novelty value.
In our case, the empirical findings suggest that, in the context of the South African economy, subsidiaries of foreign multinationals act as channels for the introduction of foreign innovations and hence the technologies associated with them. The domestic use of foreign technologies may bring about productivity gains to other domestic firms, as in Blalock and Gertler (2009). In any case, the potential gains from foreign spillovers will greatly depend on the level of absorptive capacity of domestic firms, i.e. their ability to acquire and make use of external knowledge (Zahra and George, 2002), and on their level of engagement with foreign subsidiaries in innovative activities (Marin and Sasidharan, 2010). However, given the available evidence, we cannot claim that our results may be interpreted as direct evidence of the existence of such external effects. Indeed, our results are suggestive of the potential existence of such effects, not a proof of their presence.
The remainder of the paper is organized as follows. Section 2 introduces the hypotheses to be tested using our data. Section 3 describes the data that will be analyzed in Section 4.
Finally, section 5 presents some concluding comments.

Multinationals and the introduction of foreign innovations
This section presents the hypotheses that will be tested using data from the South African Innovation Survey. A question with relevant policy implications is whether subsidiaries of foreign MNCs add to the host country's technological base.In fact, that there are differences in innovativeness between indigenous firms and subsidiaries of foreign multinationals has been the object of study of a large strand of the literature. The fundamental questions are whether multinationals acquire the most efficient firms and what is the effect of foreign acquisitions on innovation performance. In this line, Stiebale and Reize (2011) using data from German firms find a negative effect of foreign acquisitions on the propensity to perform innovative activities and on R&D expenditures of innovative firms. Guadalupe and Kuzmina (2012), using a dataset of Spanish manufacturing firms, find that multinational firms acquire the most efficient firms, and that the effect of foreign acquisition on the introduction of new products and processes.
This leads us to formulate the first hypothesis to be tested: H1: South African subsidiaries of foreign MNCs are more likely to innovate than domestic firms.
From another perspective, the nature of transnational corporations is precisely the transfer of knowledge across national borders. In fact, Kogut and Zander (1993) argue that multinationals arise because of their greater efficiency in transferring knowledge internationally, especially know-how. From this perspective, subsidiaries of foreign MNCs are expected to be more likely to introduce innovations that have been developed elsewhere within the multinational.
H2: South African subsidiaries of foreign MNCs are more likely to introduce innovations developed outside South Africa than domestic firms.
One concern is the fact that the subsidiaries of foreign MNCs are good at transferring innovations developed within the enterprise group, but not other foreign innovations.
However, the very presence of other parts of the multinational in other countries implies a greater exposure to innovations developed outside of the multinational. We hypothesize that this will be translated into a greater propensity to introduce innovations developed in foreign countries, but outside the group of firms.
H3: South African subsidiaries of foreign MNCs are more likely to introduce innovations developed by third parties outside South Africa than domestic firms.
The impact of MNCs on the local economy is considered beneficial when local companies are spawned from interactions or collaborations in joint ventures or public-private partnerships with subsidiaries of technology-and knowledge-rich corporations. Collaborations of SA companies with high-tech foreign subsidiaries would mostly be necessary if it entails the creation of innovations that would be beneficial to both groups. The third edition of the Oslo manual (OECD, 2005) discusses varying degrees of novelty from firm-only innovation, which occurs when a firm implements an innovation which is novel for the unit concerned but that is already implemented in other firmsand industries, to worldwide innovation which occurs when an innovation is delivered to the market for the very first time. We hypothesize that the type of innovations done in collaboration with subsidiaries of MNCs is likely to be of greater novelty to the SA market or the world than those innovations that occur in domestic companies.
H4: South African subsidiaries of foreign MNCs are more likely to contribute to novel innovations than indigenous South African companies.
In order to test these hypotheses, we will use data from the 2008 South African Innovation Survey, which refers to innovation activities in the 2005-07 reference period. This survey was conducted following the recommendations of Eurostat for the Community Innovation Survey, which should allow for a cross-country comparison of innovation activities.

The Data: The South African Innovation Survey
The 2008 South African Innovation Survey was conducted by the Centre for Science  (2011), suggest that the population of South African firms sampled have a high rate of innovationat 65%, comparable with that of firms in OECD countries, although the rate of innovation is observed to be very much sensitive to firm size. We assess here the role of subsidiaries of foreign MNCs as channels for local diffusion of foreign technologies. Table 1 lists the main variables used in the present study. Among these variables, FORINN is an indicator variable that takes value one if the firm introduced an innovationwhether product of process-that was originated abroad during 2005-07, zero otherwise. The indicator for innovation that has been measured prior to the third edition of the Oslo manual is INNOV, which takes value one if the firm introduced either a product or a process innovation during 2005-07, regardless of the origin of that innovation, zero otherwise. The latter variable has been used in many studies of the determinants of innovation activities. However, this is, to the best of our knowledge, the first time the FORINN variable has been used in an analysis of the determinants of innovation. The rest of the variables are similar to those used in related studies. FORSUB is a binary variable that takes value one if the firm is a subsidiary of a foreign  case study approach was taken that utilisedthe raw data arising from the 757 firms collected.
Out of these 757 firms in the sample, 420 introduced at least one product and/or one process innovation in 2005-07. This represents 55% of the total of firms in the sample. 95 of these introduced either a product or a process innovation that was originated abroad (FORINN=1). This is 13% of the firms in the sample, and 23% of innovative firms.

Empirical Analysis
In this section, we describe the econometric analysis that is carried out to test the hypotheses laid out in Section 2, and presents the results obtained. Probit regression results are presented for all industries, as well as conditional on non-services industries (mining and quarrying;manufacturing; electricity, gas and water supply) and services industries (wholesale and retail trade; transport, storage and communication; financial intermediation, computer and related activities, research and development, architectural, engineering and other technical activities).
In order to test the first hypothesis, we estimate a probit model where the dependent variable is ALLINNOVATIVE, and FORSUB is the independent variable. Additionally, we control for industry fixed effects, size, and obstacles to innovation activities (COSTFACTOR, KNOWLEDGEFACTOR, MARKETFACTOR and REASONSFACTOR). Standard errors in brackets and significance level ( * * * significant at 1%, * * significant at 5%, * significant at 10%). Coefficients and standard errors of the six industry dummies are not explicitly reported to save on space. Table 3 presents results from the probit model. Indeed, the effect of FORSUB is positive and significant, suggesting a higher propensity to innovate by subsidiaries of foreign

Table 3. Multinational corporations and innovativeness
MNCs. This confirms our first hypothesis. In the case of the services industries the effect of FORSUB is also positive and significant suggesting a higher propensity to innovate by subsidiaries of foreign MNCs in these industries. Other results are obtained in Table 3. Firstly, the often-stated assertion that the probability of a firm being innovative is strongly and positively associated with firm size is borne out by the large and significant coefficient of  Table 3, when the reasons for unsuccessful innovations were reported to be knowledge-related factors such as lack of qualified personnel, lack of information on technology or markets, and difficulty in finding cooperation partners, this was associated with firms that were likely to be innovative. Also, an absence of a need to innovate as a reason for unsuccessful innovations was reported to be negatively associated with innovative firms, as evidenced by the coefficient of REASONSFACTOR in all three cases.
We now turn our attention to the comparison between local firms and subsidiaries of   Standard errors in brackets and significance level ( * * * significant at 1%, * * significant at 5%, * significant at 10%). Coefficients and standard errors of the six industry dummies are not explicitly reported to save on space.
The coefficient of FORSUB is not significant in any of the cases. Interestingly, the results hint at foreign subsidiaries with internal R&D activity having a propensity not to introduce innovations originating outside South Africa, since the coefficient of the interaction term FORSUB*RDINTENSITY is negative and significant.
Finally, we consider the fourth hypothesis expressed. In order to do this, we repeat the previous analyses but use an indicator of the novelty value of the innovation as dependent variable. Like in the previous situations, the nature of the variable calls for correction for sample selection with ALLINNOVATIVE being the selection variable as before. Subsidiaries of multinationals are expected to be able to draw more easily on the innovative processes and practices of their parent companies, and thus transfer foreign technology of a nature that is new to the SA market at the very least. Therefore, we expect a positive relationship between a firm being a subsidiary of a foreign MNC and the probability that the firm introduces a product or process innovation that is of high novelty value, at least in South Africa. The estimated coefficients are displayed in Table 6. Standard errors in brackets and significance level ( * * * significant at 1%, * * significant at 5%, * significant at 10%). Coefficients and standard errors of the six industry dummies are not explicitly reported to save on space.
The significant and positive coefficient for RDINTENSITY indicates that R&Dintensive firms in the overall sample contribute positively to the propensity for innovation that is new to the South African market or the world. Thus, the introduction of innovations that are new to the market seems to be mainly driven by the firms' internal capabilities. On the other hand, the coefficient on FORSUB is found to be statistically insignificant in all four specifications. Furthermore, the coefficient on the interaction term is negative and statistically significant in specifications (i), (ii) and (iv). This suggests that internal capabilities are not as important for subsidiaries of foreign multinationals, which implies that these firms are simply transferring already-developed technologies without much contribution from the local subsidiary. Therefore, we do not find evidence of subsidiaries of foreign multinationals being significantly more active than local firms in the introduction of technologies that are new to the South African market.

Conclusions
This paper has analyzed the innovative activities of South African subsidiaries of foreign multinationals, in comparison with indigenous firms. We found that subsidiaries of foreign multinationals are more likely to be innovative, and also more likely to introduce innovations that have a foreign origin. However, they are not more likely to introduce foreign innovations developed mostly by another firm outside its own multinational, or innovations that are new to the South African market. These results suggest that South African subsidiaries of foreign multinationals specialize in the transfer of technologies developed within its own multinational, and show no particular advantage in transferring foreign technologies developed by third parties. Furthermore, internal R&D capability has a positive effect on the novelty level of innovations mostly due to the activities of domestic firms, since the activities of subsidiaries of foreign multinationals that have R&D expenditure impact negatively on the propensity for novel innovations.