Methodological and Technological Issues in Technology Transfer

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4.8.2 Managing contractual, property and regulatory risks

Three broad types of legal risk are likely to influence decisions to invest in advanced environmental technologies by foreign and domestic actors. Contract risk refers to the likelihood and costs of enforcing legal obligations with suppliers, partners, distributors, managers, labour forces, construction organisations or licensors (Lubman, 1998)]. Property risks refer both to more familiar risks associated with expropriation or other interference with asset ownership and to less visible, but essential questions of corporate governance including public shareholder rights that determine how decision making within the firm is divided or competition law which determines whether companies will be able to operate in open markets (Black et al., 1999; Black, 1999). Clear property rights permit the evaluation of local companies, ownership of essential project assets including land, and outstanding or potential liabilities that determine the ability of firms to raise capital from banks and securities markets. Also essential are bankruptcy and commercial laws concerning security interests that allow creditors to know with relative certainty their rights versus other classes of creditors. Regulatory risk arises from the behaviour of public administrations which influence economic returns through licensing, tariff setting, taxation, and foreign exchange and trade controls (Corne, 1997). Well developed administrative law assures private actors relatively prompt and articulated regulatory decisions, an absence of excessive corruption, and coordination between multiple agencies with regulatory responsibilities. In addition, administrative processes can enhance investment by ensuring inclusive participation in regulatory policy making, transparent rules, and accessible independent review of regulations. Regulatory reform can also reduce impediments to the development of service sector organisations in law, accounting, business consulting, market evaluation, or investment rating that are important complements to foreign direct investments.

Different nations have used their laws to select the mechanisms through which private technology transfers have occurred. During its high growth years, Japan limited foreign direct investment by regulation and constrained equipment imports through foreign exchange controls. Technology licensing was encouraged by strong domestic IPR and contract enforcement. Taiwan made greater use of equipment imports through special processing zones and tax reductions. More recently, the People's Republic of China has favoured foreign direct investment of advanced technology industry with special economic incentives, while its technology licensing market is weakened by poor enforcement of the law (Oksenberg et. al., 1996). While there are no agreed propositions that the legal privileging of any particular mechanisms of private technology transfer is superior, there is coincidental evidence that the failure of a national system to manage legal risk can have unexpected consequences for technology development. Where capital assets are not secure, it is possible to discern concentrations of labour intensive production facilities that minimise risks of gradual expropriation (Huang, 1998). When the law does not afford certainty through the courts, there are incentives to engage in corruption to substitute personal and regulatory influence for contracts (Rose-Ackerman, 1996). When open and competitive markets are not assured, it is more likely firms will seek joint venture partners who retain monopoly power, and whose value they will then strive to protect. When IPRs are weak, obsolescing technologies will be more prevalent. In sum, to the extent that domestic legal institutions are deficient in managing contractual, property and regulatory risks, there will be incentives to distort technology choices and supporting financial flows in ways that discourage rapid international diffusion of ESTs.

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