When do technology transfer policies work? Exploring the Indonesian case

Abstract

Technology is a source of value generation, growth, and competitiveness. Developing countries have long tried to tap into the technologies flowing through the global value chains (GVCs) by welcoming foreign direct investment (FDI). FDI is still believed to provide the best access to technologies and the post-COVID GVC reconfiguration creates new opportunities to become a host. However, the extant literature shows that finding the right policy mix to attract FDI and capture their technologies can be elusive. Incentives to draw FDI inward often clash with industrial policies stipulating localisation. Outward FDI to acquire technology can also cause friction between host and home countries. This thesis argues that ignoring these policy trade-offs can inhibit technology transfer from GVCs and that building absorptive capacity minimises this risk. As such, it proposes a technology transfer theoretical framework that highlights the foundational role of absorptive capacity within the inward and outward access channels. This framework is empirically tested on Indonesia, a developing country that is undertaking multiple policy reforms to become a technologically advanced, high-income economy by 2045. The reforms create a variety of investment and industrial policies that focus on localising MNE activities, often coercively. Examining these policies through semi-structured interviews, regression analysis, video and document analysis, and text frequency analysis confirms the dangers of pursuing technology transfer without preparing sufficient absorptive capacity. Weak absorptive capacity makes a host location unattractive to MNEs and encumbers outward engagement as well. Drawing from these insights, this thesis proposes several alternative policies that Indonesia might pursue, focusing on the development of absorptive capacity. This research contributes to the academic and policy discourse by offering a new perspective on technology transfer policies, one that calls for minimising access obstruction and maximising absorption opportunities. By building a strong foundation of absorptive capacity, developing countries have a higher chance of securing the technologies they need to support their economic development.