information problems are more severe and the enforcement of contracts more difficult to achieve. As a result
multinational firms are often seen to establish foreign subsidiaries due to the difficulty of using markets to profit
from the technologies they own.
(ii) Market Power
Owners of new technologies typically have substantial market power resulting from ‘lead time’ and patents and
other IPRs. This necessarily implies that the price of technology will exceed the socially optimal level (i.e.,
marginal cost). While this divergence between price and cost allows innovators to profit from their innovation,
it implies a reduction in the national welfare of those importing technologies at least while the patents remain
valid.
(iii) Externalities
A major share of benefits to recipient countries of technology transfer is likely to arise from uncompensated
spillovers (externalities). Positive spillovers exist whenever technological information is diffused into the wider
economy and the technology provider cannot extract the economic value of that diffusion. Spillovers can arise
from imitation, trade, licensing, FDI and movement of people.
Implications for policy
These market failures imply a potential for policies to increase welfare by encouraging technology transfer. To
be effective, policy must alter the incentives of agents that possess innovative technologies in order to ensure
that they transfer these technologies. In practice this means encouraging the means for transfer - licensing and
arms length trade; and foreign direct investment (FDI).
4.2 Technology licensing
Data on the value of technology flows from Hoekman et al. 5 shows that while high-income countries (in 2001)
account for 72 per cent of FDI flows, they account for 96.7 per cent of royalty flows related to technology
licensing. The remainder is accounted for by upper middle income countries and to a smaller extent lower
middle income countries. Low-income countries are simply not players in the transfer of technology by
licensing. This suggests that FDI may be a more fruitful route.
4.3 Foreign direct investment (FDI)
Sub-Saharan African (SSA) states accounted for 0.8 per cent of FDI flows in 2001, down from 1.2 per cent in
1970. The decrease in FDI flows has seen a concomitant fall in the transfer of technology associated with FDI
flows. This is extremely damaging for SSA countries and has resulted in the deindustrialisation of many of
these states. Rwanda should be at the vanguard of reversing this trend and ensuring that together with FDI
comes technology.
Rwanda now has one of the most open foreign direct investment (FDI) regimes in the region. The laws and
regulations do not place restrictions on FDI entry and establishment or any discrimination on incentives and
facilities enjoyed by local investors. All foreign investments are allowed without screening or restriction of
amount or sector, and foreign investors are granted national treatment for most intents and purposes. The levels
of investment, though relatively small by global standards, have been rising. Net annual FDI inflows averaged
RWF20 billion in 2001-2004 and then ten times that at RWF 225 billion in 2005-2008.
5
Ibid.
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