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. 11