Technology Gap and International Knowledge Transfer: New Evidence from the Operations of Multinational Corporations

Multinational corporations have long been recognized as both major creators of technology and as conduits of technology transfer. Technology transfer can happen directly, when the affiliate licenses the technology from the parent, or indirectly, when the affiliate imports intermediate goods with embodied technology. This paper estimates the effect of the affiliates’ productivity relative to the frontier—the technology gap—on the choice of licensing the technology or importing it through intermediate goods. A novel measure of multinational technology transfer is employed using data on technology licensing payments versus imports from U.S. multinationals across many countries and industries. The main finding of this paper is that a large technology gap of an affiliate favors indirect knowledge transfer through imports. On average, a 10% increase in the technology gap decreases the share of licensing versus importing inputs embodying the technology by 1.5%. Considering that access to ideas and generation of new ones are crucial for long-run economic growth, and convergence of a country, this study highlights the policy implications for countries to raise their productivity levels.