The Effect of Spatial Proximity on Technology Transfer from TNCs to Local Suppliers in Developing Countries: The Case of AB Volvo in Asia and Latin America

This article contributes to the limited number of studies on how agglomeration and spatial proximity contribute to the establishment of technology linkages between foreign transnational corporations and suppliers in developing countries. We use firm-level data, collected at the bus and truck plants of AB Volvo in Brazil, China, India, and Mexico, to analyze the extent to which “local” suppliers, located near the assembly plants, are in a better position than are other suppliers in the host country to take advantage of the technological assistance that Volvo provides as part of its ongoing business relations. Our analysis shows that many suppliers are provided with technological assistance, related both to “embodied” and “disembodied” forms of technology. Our main finding is that the higher transaction and communication costs that Volvo has to bear when interacting with nonlocal suppliers, compared to local suppliers, only marginally seem to affect the extent to which the suppliers are provided with technological assistance. However, geographic proximity is more crucial for opportunities for the suppliers to absorb external technology. Especially in China and India, but also in Brazil, local suppliers take advantage of their interaction with Volvo to a larger extent than do other suppliers. For many of the smaller domestic companies that make up the dominant share of Volvo’s local suppliers, low transaction and communication costs and the opportunity to interact regularly with Volvo are an important determinant of the successful absorption of external technology.