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FIRM LEVEL TECHNOLOGICAL

CAPABILITY BUILDING
by
Roger D. Posadas, Ph.D.
January 2006

APPROACHES TO TECHNOLOGICAL
CAPABILITIES:

LINEAR MODEL
TECHNOLOGICAL CAPABILITY BUILDING
(TCB) APPROACH

DYNAMIC CAPABILITIES APPROACH

THE LINEAR MODEL


Lall (1987, 1992) gives a hierarchy of technological capabilities and
suggests that firms move through these four levels. This is the LINEAR
VIEW OF TECHNOLOGICAL CAPABILITY DEVELOPMENT:
OPERATIONAL (Basic Level) --- Ability to manage/operate production
facility designed and built by foreign
firm.
DUPLICATIVE (Intermediate) --- Ability to expand output without further
foreign assistance.
ADAPTIVE (Self-Reliant)

--- Ability to adapt product design or


reengineer production processes

INNOVATIVE (Advanced)

--- Ability to develop next generation


system.

The linear approach to technological capability development can be


characterized as follows:

The linear approach assumes that LDC firms have an inevitable or


increasing desire to move up the technology ladder.

The linear approach has misdirected policy efforts toward ways by


which LDC firms can gain access to higher stages of technological
capabilities rather than on providing mutual benefits to parties in
technology transfer.

The linear approach offers little insight into how LDC firms can move
up the technology ladder.

The linear approach suggests that the involvement of foreign


partners is detrimental to the accumulation of more advanced
capabilities rather than an input to that process.

The linear approach does not adequately deal with variation in the
ability of firms to manage.

THE TCB APPROACH


TECHNOLOGICAL CAPABILITY BUILDING (TCB): The process of
assembling or accumulating technological capabilities. It is an
investment activity which is not linear, sequential or orderly and which is
not overly influenced by exogenous or contextual factors.
TCB SYSTEMS: The set of integrated processes and mechanisms that are
used by firms to build technological capabilities over time. A firms TCB
system consists of five components:
1. allocation of financial resources
2. management practices, systems and decision-making rules
3. practices to establish and maintain facilitating leadership and
organizational culture
4. accessing external technology capability resources from suppliers
5. accessing technology capability resources from the innovation
system (local and global)

The TCB approach is a non-linear process of technology acquisition in


which the balance of interest between suppliers and buyers of
technological inputs is ever changing. The TCB approach

recognizes that, for the majority of the LDC firms, importation of


technological inputs is a major source of capability development.

emphasizes the need to balance indigenous capacity development with


the importation of know-how.

assumes that firms which have developed capabilities to manage and


process change and learning (i.e., absorptive capacities) will be more
adept at acquiring technological inputs from external sources.

considers the technology acquisition process as a boundary relationship


in which LDC firms exercise constrained agency, i.e., LDC firms are
not completely passive actors at the mercy of TNCs but are also not fully
in control of the extent to which they can maximize capability
development objectives.

provides a detailed analysis of the conditions and industry specific


factors that influence the acquisition of different types of capabilities.

Studies of technology transfer suggest that firms which have been able to
manage technology acquisition successfully incorporated the following:

Training and learning components in technology transfer agreement with


an explicit focus on acquiring design and engineering capabilities.

Sponsoring overseas graduate training and work experience for


engineers and managers.

Establishing knowledge acquiring operations such as R&D centers or


overseas technological learning outposts.

Management practices, corporate culture, and leadership styles


facilitating the success of technology importation and local capability
development.

Concentration on a wider range of activities than those associated with


passive importation of technological inputs.

Bell and Pavitt (1993, 1997) show that

LDC firms which develop effective systems for importing


foreign technologies do so in combination with efforts to
develop local technologies and to build technological
capability.

an ideal process of technological capability development


by LDC firms involves a complementary balance between
technology imports and local technology accumulation.

technological capability development by LDC firms may


involve intensive efforts to improve and develop what is
initially acquired or more passive adaptation/minor
modification of imported inputs

THE DYNAMIC CAPABILITIES APPROACH


According to John Matthews (1998), the latecomer firm (LCF)
acquires capabilities through resource leverage or leverage of
external technologies and knowledge:

It looks to the wider world for sources of technology, knowledge,


and market access.

It secures a foothold in the worlds production chains by securing


access to these resources through, for example, low-cost
contract manufacturing.

it is then able to use this foothold to leverage further resources


and turn them into further capabilities, gradually increasing the
quality and reliability of production, and the range of functional
capabilities.

THREE ESSENTIAL FACTORS OR CONDITIONS FOR


SUCCESSFUL RESOURCE LEVERAGE BY LCFs:

ABSORPTIVE CAPACITY --------- a firms capability to capture, absorb and


exploit leverage resources such as product
and process technologies as well as tacit
and explicit knowledge.

COMBINATIVE CAPABILITIES ---- a firms organizational capacity to generate


new applications for existing knowledge by
assembling, mixing and matching, and
adapting externally acquired technologies for
its own catch-up efforts.

SUPPORTING INSTITUTIONAL ---- the system of public institutions and interFRAMEWORK


organizational superstructures which
accelerates and guides ICF learning and
provides the conditions in which the process
of learning and leverage can be applied,
over and over again, each time at higher
levels of technological and organizational
capability.

In Korea and Taiwan, the institutional framework ushered the newly


created semiconductor industry through four phases:

Preparation

----------

laying the groundwork in terms of basic


skills

Seeding

-----------

leveraging the targeted technology

Propagation

-----------

diffusion of capabilities to as many firms


as possible

Sustainability

-----------

deepening the roots of capabilities


through R&D expenditures, globalization
of production and marketing, and
alliance with advanced firms

The whole process of leverage and learning within its institutional setting can
be termed developmental resource leverage and depicted as a spiral of
expanding capabilities, with each iteration serving as the platform for the next

Sustainability
Propagation
Seeding
Preparation

EXANDING CORE OF TECHNOLOGICAL CAPABILITY


Source: Matthews and Cho (1998)

The developmental resource leverage depicts the LCF as acquiring


dynamic capabilities through iterated episodes of knowledge
leverage, each one of which deepens and sustains absorptive
capacities and combinative capabilities. The dynamic capabilities
perspective

focuses not only on the exploitation of existing internal and


external firm-specific capabilities but also on developing new
ones.

is concerned with the specifics of how some organizations first


develop firm-specific capabilities and how they renew
competences to respond to shifts in the business environment.

implies that a firm is involved in choosing among and committing


to long-term paths or trajectories of competence development.

An LCFs Strategic Targeting of Resources to Leverage


If resource leverage is the principal vehicle through which the LCF converts
its initial disadvantages into sources of advantage, how should it make its
strategic choices or targeting? The LCF will have to target resources which
are most amenable to leverage. Specifically. the LCF will target resources
which are:

imitable

----------

substitutable

----------- susceptible to technological overthrow


and replacement

transferable

----------- easily transferred as explicit technical


knowledge, available through
consultants or on the open market in the
form of specialized equipment

most easily imitated (through reverse


engineering, for example)

THE LCF TARGETS RESOURCES FOR LEVERAGE WHICH ARE MOST


IMITABLE, SUBSTITUTABLE, AND TRANSFERABLE

The conditions faced by LCFs which seek to enter advanced


technology industries through leverage and learning are the same
as the conditions faced by high-tech firms engaged in
hypercompetition, where

firms are being forced to destroy their own sources of competitive


advantage and to create new ones; they cannibalize their own
leading products or brands before they have run the full course of
the traditional product life cycle.

entry barriers are having less salience as technological change


sweeps aside such barriers through Schumpeterian substitution.

firms are increasingly adopting a strategy of acquiring


competences as insurance in order to deal with unpredictable
events, as opposed to planning product and market sequences in
logical progression.

FACTORS BEHIND LCF SUCCESS


Traditionally, firms try to acquire sustainable competitive
advantage through the prolongation of monopoly rents and
avoidance of competition.
In contrast, the LCF does not seek permanent sustainable
competitive advantages but rather analyzes the world in terms of
its potential for appropriability, imitation, and transfer. The LCF
embraces competition via the promotion of diffusion as well as
collaborative advantage through resource leverage.
LCF success can be accounted for by this combination of
competitive and collaborative capabilities built up through a
process of leverage and learning.

- End of Lecture Presentation -