Technology Transfer to the Middle East

September 1984

NTIS order #PB85-127744

Recommended Citation:Technology Transfer to the Middle East (Washington, D. C.: U.S. Congress, Officeof Technology Assessment, OTA-l SC-173, September 1984).

Library of Congress Catalog Card Number 84-601109

For sale by the Superintendent of DocumentsU.S. Government Printing Office, Washington, D.C. 20402

Foreword

This assessment was undertaken in response to requests of the House Com-mittee on Science and Technology and the Senate Committee on Banking, Hous-ing, and Urban Affairs to examine technology trade and transfer to developingcountries in the Middle East. In addition, the Subcommittee on Energy, NuclearNonproliferation, and Governmental Processes of the Senate Committee on Gov-ernmental Affairs requested that the assessment examine transfers of nuclear tech-nology.

This report clarifies the policy issues surrounding technology transfer todeveloping countries, by highlighting tradeoffs among various commercial, po-litical, and development assistance policy goals, and by suggesting options formore consistent policies affecting technology transfer to developing countries. Itfollows earlier OTA work dealing with East-West technology transfer, includingassessments of East-West Technology Trade and Technology and Soviet EnergyAvailability.

The study focuses on a region of great strategic importance, one where signifi-cant development efforts during the past decade have involved the introductionof technology from the United States and other supplier countries. It examinesin detail competition among suppliers of technology, and problems the recipientsface in effectively utilizing advanced civilian technologies in five sectors: petro-chemical production, telecommunications systems, commercial aircraft supportsystems, medical services, and nuclear power. The policy perspectives of the recip-ient as well as other supplier countries and evaluated. The report identifies U.S.policy options in light of an evaluation of future prospects for Middle East tech-nology trade.

OTA is grateful for the assistance of its distinguished project advisory panelchaired by George Bugliarello, and for the assistance and advice of numerous Mid-dle Eastern policy makers, agencies of the U.S. Government, and individuals fromacademia and industry. It should be understood, however, that OTA assumes fullresponsibility for the report, which does not necessarily represent the views ofindividual members of the advisory panel.

Director

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Technology Transfer to the Middle East Advisory Panel

George Bugliarello, ChairmanPolytechnic Institute of New York

Fouad AjamiJohns Hopkins University

J. S. DanaSouth Hampton Refining Co.

Farouk El-BazItek Optical Systems

Ragaei El-MallakhUniversity of Colorado

James A. FinneranM. W. Kellogg Co.

Eric GlasscottTelephone & General Services, Inc.

Carl N. Hodges*University of Arizona

Gary HufbauerInstitute for International Economics

J. C. HurewitzColumbia University

Charles IssawiPrinceton University

T. R. McLindenTransworld Airlines

Joseph NyeHarvard University

Anthony PascalRAND Corp.William H. PickeringPickering Asssociates COrp.

William B. QuandtThe Brookings Institution

Joseph J. SiscoSisco Associates

Joseph S. SzyliowiczUniversity of Denver

Theodore B. TaylorAppropriate Solar Technology Institute

William L. WeirichHospital Corp. of America

Samuel F. Wells, Jr.The Smithsonian Institution

● Ex officio member from OTA Technology Assessment Council.

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members. The viewsexpressed in this OTA report, however, are the sole responsibility of the Office of Technology Assessment.

iv

OTA Technology Transfer to the Middle East Project Staff

Lionel S. Johns, Assistant Director, OTAEnergy, Materials, and International Security Division

Peter Sharfman, International Security and Commerce Program Manager

Martha Caldwell Harris, Project Director

Douglas L. Adkins Eric Bazques Nancy Lubin

Daniel Kevin*

Administrative Staff

Jannie Coles Dottie Richroath Jackie Robinson

Project Contractors

Riad AjamiBooz-Allen & Hamilton, Inc.Nazli ChoucriChem SystemsConsultants for Industry and TradeDevelopment Decisions, Inc.

Thomas IlgenPeter KnaussThe Futures GroupMassachusetts Institute of TechnologyT. J. PempelT. I.E.-West Corp.Tagi Sugafi-nejad

● Contributor

Acknowledgments

This report was prepared by the staff of the International Security and Commerce Pro-gram of the Office of Technology Assessment. The staff wishes to acknowledge the con-tributions of the following individuals, Government agencies, and organizations for theirgenerous assistance:

Agency for International DevelopmentCentral Intelligence AgencyCongressional Research ServiceDepartment of CommerceWarren DonnellyEmbassy of EgyptDepartment of EnergyFereidun FesharakiThomas GrahamDavid Isaak

OTA Reviewers

Embassy of KuwaitThe Middle East InstituteMarvin MillerEmbassy of Saudi ArabiaClive SinclairDepartment of StateTransnational GroupRichard WilsonVahan Zanoyan

John Alic Audrey Buyrn Larry Jenney Richard Rowberg Chuck WilkThomas Bull Alan Crane Gordon Law Jane Sisk Ray Williamson

Contents

Chapter Page

l. Summary and Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2. Analyzing Technology Trade and Transfer: Conceptual Issuesand Policy Choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

3. The Middle East as a Context for Technology Transfer . . . . . . 55

4. Technology Trade With the Middle East. . . . . . . . . . . . . . . . . . . . . . . . . 89

5. Petrochemical Technology Transfers . . . . . . 119

6. Telecommunications Technology Transfers 185

7. Technology Transfers in Commercial Aircraft Support Systems 247

8. Technology Transfers in Medical Services. . . . 303

9. Nuclear Technology Transfers. . . . . . . . . . . . . . . 351

10. Patterns in Technology Transfer: Impacts and Experiences. . . 403

11. Recipient Country Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425

12. Policies of Other Supplier Countries. . . . . . . 473

13. U.S. Policies Affecting Technology Trade and Transfer . . 521

14. Future Prospects for Technology Trade. . . . . . . . . . . . . . . . . . . . . . 563

15. Options for U.S. Policies Affecting Technology Transfer . . . 581

Appendix Page

A. Selected Medical Services Projects in the Middle East . . . . . . . . . 597B. Selected Names and Acronyms . . . . . . . . . . . . . . . . . . ., 603

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 607

Vii

CHAPTER 1

Summary and Findings

Contents

PageINTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

PRINCIPAL FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Technology Transfer and Trade During the Past Decade . . . . . . . . . . . . . . 4Technology Transfer: Competition Among Suppliers and

Technology Absorption, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

POLICIES AFFECTING TECHNOLOGY TRANSFER . . . . . . . . . . . . . . 11

Recipient Country Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Policies of Other Supplier Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12U.S. Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. . . . . . . . . . . . . . . 13

FUTURE PROSPECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Prospects for U.S. Technology Trade With the Middle East . . . . . . . . . . . 14Options for U.S. Policies Affecting Technology Transfer . . . . . . . . . . . . . 15

Figures

Figure No. PageI. Supplier Shares of Six Industrial Countries in Machinery and

Equipment Exports to the Middle East, 1970 and 1982 . . . . . . . . . . . . . 52. Summary of Findings: Technology Absorption in the

Middle East, 1984. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

CHAPTER 1

Summary and Findings—.—

I N T R O D U C T I O N

During the 1970’s, the Middle East was theworld fastest growing market for engineer-ing products, construction, and technical serv-ices. Rising oil revenues supplied the oil-producing nations in particular with the finan-cial resources needed to purchase these im-ports. At no other time in recent history hasa group of developing nations attempted soquickly and dramatically to transform theireconomies and societies as did the Islamic na-tions of the Middle East during this period.The experiences of these nations, which havebeen in a unique position to import advancedtechnologies from abroad, elucidate the prom-ise and problems of technology transfer to de-veloping nations.

U. S. firms and organizations have been ma-jor suppliers of engineering products and tech-nical services to the Middle East, and thisraises important issues for U.S. policy. Theseinclude questions concerning the competitivepositions of U.S. firms in developing countrymarkets, the long-term effects of technologytransfers on the growth of export industriesabroad, the effectiveness of U.S. Government-supported assistance programs involving tech-nology transfers, and the military-strategicimplications of advanced civilian transfers.The U.S. Government has no coherent policygoverning technology transfer to developingnations, and there has been no systematicstudy of the policy implications of civiliantechnology transfer to the Middle East. TheOffice of Technology Assessment (OTA) re-search was designed to clarify U.S. policyissues germane to civilian technology trans-fers to Islamic countries in the Middle East. *

*The research focuses on six Middle Eastern nations: Algeria,Egypt, Iran, Iraq, Kuwait, and Saudi Arabia. These countrieswere selected because they have imported comparatively largevolumes of equipment and technical services, because they havevaried financial resources and labor forces to support technol-ogy transfer, and because they have different approaches toforeign policy and industrial development. Because Israel has

Recipient and supplier nations alike havecritical interests at stake in technology trans-fer. As a process that enhances the recipient’scapacity to produce goods and services, tech-nology transfer is a two-way interaction. Fordeveloping countries, successful technologytransfers promise economic growth, improvedliving conditions, manpower development, andeven enhanced national prestige and influence.However, technology transfers that fail orhave unintended consequences may pose eco-nomic and political problems. From the per-spective of supplier nations, technology trans-fers may help win friends, cement politicalalliances, increase exports, or alternativelylead to resentment and conflicts of interest.The promises of success and problems of fail-ure are particularly apparent when new andcomplex technologies are introduced into de-veloping nations that have limited scientificand technological infrastructures.

This study, undertaken at the request of theHouse Committee on Science and Technologyand the Senate Committee on Banking, Hous-ing, and Urban Affairs, examines the processof technology transfer to the Middle East(focusing particularly on competition amongsuppliers and absorption of technology by re-cipients) in order to identify policy issues forthe United States. The Subcommittee on En-ergy, Nuclear Nonproliferation, and Govern-mental Processes of the Senate Committee onGovernmental Affairs presented a supportingrequest that the study deal with transfers ofnuclear technology to the Middle East.

———— .attained a much higher level of technological development, itis not included as a major focus of study.

The term “Islamic countries” is used here simply to indicatethat sizable proportions of the populations of these and someother Middle Eastern countries are Muslims, or followers ofIslam. As discussed in ch. 3, however, there are many groupsin these countries and the role of Islam in politics, economics,and social affairs varies widely.

3

4 . Technology Transfer to the Middle East

The study examines technology transfers required for the establishment of several com-plex civilian production and service systems:petrochemical and nuclear power productionfacilities, telecommunications systems, com-mercial airline support services, and medicalservices. These types of technology transferswere selected because they are associated withlarge volumes of trade in equipment and tech-nical services, because of the challenges recip-ients face in fully utilizing them, and becausein recent years U.S. policies have restricted ex-ports of advanced technologies for politicaland military reasons. This study addresses thefollowing questions concerning advanced tech-nology transfers:

●

●

How extensive have transfers of ad-vanced technologies been to the MiddleEast during the last decade, and whatfactors affect international technologytrade?What factors inhibit or enhance the abil-ity of recipients to utilize or absorb ad-

P R I N C I P A L

T E C H N O L O G Y T R A N S F E RA N D T R A D E D U R I N G T H E

P A S T D E C A D E

During the past decade, Middle Eastern coun-tries have rapidly expanded their imports of ad-vanced civilian equipment and technologies. Themajor suppliers have been the United States, Ja-pan, and the West European countries. Total ex-ports from industrial countries to 15 Islamiccountries in the Middle East rose from $5.5billion in 1970 to about $100 billion in 1982,an eightfold increase in constant dollars. En-gineering products—machinery, equipment,and instruments-accounted for about half ofthese exports. Technical and managerial serv-ices have been increasingly important exports.

The Middle East is a very competitive mar-ketplace, and suppliers have specialized in ex-ports of certain types. U.S. firms have beenmajor suppliers of machinery and equipment,particularly nonelectrical machinery and air-

vanced technologies, and do the experi-ences of various nations differ?How effectively have U.S. firms and orga-nizations transferred technology, and howwell have they competed with those orga-nizations from other supplier nations?What are the prospects for technologytrade with the-Middle East during thenext decade, and what policy options areavailable to the United States?

Many U.S. policies affect technology trans-fer to developing nations in the Middle East,although these policies were not formulatedwith that goal. Technology transfer is oftenan underlying issue in discussions of develop-ment assistance, commercial, and political-strategic policies. Public policy debates, how-ever, rarely center on civilian technologytransfer. This study addresses the issue ofwhether the United States should developmore consistent policies regarding technologytransfer.

F I N D I N G S

craft. Like the United States, West Germanyand Japan have been major suppliers of ma-chinery and equipment, but Japanese firmshave been prominent in exports of basic man-ufactures such as consumer electronics anddominate in exports of road vehicles. In con-trast, French firms have been particularlyprominent in public works projects. U.S. firmsappear to have had a comparative advantage inthe technical services area, including manage-ment of large projects and provision of techni-cal support. For newly industrializing coun-tries such as South Korea, the Middle East isa key market for construction services. Sovietbloc countries have been much less prominentin commercial technology trade, but some ofthem have expanded sales in certain marketniches such as medical services.

In 1982, the market share of U.S. firms re-mained approximately the same as it had beenin 1970, 20 percent of machinery and equipmentimports to the Middle East (see fig. 1). In con-

Ch 1—Summary and Findngs ● 5——.———— . —

trast, Japanese firms increased their marketshare during the same period from 9 to 23 per-cent, while France’s market share fell from 18to 9 percent. U.S. economic interactions withthe region have, furthermore, been stronglyconcentrated in trade with a small number ofnations. Exports to Saudi Arabia and Egyptaccounted for more than two-thirds of U.S. ex-ports to the region in 1982.

Although Middle East technology trade hasincreased rapidly, OTA’s research indicates thattechnology transfers have been limited. For thepurpose of this study, technology transfer isa process involving a supplier and recipientwhereby the recipient attains, as a result, animproved capability to operate an industrialproduction facility or service system. Technol-

ogy trade, which includes international salesof industrial rights, equipment, technical serv-ices and training, and plans and documents,is only one part of technology transfer. Tech-nology utilization or absorption by the recip-ient is a critical part of technology transfer.The extent of absorption depends on the typeof capability developed by indigenous person-nel in a particular firm or industrial sector—to operate and maintain equipment or, at high-er levels, to modify the technology or designand produce new products. OTA’s researchshows that technology is much more easilytraded internationally than it is absorbed byrecipients in developing countries.

In the Middle East a number of factors con-strain technology absorption. They all relateto the considerable technological distance that

Figure 1 .—Supplier Shares of Six Industrial Countries in Machinery and Equipment Exportsb

to the Middle East,c 1970 and 1982 (percent)

United

1970

Total value: $2.2 billiond United

1982

Total value: $42 billiond

Italy

United States

Kingdom9

Japan

France

West Germany

6 ● Technology Transfer to the Middle East

must be bridged between the suppliers and therecipients. Chief among them is a disparity between human and financial resources. Coun-tries such as Saudi Arabia and Kuwait, despitetheir capital resources, are constrained byshortages of technical and managerial person-nel. In contrast, Egypt is the Middle Easterncountry with the most extensive technologi-cal infrastructure, but many Egyptian engi-neers and teachers have gone abroad to findwork. In addition, the Islamic countries of theMiddle East are challenged to use foreign tech-nologies and personnel in meeting develop-ment goals without creating irreconcilable con-flicts with traditions and among groups intheir societies.

T E C H N O L O G Y T R A N S F E R :COMPETITION AMONG

SUPPLIERS AND TECHNOLOGYABSORPTION

OTA’s analysis of competition among sup-pliers for sales of advanced technologies indi-cates that a broad array of factors has influ-enced contract awards. In addition to price,the willingness of firms to provide state-of-theart technologies, after-the-sale service, andtraining, as well as marketing strategies havebeen particularly important. While they havenot determined overall patterns of technologytrade, supplier government policies involvingexport financing, export controls, and repre-sentation of business have also been importantfactors in some cases.

To assess the extent of technology absorp-tion, OTA’s research focused on the technol-ogy-using firms and industrial sectors. The ex-periences of suppliers and recipients in varioustypes of technology transfers were found todiffer widely.

Petrochemical Production

Middle Eastern countries such as SaudiArabia are currently expanding their petro-chemical production facilities so that by the1990’s they will be producing approximately4 percent of all major commodity petrochem-icals manufactured worldwide, and their ex-

ports in these products will account for 20percent of worldwide trade. Petrochemicaltechnology transfers contribute to the growthof an important Middle Eastern export in-dustry.

Middle Eastern countries building petro-chemical industries (Saudi Arabia Kuwait,Qatar, Algeria, Bahrain) have financed thesecapital-intensive projects themselves. How-ever, they remain dependent on foreign tech-nical assistance, even though the technologyhas become fairly standardized. U.S. firms arecurrently playing major roles as joint venturepartners, licensers of technology, and con-tractors—particularly in Saudi Arabia, wherejoint ventures have been promoted. The qual-ity of technology offered has been a major con-sideration for Middle Eastern countries intheir awards of contracts to foreign firms.Kuwait, alone, has attempted to obtain petro-chemical technology extensively through pur-chases of equity ownership in foreign firms.

Petrochemical technology is transferred toMiddle Eastern countries in packages. Thistype of technology transfer allows recipientsto operate the facilities efficiently by relyingextensively on expatriate managers and tech-nicians. Over the long run, maintenance of thefacilities and development of a skilled manpowerbase will be key issues for Middle Eastern petro-chemical firms. Nevertheless, Middle Easternnations will become world-scale producers in the1990’s. Certain aspects of petrochemical pro-duction, such as comparatively low manpowerrequirements, capital intensity, and feedstockrequirements, make it particularly well-suitedto development in the countries bordering thePersian Gulf.

During the late 1980’s, additions to petro-chemical production capacity in the MiddleEast, Canada, Mexico, and Southeast Asia willhave significant effects on global petrochem-ical product trade. Firms in western Canadaand Mexico are more likely to make significantinroads in U.S. petrochemical markets thanMiddle Eastern manufacturers. While theUnited States will probably become a net im-porter of ethylene glycol and methanol by1990, the U.S. petrochemical industry can re-main strong, if production of specialty (and sec-

Ch. 1—Summary and Findings ● 7—.———— — .

end-tier) chemicals becomes relatively moreimportant. The impacts of these changes onemployment in the United States should beminimal, since U.S. firms will continue tosupply a large domestic market.

Petrochemical technology transfers to theMiddle East therefore portend problems ofstructural adjustment for the industrializedcountries, which will be particularly acute forJapan and Western Europe. It is unlikely thateven a decline in the price of crude oil to aslow as $25 per barrel would have a significanteffect on the growth of the Middle Eastern pe-trochemical industry. A major problem in-volves the possible growth of protectionistbarriers in Western Europe, which could bestimulated if Middle Eastern manufacturerssharply reduce prices to gain market shares.If U.S. manufacturers emphasize production ofspecialty and second-tier chemicals, improve ef-ficiency of operations and invest in research anddevelopment (R&D), they should be in a positionto adjust to these anticipated changes in worldmarkets.

Telecommunications Systems

Telecommunications systems are importantcomponents of the national infrastructureneeded for the growth of other industries andservices. Technology absorption has been en-hanced by the high priority placed on the de-velopment of this sector by Middle Easterngovernments, by rapidly growing demand forservices, by opportunities for regional coop-eration, and by local production of equipmentin Algeria and Egypt. On the other hand, in-consistent policies, shortages of indigenoustechnical workers in Saudi Arabia and Kuwait,and, in Egypt, inadequate incentives for tech-nical personnel working primarily in govern-ment-owned telecommunications networkshave limited absorption.

Competition among suppliers has been in-tense. Japanese firms have gained marketshare in telecommunications exports. Exportsfrom the United States have been primarilyin advanced technology subsectors, such assatellite communications, and they have been

strongly concentrated in Saudi Arabia andprerevolutionary Iran. Since the major sup-pliers are now on a technological par in tele-communications, other factors have influencedcontract awards. These include the ability ofsuppliers to provide comprehensive financing,as well as their reputation as reliable suppliers,their commitment to after-the-sale support,and the involvement of a firm at an early stageof a project when initial equipment selectionsare made. Although U.S. firms maintain areputation for technical capability, the abilityof firms from Western Europe and Japan to puttogether comprehensive financing packages,sometimes including associated business deals,has been an advantage for them in some in-stances. U.S. Government financing, however,has supported telecommunications technologytransfers to Egypt and Algeria.

Commercial Aircraft Support Services

Compared to other types of technologytransfers examined by OTA, the most exten-sive technology absorption has been in thearea of commercial aircraft support services.The operating statistics of these airlines (in-cluding safety) indicate that they are on a parwith major international airlines. The compara-tive success of recipients in using these technol-ogies can be ascribed to a number of factors, in-cluding well-defined standards of training andperformance and relatively long experience.Nevertheless, some of these airlines will de-pend on foreign technicians (for engine main-tenance) for the foreseeable future. This is notbecause of a lack of ability on the part of in-digenous workers, but rather due to a short-age of local technical workers willing to per-form these tasks in Saudi Arabia and Kuwait.

U.S. firms are acknowledged leaders in avi-onics and aircraft engines, and have been lead-ers in airport management, but other suppliersare increasingly capable of providing similarequipment. U.S. aircraft sales in the region,important to sales of auxiliary equipment andservices, have been negatively affected by U.S.export controls. Middle Eastern governmentshave in some cases sought to diversify sup-

8 ● Technology Transfer to the Middle East— —

pliers for political reasons, such as dissatisfac-tion with U.S. policy positions.

Medical Services

During the last 10 years, Middle Easterngovernments have strongly emphasized healthcare by increasing budgetary allocations tothat sector. Of all the technology transfers ex-amined by OTA, those in medical services aremost likely to affect directly the longevity andquality of life of the average citizen in the Mid-dle East. In addition, U.S. policymakers havea special interest in technology transfers inmedical services—not only because medicalequipment and services are important exports,but also because health care has been a pri-ority in U.S. assistance programs.

Saudi Arabia is the largest Middle Easternmarket for medical equipment and hospitalmanagement services. U.S. firms producehigh-quality and reliable equipment, and theyprovided 18 percent of the medical equipmentimported by Middle Eastern nations in 1980.U.S. firms have also been particularly promi-nent in the field of hospital management, pro-viding evidence of their strong role in curativemedicine. However, U.S. firms are not known forafter-the-sale service. OTA’s research indicatesthat such service has become a critical consid-eration for Middle Eastern buyers of medicalequipment.

In contrast, U.S. assistance programs car-ried out by the Agency for International De-velopment (AID) have focused on preventivehealth care, particularly in rural areas of lower-income countries, such as Egypt. Othersupplier countries such as Sweden, Japan,Taiwan, and Belgium have aggressively pro-moted exports through bilateral health careagreements.

A major obstacle to medical technology trans-fer to the Middle East has been a lack of appro-priately trained local medical personnel and ex-perienced managers. Kuwait and Saudi Arabiapossess the most sophisticated medical facil-ities, but their indigenous technical manpowerbases are much more limited than those ofEgypt and Algeria. Despite the commitmentof Kuwait and Saudi Arabia to training and

employing indigenous populations, culturaland other factors have inhibited recruitmentof nationals into medical services. Foreign ex-patriates will be required to staff their medi-cal facilities well into the 21st century. On theother hand, Egypt-a nation that exportsmedical personnel to other Arab nations—ischallenged to improve the quality of person-nel and management and integration of Egyptvaried health care facilities, public and private.

In the past decade, U.S. firms have been in-dependently involved primarily in large hos-pital development projects in the region. In thefuture, the most pressing need will continue tobe in the area of preventive and less-sophisti-cated health care. While opportunities for hos-pital management will continue in Saudi Arabia,demand for these services may grow lessrapidly. Recipients will attempt to establishjoint ventures with foreign suppliers in orderto obtain specialized services such as trainingof indigenous personnel. The market share ofU.S. firms in medical equipment may shrinkunless improvements are made in U.S. after-the-sale service and maintenance. AID healthprojects have generally contributed to im-provements in Egyptian health indicators, butprograms providing specialized training andretraining of medical personnel may be par-ticularly important in the future.

Nuclear Power Generation

Nuclear power is in its infancy in the Islamiccountries of the Middle East: there is no com-mercial nuclear power reactor in operation inthe region today nor is there likely to be onein operation before the 1990’s. However, deci-sions made now concerning nuclear technol-ogy transfers may significantly affect the eco-nomic, military, and political future of theregion. Middle Eastern approaches to nucleartechnology transfers differ widely: Iran hadthe most ambitious commercial nuclear powerprogram prior to the revolution; Egypt has thestrongest rationale for commercial nuclearpower, but financing remains a major con-straint; Libya has most clearly expressed itsintentions to develop nuclear weapons. Most

Ch 1—Summary and Findings ● 9

of the nations of the region have not yet com-mitted themselves to nuclear programs.

Despite the very high growth in demand forelectricity, a number of factors reduce the at-tractiveness of commercial nuclear power formost Middle Eastern countries. The most im-portant is the availability of hydrocarbonresources. In addition, only Egypt, Iran, Ku-wait, and Saudi Arabia will possess the inter-connected grid and electricity generation ca-pacity needed to accommodate a 900-megawatt (MW) commercial reactor by 1990.*However, if small reactors (under 600 MW ca-pacity) become available, other Middle East-ern nations could be buyers. OTA’s analysisindicates that nuclear desalination, a potential-ly useful application, will be attractive only tonations where nuclear power generation is eco-nomically feasible. Even for Egypt, the coun-try with the strongest rationale for nuclear pow-er, progress in nuclear power development hasbeen slow. Egypt’s program will progress onlywith subsidized financing from abroad.

Transfers of nuclear technology are impor-tant not only because of their potential in elec-tricity generation, but also because transfersof certain types raise questions of nuclearweapons proliferation. OTA’s analysis indi-cates that no Islamic Middle Eastern countrywill be capable of acquiring a nuclear deviceon a wholly indigenous basis within this dec-ade, and most would find it impossible to doso before the turn of the century. The majorconstraints on the proliferation of nuclearweapons have been the weak technical capa-bilities of these countries and the reluctanceof suppliers to sell unsafeguarded enrichmentand reprocessing facilities.

The most likely path to nuclear weapons pro-duction is through the use of small-scale re-search reactors in conjunction with laboratory-scale enrichment or reprocessing facilities overa long period of time, allowing for productionof very small amounts of weapons-grade materi-als. Middle Eastern countries will build their

*These countries will probably be able to install a 900-MWreactor that does not generate more than 10 percent of totalinstalled interconnected electrical grid.

latent nuclear weapons production capabilitiesgradually, unless one of the countries in theregion demonstrates its capability to producenuclear weapons and thereby stimulates othernations to follow suit, or unless supplier na-tions significantly relax export regulationsand safeguards requirements.

Prospects for nuclear weapons proliferationin the Middle East are likely to increase duringthe next decade because new supplier states,such as Argentina, Brazil, and India, that arenot parties to the Nonproliferation Treaty maybe willing to sell sensitive facilities and alsobecause Middle Eastern countries will graduallyimprove their indigenous capabilities. Policy op-tions available to the United States are lim-ited, but they include bilateral nuclear coop-eration agreements with countries developingexpanded nuclear power for peaceful purposes,financing of nuclear exports to countries ac-cepting stringent safeguards, or assistance todeveloping nations in assessing various energyoptions. Stronger consensus among suppliersto limit exports of highly enriched uraniumand laboratory-scale sensitive facilities couldcontribute significantly to nonproliferationgoals.

Impacts of Technology Transferto the Middle East

The ability of recipient countries to utilizeimported technologies effectively depends notonly on the sophistication of the equipment,but also on the capabilities of the indigenouswork force. OTA research indicates that ex-periences with technology absorption differwidely across countries and technology sectors.Generally speaking, recipients have developedan independent capability to operate and main-tain facilities, but not to modify equipment orsignificantly adapt technologies imported fromabroad.

Not surprisingly, technology absorption hasbeen most limited when new and extremelycomplex technologies were introduced. Trans-fer of nuclear technology represents the ex-treme case-not only is experience limited andtechnologies complex, but most of these coun-tries have not built an internal consensus fa-

10 ● Technology Transfer to the Middle East—

voring nuclear power development. Technol-ogy absorption has been comparativelyextensive when transfers contribute directly toproduction of locally used goods and services,as indicated by successful transfer of commer-cial airline support technologies. In cases whereindustries are not forced to compete directlywith foreign firms, recipients have more lee-way to introduce training and local employ-ment requirements, though this is often costly.

In contrast, technology absorption in thepetrochemical sector will be limited for someyears to come, mostly because this industrymust compete directly with industry leadersin world markets. Middle Eastern petrochem-ical producers are relying heavily on expatriatepersonnel and the acquisition of technology inthe form of packages, while gradually increas-ing indigenous personnel. Technology transfersin petrochemicals will benefit recipients throughincreased export revenues, despite the near-termlimitation of technology absorption. Figure 2 il-lustrates a range of experiences with technologyabsorption in the five sectors under study.

Middle East countries face varied problemsin importing and using foreign technologies.A key question is how quickly to implementprograms aimed at expanding the indigenoustechnical work force. Rapid expansion can bevery costly in the short run. However, relianceon expatriate labor may limit long-term ab-sorption, particularly if it precludes develop-ment of domestic technological capability. Forboth the oil-rich and oil-poor countries, inade-quate supplies of technical manpower presenta critical constraint on technology absorption.Egypt’s problem is to put to better use andupgrade the capabilities of its comparativelywell-developed technical manpower base; SaudiArabia and Kuwait must build from muchsmaller technical manpower bases.

The technology transfers examined by OTAhave certainly contributed to the growth ofMiddle Eastern economies and to the export rev-enues of supplier firms. From a commercial per-spective these technology transfers have gen-erally been mutually beneficial. For each typeof technology transfer, OTA identified positiveand negative effects (political, social, economic)

Figure 2.—Summary of Findings: TechnologyAbsorption in the Middle East, 1984

Very high

High

Medium

Low

Very Low

Potential technologyabsorption

Highest level of absorptioncurrently attained by firms in atIeast one country under review

Absorption that has alreadytaken place in all of thecountries under review

Commercial Pelrochemical Medical Telecommuni- Nuclearaircraft production services cationssupport

power

Note: Height of bar indicates relative difficulty of tasks required to design con-struct, operate and maintain facilities independentlyPotential technology absorption refers to the level required to operate andmaintain facilities Independently on a par with similar facilities in industrialcountriesEvaluation of the current extent of technology absorption IS based on anassessment of the sophistication of technologies and the efflciency ofoperations as well as the capabiIiIty of indigenous personnel to use them

SOURCE Oft Ice of Technology Assessment

on recipients and suppliers. The choices madeby political and technical leaders in the recipi-ent countries about selection and use of im-ported technologies lead to fundamental eco-nomic, social and political changes in theircountries. In some cases, certain groups insociety may benefit disproportionately fromadvanced technology transfers, leading to re-sentment and political opposition on the partof others. In other cases, the life of the aver-age citizen may be greatly improved. Choicesmade by policy makers determine whether thetechnology transfers fit with resource endow-ments, meet the needs of the local population,or build indigenous capabilities.

Technology transfers involve ongoing rela-tionships between recipients and suppliersthat include both potential risks and benefits.It is beyond the capacity of governments todevelop policies that eliminate these risks oranticipate the potential effects of all commer-cial technology transfers.

Ch. 1—Summary and Findings ● 1 1— . —

P O L I C I E S A F F E C T I N G T E C H N O L O G YT R A N S F E R

No nation has developed a systematic policygoverning international technology transfer, butmany recipient and supplier nations have devel-oped policies to promote and regulate technol-ogy transfer.

R E C I P I E N T C O U N T R YP O L I C I E S

Policymakers in the Middle East are tryingto transform their economies rapidly, largelythrough the introduction of foreign technol-ogies. Yet they are attempting to do so whileavoiding excessive dependence on foreign sup-pliers; maintaining their political legitimacyand influence over domestic economic, social,and political developments; and preserving in-digenous cultures, traditions, and values. De-spite these common challenges, there is consid-erable variation in the policies of these countries.

These countries do not have comprehensivetechnology transfer policies, but all are at-tempting to improve their capacities for select-ing and using foreign technologies, carried outprimarily by strong government firms and in-stitutions. Each has developed an implicitstrategy for dealing with technology transferchoices in conjunction with development plan-ning, and some have already experimentedwith and modified their approaches in the lastdecade. All face choices concerning the natureand pace of economic development, promotionof private enterprise, regulation of foreignbusinesses, choice of suppliers, financing,education and manpower policies, and admin-istrative reform.

Saudi Arabia and Kuwait emphasize capital-intensive technology transfers, while Algerianleaders, dissatisfied with the earlier emphasison heavy industrialization, have come to stresslabor-intensive technology transfers. WhileIraq has attempted to limit involvement byforeigners, Egypt and Saudi Arabia have en-couraged joint ventures.

These countries face different immediateproblems. For the labor-short Gulf States,Saudi Arabia and Kuwait, one challenge is totrain indigenous workers to use foreign tech-nologies effectively. In both countries, short-ages of technical manpower may be allayedover the short term through a reliance on for-eign labor while the local population is grad-ually trained. However, technology absorptionmay be limited in the long term unless the lo-cal population is attracted to enter technicaljobs by incentives introduced by the gov-ernments.

For those countries with larger populationsbut limited financial resources, such as Egyptand Algeria, issues of promoting private sec-tor firms, administrative reform and the fi-nancing of technology transfer are paramount.Egypt, a country rich in human resources, ischallenged to eliminate the economic disincen-tives such as subsidies and occupational re-dundancy that grew with a large bureaucracyand to introduce efficiency into public sectorfirms. Egyptian leaders must chart a delicatecourse, however, because economic reformsmay give rise to conflicts among variousgroups. Algeria as well as Egypt must dealwith the issues of administrative reform andmigration of workers abroad.

Both Iran and Iraq had comparatively well-developed infrastructural and industrial basesprior to the current Iran-Iraq War. A key issuefor both is how to compensate for the diminu-tion in resources available for civilian technolo-gy transfers resulting from their preoccupa-tion with the war effort. In Iraq, lack of fi-nancing has already jeopardized technologytransfer plans in certain sectors. The regimein Iran, though outwardly hostile to Westerninfluences, has in recent years expanded tradewith West European and Japanese suppliers.For both these countries, however, the war isthe key factor affecting prospects for civiliantechnology transfer.

I2 ● Technology Transfer to the Middle East

These countries have attempted to diversifytheir reliance on outside suppliers of technol-ogy for both political and economic reasons.Most of them also look favorably on proposalsfor regional economic and technical coopera-tion, though progress has been limited by po-litical differences. The persistence of regionalconflicts undoubtedly remains a major con-straint on effective commercial technologytransfer.

P O L I C I E S O F O T H E RS U P P L I E R C O U N T R I E S

Apart from the United States, the most im-portant countries supplying advanced technol-ogies to the Middle East are those in West-ern Europe, and Japan. In comparison to theUnited States, Japan and West European coun-tries emphasize economic interests more in theirforeign policies, and their policies have generallysupported technology trade with the MiddleEast. While these nations have approachedtechnology transfer quite differently, the ab-sence of controls on technology exports—aswell as their readiness to combine develop-ment assistance and commercial promotionprograms and the willingness of governmentofficials to take a leading role in economicdiplomacy-have supported expanded technol-ogy trade with the region. Supplier-govern-ment export financing has influenced com-petition in transfers of commercial aircraft,telecommunications, and nuclear power tech-nologies, to countries such as Egypt andAlgeria, but official export programs have notdetermined general patterns of technologytrade. More importantly, government and bus-iness are normally on the same side—sup-porting technology trade.

Soviet bloc nations, in contrast, are muchless important as suppliers of advanced civil-ian technology to the Middle East, and there-fore do not figure prominently as competitorsin the technology transfer sectors examinedby OTA. For the Soviet Union, military assist-ance has been the most important channel forinteractions with Middle Eastern countries,but commercial interests have become more

salient in recent years. Some East Europeancountries have expanded exports to the Mid-dle East, but they provide only a small shareof total imports to the region, and these havebeen concentrated in a few sectors such asheavy machinery. Despite the comparativelysmall role that Soviet bloc nations play in com-mercial technology trade with the region, someMiddle Eastern countries have been recipientsof Soviet military assistance, and the MiddleEast has been the largest noncommunist devel-oping country export market for Soviet blocnations.

Supplier governments play important rolesby setting the context for technology tradethrough their foreign policies. Historical andpolitical factors strongly influence technologytrade with Middle Eastern countries. French ex-ports flow primarily to Egypt and Algeria (aformer colony), while British exports go toOman, the United Arab Emirates (UAE), andQatar-all under British rule in years past. Soviet bloc exports are concentrated in Iraq,Iran, Syria, and Algeria. In contrast, Japan’stechnology exports are less concentrated andreflect that country’s weak historical ties toparticular nations in the region.

The United Kingdom and the Soviet Union,which in addition to the United States haveplayed important political and diplomatic rolesin the Middle East, have placed less stress onpromotion of commercial technology tradethan have nations such as Japan, West Ger-many, Hungary, and Romania. France, in con-trast, has attempted to combine a high-profilediplomatic role with state-led trade promotion.In the past decade, Japan, a nation that has notassumed a leading political role in the MiddleEast, expanded its market presence in countrieswith differing positions on political issues. Gov-ernment policies, particularly overall foreignpolicies concerning the Arab-Israeli dispute,remain important influences on technologytrade. In some cases, the absence of politicalconstraints on trade set by supplier govern-ments has been an asset to foreign exportersin establishing diverse trading relations in theMiddle East.

Ch. 1—Summary and Findings ● 13

U .S . P O L I C I E S

U.S. policies affecting technology transferhave been more restrictive than those of otherWestern supplier nations. During the past dec-ade, U.S. trade with countries of the IslamicMiddle East has grown rapidly, despite thefact that official policies have been character-ized by an unusual tension between economicand political goals. This tension has precludedthe formulation of a coherent policy govern-ing technology transfer.

U.S. interactions are strongly concentrated ina few Middle Eastern countries: in commercialtrade, Saudi Arabia and Egypt are the majortrading partners of the United States; in eco-nomic and military assistance Egypt (and Israel)have been the most important Middle East reci-pients. U.S. technology trade with the MiddleEast thus reflects political alliances.

During the last 30 years, U.S. foreign pol-icy has reflected four themes: ensuring thesecurity of Israel, ensuring oil supplies to theWest, limiting Soviet expansion in the region,and promoting the economic and social devel-opment of Middle Eastern countries. OfficialU.S. policies have, however, placed increasingstress on military and security issues ratherthan on commercial interests during the past 10years.

U.S. Government programs designed to pro-mote the representation of U.S. business abroad,including both high-level trade missions and rou-tine representation by the Foreign CommercialService, have been comparatively weak. Only afew programs are designed, even in part, topromote technology transfer. In addition,there has been continuing controversy con-cerning official export financing, particularlymixed credits, which combine commercial andconfessional financing. U.S. export financingprograms are not as broad in scope as thoseoffered by some other Western supplier na-tions. On the other hand, such Governmentsupports have only infrequently been deter-mining factors in competition for contracts inMiddle Eastern markets. Finally, the UnitedStates has established few bilateral trade or

investment treaties with any nations in the re-gion except Egypt.

U.S. development assistance policies areparticularly important for lower-income Mid-dle Eastern countries, especially Egypt. AIDadministers a vast number of programs, but feware designed with the goal of promoting tech-nology transfer in the industrial and service sec-tors examined by OTA. Congress has empha-sized the importance of science and technologyprograms, but in Egypt these programs havenot been guided by a coherent strategy andonly a small number are directed toward as-sisting industrial end-users of technology. TheUnited States has few Government-supportedtechnical assistance efforts in high-income, developing nations in the Middle East, the mostprominent being those supported by the U. S.-Saudi Joint Commission.

U.S. policies affecting technology transfer aredistinguished from those of other Western sup-plier nations by the recent expansion of controlson exports. These controls heighten the polit-ical dimension of U.S. technology trade withthe Middle East. There is general agreementamong U.S. experts that national security andnuclear nonproliferation controls have been ef-fective in limiting exports of military equipmentand slowing nuclear weapons proliferation.There is less agreement concerning foreign pol-icy controls, antiboycott regulations, and othertypes of controls. Proponents of controls arguethat the United States can use them to takea stand in support of political principles andthat the economic loss resulting is minimal orworth the cost. Opponents argue that foreignpolicy and other “political” controls haverarely achieved their designated goals, thatthe economic effects have been significant, andthat they earn the United States a reputationas an unreliable supplier. It is impossible tomeasure precisely the impacts of various typesof controls on trade, but taken together thesecontrols have been a liability to U.S. exportersand have served to inhibit trade. OTA re-search did not uncover cases where the use offoreign policy controls clearly resulted in theachievement of desired political results.

14 ● Technology Transfer to the Middle East— —

F U T U R E P R O S P E C T S

PROSPECTS FOR U.S.TECHNOLOGY TRADE WITH

THE MIDDLE EASTFor the Islamic countries of the Middle

East, the decade ahead will be one of slowereconomic growth than the 1970’s. The majorreason is that oil revenues are expected togrow at a slower rate (5 percent per annum orless in real terms), reducing the prospects forgovernment spending, which has been the ma-jor driving force behind technology trade. Forthis and other reasons, imports of machineryand equipment can be expected to grow atroughly the same rate as oil revenues, in con-trast to the 19 percent annual real growth inthe 1970-82 period. The Middle East will remain

an important market for technology trade in theyears ahead, but the explosive growth of yearspast will probably not be repeated.

OTA’s analysis includes two scenarios forthe future, involving high and low U.S. exportshares to the Middle East. While the high ex-port share is theoretically possible, OTA con-cludes that it is less plausible. In light of an-ticipated slower growth in the volume of overallexports to the Islamic Middle East, it may wellbe that the U.S. export share will decline. Anumber of factors, including a shift towardsmaller projects in the Middle East and thedesire of Middle Eastern countries to diver-sify suppliers, and the course of the Iran-IraqWar will influence technology trade. U.S.

Photo credit Aramco World Magazine

In less than a decade backyard generators have been replaced by power grids, like the one shown here carryingelectricity to the new Industrial city of Jubail i n Saudi Arabia

Ch. 1—Summary and Findings * 15—

firms, no longer enjoying an overwhelmingtechnological edge over competitors in manysectors, must adjust to changing Middle Easttechnology requirements in order to maintaintheir position.

OPTIONS FOR U.S. POLICIESAFFECTING TECHNOLOGY

TRANSFER

In view of the persisting tension among vari-ous policies (commercial, development assist-ance, military-strategic) affecting technologytransfer, it is not surprising that a coherenttechnology transfer policy has not been estab-lished. Policy makers may wish to alter sub-stantially the scope and nature of commercialtechnology transfers to the Middle East bydeveloping a more consistent policy. In orderto do so, however, a new understanding of therole of technology transfer in U.S. foreign pol-icy would have to be established. Three generalperspectives are outlined below.

Perspective 1: Selective Use ofTechnology to Promote PoliticalInterests

This approach would make technology tradethe servant of U.S. foreign policy toward theMiddle East. The U.S. Government would notonly extend export controls to impose sanc-tions on countries whose policies run counterto those of the United States, but would alsoselectively provide advanced technologies(e.g., dual-use items) to countries associatedwith U.S. political positions. Developmentassistance programs could be used as a vehi-cle for rewarding friendly nations.

This option has the advantage of placingmajor emphasis on U.S. foreign policy in-terests that are of central importance to pol-icymakers. It capitalizes on denial and supplyof technology to influence the behavior of re-cipient countries. In cases where other policymeasures are inappropriate or unavailable,this approach would allow for systematic pol-icies of denial. On a more positive note, theprovision of advanced technologies to nations

closely associated with U.S. positions couldenhance their regional and global stature.

The approach, however, has serious draw-backs. Success would depend on accurate fore-casts of the foreign policies of Middle East-ern countries. One danger would be that shiftsin political alignments and regime changescould lead to sudden interruptions of technol-ogy transfers. Another problem is that if U.S.policy makers control items that are readilyavailable from foreign suppliers, buyers prob-ably will simply go elsewhere. This optionwould place considerable burden on the Gov-ernment to monitor and regulate commercialtrade and technology transfers, despite thefact that OTA’s research indicates severeobstacles to anticipating the long-term effectsof technology transfers.

In addition, this approach could be serious-ly impeded by disagreement concerning appro-priate U.S. policies toward specific countries.Finally, it would rely strongly on the use offoreign policy controls, despite the fact thatmany observers question their effectivenessin achieving political goals. It would certainlypoliticize even more strongly U.S. technologytrade and would run the risk of jeopardizingrelations with nations not closely associatedwith U.S. positions, yet not strongly oppos-ing them.

Perspective 2: Decouple CommercialTechnology Trade From PoliticalInterests

Policymakers may wish to reduce the link-age between politics and economics which hasdistinguished U.S. policies from those of othersupplier nations. This approach is based on theassumption that technology trade should bepromoted with all nations, regardless of theirpolitical positions, because it not only bringscommercial gains to the United States but alsoserves as a foundation for friendly politicalrelations. U.S. diplomatic efforts would pro-ceed independently, while trade in nonmilitaryitems would be permitted with any nation inthe region where U.S. firms judged the mar-

16 ● Technology Transfer to the Middle East—

ket opportunity worth the risk of investmentor involvement. Foreign policy export controlswould be eliminated, making U.S. policiesmore similar to those of Japan and West Euro-pean countries.

One advantage would be to eliminate thetension that has existed between commercialand political interests; another would be topromote technology trade with Middle Eastcountries. It would put U.S. firms on a moreequal footing with their competitors, andpossibly lead to the expansion of exports tonations not currently major U.S. trading part-ners in the region. In addition, it would placefewer demands on the Government to regulatetrade than would the first option. This optioncould be expanded to include improved repre-sentation of business, but the major empha-sis would be on decoupling trade from politics.

By eschewing the use of technology tradeas a lever, this approach narrows the range ofinstruments available to policymakers. At thesame time, it might increase the probabilitythat U.S. firms could become targets of polit-ical opposition because of their expanded in-volvement in countries whose governmentsoppose U.S. political positions. Nor wouldsuch a policy guarantee the end of the selec-tive technology trade characteristic of yearspast. OTA’s research indicates that technol-ogy trade may remain strongly influenced byU.S. foreign policies: even if the disincentivesfor nonselective trade were eliminated and pro-motional policies enhanced, recipient govern-ments might still wish to diversify suppliersfor political reasons and U.S. firms might pre-fer to trade with countries friendly to theUnited States. However, ending foreign policyand other political constraints on technologytrade would undoubtedly encourage wider andmore flexible trading relations over time.

Perspective 3: Promote CivilianTechnology Transfer

Both the technology leverage and decoupl-ing perspectives are oriented more towardtechnology trade than its transfer. Policy-makers may wish to facilitate expanded tech-nology transfers from the United States, and

more extensive absorption of technology byrecipients in the Middle East, by establishingmore explicit policies. This is based on theassumption that civilian technology transfershave been generally mutually beneficial, andthe U.S. Government can do more to promotethem. Underlying this perspective is the con-viction that it is useless to try to controltransfers of civilian technology, and a recogni-tion that U.S. firms can best maintain theirtechnological strength by fully participatingin international technology exchange. Whileretaining national security and nonprolifera-tion controls, this approach would employother types of export controls only under ex-traordinary circumstances, such as the Iranianhostage crisis.

A variety of commercial and developmentassistance policy measures could be used topromote technology transfer. These includeexpanding assistance programs involvingtechnology transfers in manufacturing andservice sectors, upgrading the technical capa-bilities of the commercial representatives, ex-panding technical assistance and bilateral in-vestment agreements, improving U.S.Government financing and insurance pro-grams supporting technology transfers, aswell as improving the ability of the FederalGovernment to record and anticipate trendsin technical service trade. In light of the in-terrelationship of manpower problems amongcountries in the Middle East, U.S. Govern-ment-supported technical assistance effortscould include participants from a number ofcountries, including the higher-income nations.Coordination with private sector firms wouldbe important to the success of all these efforts.

One problem is to coordinate the efforts ofGovernment agencies currently involved invarious aspects of these disparate programs.This implies increased allocation of resources,challenges in designing programs aimed totransfer technology, and in evaluating theirsuccess. In addition, disagreements might wellarise over when “extraordinary circum-stances’ would justify use of controls ontrade. On the other hand, this approach em-phasizes the positive aspects of technology

transfer.ably not

While these programs would prob-drastically affect technology trade

with close political allies or with strong polit-ical opponents, they could open relations withnonaligned countries. This approach is uniquein that it could also contribute significantlyto regionwide development.

Each of the three policy perspectives out-lined above involves a consistent strategy, em-phasizing political and economic objectives indifferent ways. Although each may have itsvirtues in the abstract, a new consensus on therole of technology transfer in foreign policywould be required to implement fully any oneof them.

Even if no consistent technology transferpolicy is established, U.S. policy makers willcontinue to face a fundamental choice as theymake decisions on a case-by-case basis: theycan promote or discourage technology trans-fer. Civilian technology transfers to the Is-lamic countries of the Middle East appear tohave been mutually beneficial in economic

Ch. 1—Summary and Findings ● 1 7

terms, and are highly valued by recipient coun-tries. Therefore, U.S. policies—regardless ofwhich goals are maximized-will remain im-portant to Middle Eastern countries.

In the decade ahead, the Middle East willremain a market for U.S. equipment and tech-nical services, and a region of great strategicimportance. Instead of subordinating econom-ics to politics, the challenge for U.S. policy-makers is to balance these interests in a moreconsistent way. In the absence of such effort,the pattern of expanding controls and selec-tive technology trade characteristic of yearspast is likely to continue. Technology transfersfrom the United States to countries in theMiddle East are a major dimension of U.S. in-fluence there. Despite the negative effects ofsome technology transfers, more often civil-ian technology transfers have supported mu-tually beneficial relations with countries ofgreat strategic and economic importance tothe West.

CHAPTER 2

Analyzing Technology Trade andTransfer: Conceptual Issues

and Policy Choices

Contents

PageINTRODUCTION . . . . . . . . . . . . . . . . . . . ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

TECHNOLOGY TRANSFER AND TRADE:MEANING AND MEASUREMENT . . . . . . . . . . . . . . . . . . . . ... , . . . . . . . . 22

Relationship Between Transfer and Trade in Technology. . . . . . . . . . . . . . . . . . 22Assessing Technology Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Measuring Technology Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

FACTORS AFFECTING TECHNOLOGY TRANSFER AND TRADE . . . . . 29

Factors Affecting Recipient Demand for Technology . . . . . . . . . . . . . . . . . . . . . 29Factors Affecting Supply of Technology and Competition Among Suppliers.. 34

TECHNOLOGY TRANSFER: THE POLICY ISSUES . . . . . . . . . . . . . . . . . . . 37

Recipient Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Supplier Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . + . . . . . . . . . . . . . . . . . . . . . 44Policy Tradeoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Table

Table No. PageI. Cumulative Current Account Balances, 1973-80: Six Middle Eastern Countries 30

CHAPTER 2

Analyzing Technology Trade and Transfer:Conceptual Issues and Policy Choices

I N T R O D U C T I O N

Technology transfer to the Middle East isa complex process that occurs primarily in thecommercial marketplace through transactionsbetween suppliers and recipients. In the Mid-dle East, governments and public corporationsare the primary recipients. On the supplierside, while governments influence civilian tech-nology trade through various policies and as-sistance programs, the major participants areprivate U.S. firms. In Western Europe, Asia,and Soviet bloc nations, the suppliers areoften public corporations.

Technology transfer is necessary for theachievement of widely differing goals, and itseffects on recipient countries can vary consid-erably. For example, technology transfers canlead to improvements in agricultural yield(through introduction of irrigation technolo-gies), better quality of life (through provisionof medical services), foreign exchange reve-nues (through the establishment of manufac-turing facilities that produce goods for export),or to the potential expansion of regional con-flict (through the introduction of enrichmentand reprocessing technologies which can beused to produce nuclear weapons). When tech-nology transfer works, the recipient developsa greater capability to operate a productionprocess or a service system, and the supplieraccrues commercial and sometimes politicalgains. However, suppliers and recipients right-ly worry about the potential negative conse-quences of technology transfers that fail toachieve anticipated results.

This report evaluates the benefits and costsof technology transfers to the Middle Eastfrom the perspective of the U.S. Government.Generally speaking, unless overarching for-eign policy interests justify restrictions ontechnology transfer for military or strategic

reasons, the major concern is that technologytransfers involve fair exchanges in which U.S.firms and organizations are appropriatelycompensated, that the transfers be successfulin improving the recipient’s capability andthereby serve to reinforce mutually beneficialinternational relations, and that trade frictionswith new recipient producers and with othersupplier nations be avoided. In practice, how-ever, U.S. policies affecting technology trans-fer to the Middle East have been distinguishedby a tension between political and economicinterests. Chapters 13 and 15 identify andassess the competing themes in U.S. policiesaffecting technology transfer.

Analysis of technology transfer poses somedifficult questions: How is commercial tech-nology transfer-l distinguished from trade—and how extensive have technology transfers,in contrast to trade, been to the Middle Eastduring the past decade? What factors affectthe ability of recipients to use or ‘‘absorb” im-ported technology? What factors influenceflows of technology between suppliers and re-cipients in the Middle East? What choices dorecipients and suppliers face as they engagein technology transfer transactions? Thischapter outlines an approach to analyzingthese questions. Its primary focus is concep-tual; it provides a framework for the analysisof technology trade and transfer in the chap-ters that follow.

Because of the absence of quantitative in-dicators which would allow us to measure tech-nology transfer precisely, trade flows can betraced much more easily than the actual ex-

‘Technology transfer can take place illegally through theftof information documents, or products embodying technology.This report, however, focuses on commercial technologytransfers.

22 ● Technology Transfer to the Middle East

tent of technology transfer. This chapter ex-plores economic and political factors influ-encing technology trade, the context in whichtechnology transfer normally occurs. It iden-tifies factors which affect technology transferdirectly at the projector firm level, as well asbroader effects. A central theme of the chapteris that there are significant constraints ontechnology transfer, despite the rapid growthand mutually beneficial effects of trade.

Technology transfer to the Middle Eastraises important foreign, commercial, and de-velopment assistance policy issues for theUnited States. The U.S. Government has astrong interest in the peaceful development ofMiddle Eastern nations, and Western technol-ogy can contribute to this process. This ap-plies not only to the oil-rich countries of theregion, but also to other important countriessuch as Egypt. Transfer of advanced civiliantechnologies is also important from a strate-gic perspective, since U.S. policies includerestrictions on exports of advanced technolo-gies (e.g., civilian aircraft), in order to achieveforeign policy goals, and technologies with mil-itary applications (e.g., some nuclear technol-ogies) in order to reduce the proliferation of

nuclear weapons. From a commercial perspec-tive, the United States has an interest in pro-moting technology trade and in anticipatingand avoiding trade frictions arising from thegrowth of Middle Eastern export industriesand from unfair competition between suppli-ers. Technology transfers are, in turn, affectedby and raise critical questions for commercial,assistance, and strategic policies of the UnitedStates.

Chapter 2 begins with a discussion of themeaning of technology transfer, which in-cludes consideration of factors directly affect-ing the process and problems of measurement.Next, the chapter analyzes factors affectinginternational flows of technology to the Mid-dle East, since technology trade (through var-ious channels such as sales of products andequipment, turnkey plants, technical services,direct investment, licenses and patents) is themeans through which technology transfersnormally occur in the commercial marketplace.Finally, the chapter deals with the policychoices that recipients and suppliers face, ex-plicitly or implicitly, as they interact in tech-nology transfers.

T E C H N O L O G Y T R A N S F E R A N D T R A D E :M E A N I N G A N D

R E L A T I O N S H I P B E T W E E NT R A N S F E R A N D T R A D E

I N T E C H N O L O G Y

Definitions of technology and technologytransfer abound. Technology is the knowledgeneeded to design, create, or implement a pro-duction process or the services related to theprocess. Technology is the specific applicationof scientific and technical knowledge to theproduction of goods and services.2

— — —2See “Technology Transfer: Definition and Measurement, ”

in Technology and East-West Trade (Washington, D. C.: U.S.Congress, Office of Technology Assessment, OTA-ISC-1O1, No-vember 1979), pp. 99-105.

M E A S U R E M E N TAs used in this study, technology transfer

is a process involving at least two parties,whereby the recipient attains, as a result, animproved capability to design products or tooperate a production facility or a service sys-tem. Technology transfer involves:

1. technology trade—the provision of tech-nology by a supplier to a recipientthrough commercial transactions; and

2. technology absorption—the use of thattechnology by the recipient; e.g., in oper-ating and maintaining a manufacturing fa-cility.

Because technology transfer involves scientif-ic and technical knowledge required for these

Ch. 2—Analyzing Technology Trade and Transfer Conceptual Issues and POIIcy Choices ● 23

specific operations, it differs from the generaldissemination of scientific information. Moststandardized technologies are rather far re-moved from science.

For technology transfer to occur, a varietyof transactions must take place, often simul-taneously. These transactions include the saleof industrial rights, provision of training, tech-nical and management services, designs,plans, and documents, as well as the supplyof equipment needed to operate and maintaina complex industrial or service system. Trans-fer costs incurred by both parties range fromtrivial to very high. Normally, these transac-tions take place in the commercial market-place, but government-supported economicassistance programs and government-to-government technical cooperation programsare also conduits.

A commercial transaction (e.g., the sale ofa turnkey plant) indicates only that successfultechnology transfer might have taken place.The teaching and learning required for tech-nology absorption generally take place overtime and imply a two-way interaction. Fortechnology transfer to occur between partiesin industrialized and developing countries, itis necessary to bridge a considerable ‘techno-logical distance, ” and this bridging usuallytakes place gradually 3-particularly when thetechnology transferred results in the additionof completely new production capacity.

Technology transfer occurs through technol-ogy trade but should be distinguished from it.If the recipient merely purchases equipmentbut is unable to use it, technology trade hasoccurred, but no absorption has taken place;in such a case, only part of the process of tech-nology transfer has been completed. As the recipient more fully absorbs the technology, thecapability to operate and maintain it is devel-oped. When technology is fully mastered or ab-sorbed, the recipient is also able to design andproduce new products, to adapt the technolo-

3For a discussion of characteristics of technology transfer be-tween developed and developing nations, see Organization forEconomic Cooperation and Development, North/South 7’ech-nology Transfer (Paris: Organization for Economic Cooperationand Development, 19811, p. 24.

—-.—.

gy. If the recipient depends completely on ex-patriate workers to operate and maintain thefacility, technology absorption is limited.However, even in this case, the production ca-pacity may be an asset to the recipient if rev-enues accrue from sales of products or services.

Technology transfer normally occurs in thecontext of a particular enterprise, project, orindustrial sector. In order to determine the lev-el of capability that has been developed (theextent of technology absorption), it is there-fore necessary to examine the effects of tech-nology transfer in the particular productiveenterprise. Although numerous factors—e. g.,national development plans, education, labor,investment and trade policies, the political andeconomic context, and policies of and relations “with suppliers—importantly affect and are af-fected by various transfers, the effects in theproductive enterprise or sector receiving thetechnology are the most important indicatorsof the extent of transfer.

A S S E S S I N G T E C H N O L O G YT R A N S F E R

Evaluations of the extent of technologytransfer are based on judgments about theoperational efficiency of the facilities, and thequality and skills of the work force in the par-ticular firm, project, or sector. In addition, the“linkage effects, ” or the contribution of thetransfer to other economic sectors or to thecountry’s overall science and technology infra-structure, are also often taken into consider-ation. But policy makers in particular oftenevaluate the overall “success” (the net costsand benefits) taking a variety of other consid-erations into account.

Evaluating the Extent ofTechnology Transfer

Operational Criteria.—From an operationalviewpoint, transfer occurs when the transferand production costs and the quantity andquality of output are acceptable by relevantstandards. Particularly for export industries,the relevant standards may be those of themost advanced producers in other parts of the

24 “ Technology Transfer to the Middle East— . — — .

world. These standards may include costs ofproduction, foreign exchange earnings, andprofits of the firms that are the industry lead-ers. For other types of operations, such as localservice systems, the relevant standards maybe those of newly industrializing nations. Indeveloping countries, it is often difficult toassess the efficiency of operations: costs maybe competitive if labor is cheap, even thoughefficiency is low by other measures.

In cases of unsuccessful technology trans-fer, the operation may be abandoned before itgoes onstream, or the output of the facilitymay be of such high cost and low quality thateven domestic sales in a protected market aredifficult. More specifically, inefficient opera-tions may result from lack of proper mainte-nance of equipment, owing to improper pro-cedures; inadequate skills and spare parts; andinclement surroundings. Judgments aboutoperational efficiency must be based on knowl-edge of the technologies and production facil-ities involved, and comparisons to operationselsewhere.

Quality and Capabilities of the Work Force.–People are essential for technology transfer.Transfer involves technology absorption—learning by the work force of skills needed foreffective operation and maintenance of inter-related technical, financial, marketing, andpersonnel functions of the enterprise. Nor-mally, these capabilities are developed overtime when the transfer involves the establish-ment of a new type of facility in a developingcountry. In such cases, expatriate workersmay be needed at early stages.

The number of indigenous workers alone isan inadequate indicator of technology trans-fer: local workers may serve in name only tofill an employment requirement. It is more im-portant to determine what positions indige-nous people hold, what capability they possessto carry out their jobs, and whether there hasbeen improvement in their capabilities overtime. Recipients in developing nations oftenplace special emphasis on technology absorp-tion in their assessments of the extent of tech-nology transfer.

Linkages to Other Sectors.–The extent oftechnology transfer can also be assessed interms of the linkages that exist between thetechnology-receiving firms and other firms andorganizations throughout the society. Themovement of skilled workers from the originalenterprise to other enterprises maybe viewedas a means of diffusing technology transfer toother firms or sectors in the national economy.On the other hand, such movement may resultin a loss of capability at the original enterprise.Regional manpower migration in the MiddleEast is a complex phenomenon, and the ben-efits and costs may be assessed from the per-spectives of the firms, the industrial sectors,and the countries of origin and destination.

Technology transfers can also be evaluatedin terms of the contribution they make to thedevelopment of a science and technology in-frastructure in the recipient country. When re-search capabilities are expanded, when thenumbers of trained scientists and engineersare increased in conjunction with the transfer,the technological capability of the nation maybe improved. Development of institutions andcenters for research and training is essentialfor deepening technology transfers in the longterm.

Evaluating the Success ofTechnology Transfer

Evaluations of the overall success (the netcosts and benefits) of a transfer depend on thebroad policy goals and priorities of suppliersand recipients. Evaluation depends on the pri-ority placed on various political, social, envi-ronmental, and economic goals, and on judg-ments about the past or potential impacts oftransfers. As discussed in detail later in thischapter, suppliers and recipients alike weigha number of factors in deciding whether to en-gage in technology transfers and in judgingtheir success.

To expand the indigenous work force and toensure fairness in technology transfer transac-tions, recipient governments introduce regu-lations. These may encompass ownership, con-trol, local content, technology and output

Ch. 2—Analyzing Technology Trade and Transfer: Conceptual Issues and Policy Choices ● 25— —— ————— — — —

Photo credit Aramco World MagazineSolar energy research In SaudI Arabia involvesresearchers from the University of Petroleum

and Minerals

pricing, and the ability of the recipient totransfer to third parties. Broadly speaking, theaim is to ensure that transfer will result in aself-sustaining capability for technological de-velopment. What is desired over the long termis thus not only a maintenance and productioncapability}’, but also an indigenous technical ca-pability to develop technology and a demon-stration that particular projects contribute toachieving this goal.

Recipient governments and firms often se-lect certain types of technologies because ofother policy goals-–in order to develop particu-lar economic sectors or because of a preferencefor labor- or capital-saving technologies. Po-litical considerations may importantly influ-ence choices of technologies and evaluationsof success or failure. Planners in developingcountries may evaluate technology transfer asproblematic if production costs are substan-tially higher than estimates, if production ma-chinery designed to conserve energy and la-bor is installed in a labor- and energy-abundantbut capital-poor economy, or if equipment de-signed for large-scale operations is installedin a small factory and operated at high cost.On the other hand, recipients may judge aproject successful if they see it as adding tonational prestige, regardless of efficiency ofoperations.

At the supplier firm level, criteria of successmay be much narrower than a full operationalcriterion. When a turnkey plant has paid offthe cost, or when the risk has been passed tothe government, the supplier is likely to con-sider the contract a success. This may occuryears before the technology-receiving enter-prise is fully self-sustaining, and is obviouslyeven more true for equipment sellers whose re-sponsibility normally ends when the goods areshipped.

In certain cases, where continuing supplierrelationships are contemplated or where thereputation of the firm is at stake, the technol-ogy supplier may apply the full operational cri-terion. When ownership of the technology-receiving firm is involved, through joint ven-tures or other arrangements, profitability isan important criterion. In a multinationaloperation, the contribution to worldwide oper-ations of output of the particular enterpriseis also important.

Supplier country governments may or maynot take a broader view than that of the firms.Technology transfers are often viewed as for-eign exchange earners unless other foreign pol-icy or employment considerations are at stake.When output from the technology-receivingenterprises abroad competes with the suppliercountry’s domestic industries, successfultransfer from an operational point of viewmight be considered unsuccessful from thesupplier government’s perspective. Similarly,projects supported by economic assistancemay be judged successful if recipients are sat-isfied or, contrastingly, if certain goals of oper-ational efficiency are met.

In other words, evaluations of the successof technology transfers depend on the rank-ing of these various criteria, ‘technology ab-sorption is one basis for evaluating the extentof transfers, but many other criteria can be ap-plied in judging overall success. Evaluationscan be based on recognizable effects or im-pacts which have already occurred, or on ex-pectations about future effects. Generallyspeaking, when recipients are able to effective-ly use technologies which fit the requirements

26 . Technology Transfer to the Middle East

of a particular production process, they arelikely to judge the technologies as appro-priate.’

M E A S U R I N G T E C H N O L O G YT R A D E

Technology flows internationally throughtrade in machinery and equipment, invest-ments, technical services, industrial rights,and contracts awarded. Taken together, theseflows constitute international technologytrade between suppliers and recipients. Suchflows are only very imprecise indicators oftechnology transfer, but they are importantin their own right because international trans-actions are reflected in trade balances betweennations. Trade in technology is also importantas the major mechanism for commercial tech-nology transfer, and factors affecting tradealso influence the technology transfer process,including technology absorption. The thirdsection of this chapter identifies factors in-fluencing general patterns of technology trade;chapter 4 assesses the extent and character-istics of Middle East technology trade duringthe past decade.

However, as important as internationaltrade in technology is as a discrete topic, itmust be distinguished from technology trans-fer, as used hereto include technology absorp-tion or the development of recipient capabili-ty. In order for technology transfer to occur,technology trade (or provision of technologyfor free through development or other assist-ance programs) must take place. Technologytrade is thus a necessary but not a sufficientcondition for full technology transfer, includ-ing technology absorption.

Since technology is not measurable in anynatural unit, measurements of technologyflows (technology trade) are imprecise at bestand provide only the roughest approximation

4"Appropriate technology” has been defined variously ascapital-savings technology, community technology, environ-mentally sound and appropriate technology, soft technology,and intermediate technology. For a discussion of appropriatetechnology and its definitions, see The World of AppropriateTechnology (Paris: Organization for Economic Cooperation andDevelopment, 1983), pp. 10-11.

of the resulting level of technology absorption.Nevertheless, international flows of technol-ogy in machinery and equipment, technicaldocuments, patents and licenses, internationalcontracting for large projects, and invest-ments are the channels for technology trans-fer. Competition for these sales among vari-ous sellers is a characteristic feature oftechnology trade, and the positions of U.S.firms in the international market are an im-portant concern for the U.S. Government.’

Problems with measuring international tech-nology flows are significant and deserve atten-tion. However, despite these difficulties, thevarious indicators can be judiciously used toassess international flows so long as their lim-itations are understood. Generally speaking,most of the various indicators include transac-tions other than those involving technology.In addition, the various indicators, such asequipment and machinery trade and contractawards, overlap.

Machinery and Equipment Imports

Perhaps the most easily accessible single in-dicator for technology trade is data on importsof machinery and equipment into recipientcountries. This trade category includes capitalgoods, sometimes referred to as “engineering

‘The “competitiveness” of U.S. firms is a complex issue. SeeInternational Competitiveness in Electronics (Washington,D. C.: U.S. Congress, Office of Technology Assessment, OTA-ISC-200, November 1983), for a discussion of competitivenessof U.S. industry that focuses on the domestic determinants.While analysts have measured competitiveness in terms of U.S.share of world exports, there is no agreement on an approachfor analyzing U.S. competitiveness in international technologytrade. One approach is to look at the competitiveness of “high-technology industries, ” meaning those involving a high levelof scientific and engineering skills, those whose R&D effort ishigh relative to sales, or those with a rapid rate of technologi-cal development. See, for example, U.S. Department of Com-merce, An Assessment of U.S. Competitiveness in High Tech-nology Industries (Washington, D. C.: U.S. GovernmentPrinting Office, 1983).

Analysis of competitiveness also depends on whether onedefines U.S. firms by ownership or locati