Innovation is the prime source of technological advancement
"Today's world is divided no longer by ideology but by technology...15%of the earth's population,provides nearly all of the world's technology innovations...half of the world's population,is able to adopt these technologies in production and consumption.The remaining part,covering around a third of the world's population,is technologically disconnected,neither innovating at home nor adopting foreign technologies."Sachs(2000)
According to the Growth theory of the 1990's,"Innovation is the prime source of technological advancement...which in turn drives economic growth".One of the prime motives,host developing countries widely accept and encourage various channels of FDI is to absorb the technological spill over from the foreign country firms.The Hard Technologies(industrial processes,equipment and plant)or Soft Technologies(technical know-how,management ideas,marketing skills etc)(Dunning and Lundan 2008)contributed by Multi-national Enterprises(MNEs)are considered the main source of economic development and growth.
When a multinational firm vertically integrates with the developing country firms,the firms in host market are forced to abide by the MNE's strict guidance and standards to ensure quality goods or services in the form of raw materials or upstream services.The foreign firms would guide and assist,both managerially and technically which would lead to enhancement of the quality of service by the local affiliates.The domestic rival firms enhance their offerings to keep in pace with the foreign affiliated firms in the market thus enhancing the host country firms'productivity.The biggest US based retailer,Wal-Mart's entry and rapid expansion in China has helped the logistics industry in Chinese market to climb higher level Zhu(2010).
For developing countries to carve their niche in the global economy,they need to be technologically advanced.There is a possibility of importing new technology from foreign developed market,but for this to materialize;the developing countries should have sufficient funds to pay the expensive amount due to currency difference.Also countries will find themselves alienated from the advancement of technologies if they can't develop export markets,Sachs(2008).This can be minimised to a considerable extent by MNEs'trickle down'effect wherein transfer of technological skills from developed countries to developing countries occurs through FDI.The transfer of Panasonic's microwave manufacturing base from United States to China has led to the presence of 2800 Chinese enterprises to provide components for it,which has not only contributed new technology,but also advanced operations management techniques to Chinese market(Sinani and Meyer 2004).