In developing and transition economies, TNC participation (and private sector participation in general) over the past two decades has often taken place in the context of the market oriented reform of infrastructure industries. Such reform necessitates the introduction of market elements on both the demand and supply sides of transactions in infrastructure services.
On the demand side, it requires changing expectations regarding payment for services such as electricity and water, which are often subsidized, regardless of buyers incomes, under pre reform public sector provision.
On the supply side, it involves incorporating economic incentives in decision making regarding policies relating to production, and establishing an effective pricing and collecting mechanism. In addition to the corporatization of State run public utilities, the entry of TNCs is one option for achieving this end. Many developing countries, especially those with budgetary constraints and limited domestic private enterprise capabilities in these industries, have chosen this option.
Thus, in considering the impact of TNC participation on host country industries and services provision, it is important to bear in mind that the changes observed occur under conditions that differ from the pre reform conditions in which the earlier State run public utilities operated. In addition, the specific impact of TNC participation on efficiency18 and services provision varies by industry, depending on the technological and institutional characteristics of the industry.
1. Technology transfer and diffusion
Limited domestic technological and engineering capabilities, as well as managerial and other expertise, prevent many developing countries from undertaking infrastructure projects and providing related services. Thus in infrastructure, as in other industries, technology transfer is among the most important potential contributions that TNC participation can make to host developing countries.
TNCs in infrastructure bring both hard technology (e.g. specialist equipment for water purification) and soft technology (e.g. organizational and managerial practices or business models) to their operations in host countries. However, infrastructure industries are generally not of a hightech nature. Therefore, hard technology is not the principal ownership specific advantage of TNCs in this sector, except in specific niches (such as the knowledge to harness nuclear or geothermal power).
More frequently, the competitive advantages of infrastructure TNCs hinge on specialist expertise or capabilities, such as the ability to organize and operate networks, engineering skills, environmental know how, project management capabilities, financial prowess and managerial expertise (section III.D).
The extent of positive effects arising from technology transfer depends on the degree to which TNCs’ expertise is superior to that of domestic firms that could have been involved in a similar way. In fact, in the initial phases of TNC participation in the 1980s and 1990s, private domestic alternatives were lacking in many of the host developing countries, and a number of improvements that occurred in host country infrastructure industries can be attributed largely to the competitive advantages of TNCs in establishing, managing and operating their infrastructure entities.