What Is Forced Technology Transfer (FTT)?

Forced technology transfer (FTT) is a practice in which a domestic government forces foreign businesses to share their tech in exchange for market access. The practice is common in China. When a company wants to enter the Chinese market, the Chinese government can compel the firm to share its technology with Chinese companies.

Key Takeaways

  • Forced technology transfer (FTT) occurs when a domestic government compels foreign companies to share their technology, which includes intellectual property such as software code, formulas, product research, development plans, architectural drawings, processes, procedures, and designs.
  • In return for this forced technology transfer, the domestic government will give the foreign company market access.
  • One way the Chinese government enforces FTT is by requiring foreign companies that want to operate in China to form joint ventures with local companies, with whom they must then share their sensitive, private technology.
  • China's "Made in China 2025" strategy focuses on the nation's pursuit of intellectual property to transform the nation from an assembler of products for foreign firms to a developer and inventor of its own products.

Understanding Forced Technology Transfer (FTT)

How can the Chinese government compel a firm to share its technology? Good question. China has some unique economic bureaucratic features that facilitate the enforcement of the practice. For one, foreign direct investment (FDI) in China is still partially closed. This means that, in order to operate in certain industries in China, foreign companies must operate through joint ventures. The joint ventures partner with multinational and local companies, not allowing the multinational firms to hold a controlling stake in the partnership. These partnerships can force foreign companies to share their sensitive, private technology with local, domestic firms—firms that may end up being their competitors in the free market, later on.

State-owned businesses play a significant role in forced technology transfers, too. In China, the Communist Party appoints top executives to companies in hi-tech sectors like transportation, air travel, and telecommunications. The executives in these industries could be incentivized not just by profitability, but by the health and future of the sector in China. This can lead to deal-specific stipulations, which can include the transfer of technology as a precondition for access to Chinese markets.

What's the Big Deal? "Made in China 2025"

China has ambitious plans to be the world's leader in technology by 2049. In 2015, the Chinese government launched a ten-year plan to update China's high-tech manufacturing sector in ten key areas. The rallying slogan, “Made in China 2025,” has become a state-led industrial policy that relies on government subsidies funding China-owned enterprises to pursue intellectual property acquisition to catch up to Western-led technological leaders and eventually pass them.

The ten key areas, according to China's State Council are:

  1. New information technology
  2. High-end numerically controlled machine tools and robots
  3. Aerospace equipment
  4. Ocean engineering equipment and high-end vessels
  5. High-end rail transportation equipment
  6. Energy-saving cars and new energy cars
  7. Electrical equipment
  8. Farming machines
  9. New materials, such as polymers
  10. Bio-medicine and high-end medical equipment

According to the Council, China's ten-year plan is really a “three-step” strategy of transforming China into a leading manufacturing power by the year 2049, which marks the 100th anniversary of the founding of the People’s Republic of China. The Chinese government seeks to transform its economy from one that relies heavily on assembling goods for foreign firms as its primary source of revenue to an economy that also invents the goods it manufactures.

In 2018, the Chinese government announced it had updated its "Made in China 2025" roadmap. While the government said the country had already made great strides in becoming the world's dominant manufacturer of railway, telecommunication, and electrical power equipment, it identified the fields of semiconductors, industrial software, and operating systems as areas where it was lagging.

Given its current progress, the Chinese government predicted the nation's domestically developed robotics and new energy vehicles would dominate globally by 2025.

Criticism of Forced Technology Transfer (FTT)

A report issued by the Congressional Research Service in 2020 noted the U.S. government's concern regarding China's intensified FTT tactics. In addition to the licensing and joint venture requirements, China reportedly was also engaged in state-directed IP theft and the acquisition of companies operating in strategic sectors.

Criticism of China's "Made in China 2025" strategies were wide-ranging and included concerns that the plan would lead to global overcapacity, market inefficiencies, and a strengthening of the nation's military abilities. In response, the U.S. government imposed tariffs on Made in China 2025 products starting in 2018, along with implementing measures to counter theft of U.S. technology and to increase scrutiny of academic exchanges and foreign investments.