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TECHNOLOGY TRANSFER AND COMPETITIVE OPERATIONS:
THE VALUATION AND COLLABORATION QUESTION
David Bennett, Kirit Vaidya and Zhao Hongyu
Aston Business School, Birmingham, UK
ABSTRACT
To improve competitiveness and find new markets companies are extending
their operations through collaborations involving technology transfer.
However, such collaborations have often been based on ad hoc agreements
resulting from negotiations in which each side has been inadequately
equipped with information about the other’s motivations and expectations.
As a result there has been a gap in the ‘value’ attached to the technology,
leading to delays or even failure in reaching an agreement. To address this
problem a technology valuation and collaboration model has been developed
using empirical data gathered from various points along the UK-China value
chain for machine tool technology
INTRODUCTION
It has become common for companies to improve their competitiveness and find new
markets by extending their operations through strategic alliances and technological
collaborations. This has generated an increase in the rate of technology transfer,
especially between industrialised and developing countries where access to local markets
can be exchanged for a share of the transferred technology. Technology transfer
potentially can generate benefit for both suppliers and acquirers but, at the same time,
each party incurs costs and bears risks. Failed transfers are as common as successful ones,
due to each side being inadequately equipped with information about the other side’s
motivations and expectations. This has led to two principal causes of failure:
i) the ‘value’ of the technology not having been adequately determined.
ii) the form of technology transfer collaboration not having been properly
considered.
The fundamental questions concerning international technology collaborations are,
therefore, how to generate greater joint benefit through a collaborative venture and how
to share this between the two parties. From an operations management perspective the
key issues are to determine a form of collaboration that best uses the partners’ respective
strengths and ensures their objectives are realised in order to sustain commitment.
Elsewhere we have discussed the framework for a ‘technology valuation’ model (Bennett
et al, 1997a). The focus of this model is on how to determine a value for technology and
a collaboration form that takes full account of the owner’s and acquirer’s perspective.
This paper assesses the interactions of each partner’s objectives, share of benefits, cost,
risk and transfer arrangement, together with their effects of technology valuation and
collaboration and their strategic implications for collaborative operations management.
METHODOLOGY
The development of the technology valuation and collaboration model is based on an
analysis of empirical data gathered from three groups: machine tool manufacturers in the
UK; machine tool manufacturers in China; machine tool users in China. Case study data
have been gathered from companies in each of the above groups and three questionnaire
surveys have been conducted: i) a survey of UK (and UK based) machine tool companies
who have transferred, or are going to transfer, technology to China or sell machines in
China, ii) a survey of Chinese machine tool manufacturers covering most of the key
enterprises who have imported, or plan to import, technology through various forms of
collaboration, iii) a survey in China of automotive and machinery companies where both
Chinese and foreign machine tools are used.
The results reported here are based largely on the questionnaire returns from the UK and
Chinese machine tool companies. Altogether there were 69 respondents, comprising 11
UK companies (from 34 mailed-out) and 58 Chinese companies (from 100 mailed-out).
The responses provided details of 84 technology transfer experiences. Some of the
reported results are complemented by the findings from case studies. The questionnaire
focus is on transfer objectives, benefits, costs, risks and forms of collaboration
influencing the value of technology. The degree of ‘importance’ of factors, the
‘suitability’ of transfer arrangements and the ‘satisfaction’ with transfer results have been
scaled, with a score of 6 meaning imperative, entirely suitable and completely satisfied,
and 1 meaning not important, not suitable and not at all satisfied (or irrelevant). Scores
in-between refer to varying degrees of these measures.
MATCHING OF OBJECTIVES FOR TECHNOLOGY TRANSFER
The selection of an appropriate collaboration form for technology transfer that can meet
both parties’ requirements depends on each partner’s objectives and strategies. Defining
the objectives is therefore a crucial requirement when establishing a technology transfer
arrangement. Among the objectives the convergent ones need first to be identified since
they form the basis for a successful collaboration. Table 1 summarises the results of an
earlier study involving several industries in the UK and China and shows the financial,
technical and strategic objectives of both suppliers and acquirers (Bennett et al, 1997b). It
can be seen that some objectives are convergent (e.g. increase of local market sale) and
some objectives may lead to convergence in the future (e.g. the suppliers’ objective of
developing the local supply chain and the acquirers’ objective of gaining access to the
world market).
Although some objectives may not appear to converge at all (e.g. the technical objectives
of the two sides), they may still be realised for both parties depending on the type of
technology being transferred and form of collaboration. Therefore it is crucial to define
the convergent objectives and to maximise the scope of convergence by establishing an
appropriate partnership. The extent to which a specific form of collaboration can match
both sides’ objectives is vital for the success of the collaborative operation.
Table 1 Suppliers’ and acquirers’ objectives for technology transfer
Suppliers’ objectives Acquirers’ objectives
Financial
objectives
• access to local market
• increased sales in local market
• increased sales in local market
• sales to external markets
Technical
objectives
• cost reduction • upgrading technological level of the
product
• improved quality of product
• development of technical capability
Strategic
objectives
• market share and strategic position
in local market
• development of local supply chain
• technological competitiveness in local
industry
• access to the world market
ASSESSING AND SHARING BENEFITS
Generating and capturing greater joint benefit is the basic motivation for technology
collaboration. Table 2 shows suppliers’ and acquirers’ expected benefits and their
assessment of importance together with the actual results from previous transfer
experiences compared with expectations.
Table 2 Importance of transfer benefits and actual results from previous transfer
experiences compared with expectations
Importance Actual results
Suppliers’ expected transfer benefits
market entry or increased sales 5.30 2.67
enhancement of strategic position locally 5.00 3.00
reduction in production costs 4.40 1.67
meeting local customers’ requirements 4.20 2.33
improvement of after sale service 4.10 3.00
acquisition of low cost local components 3.40 1.67
Acquirers’ expected transfer benefits
product level (technological) can be upgraded 5.18 4.68
product quality can be improved 5.13 4.46
technical development capability can be improved 4.96 4.18
domestic market sale can be increased 4.24 3.70
company/product image can be improved 4.15 4.10
exports can be increased 3.87 3.26
the existing product range can be enlarged 3.58 4.24
production costs can be reduced 3.24 2.82
production management can be improved 3.21 3.36
The table shows that each side’s benefits may not be achieved to the same degree of
satisfaction. It also suggests that they may not be derived at the same stage in the process
of transfer, particularly in respect of the technical and strategic objectives. For example,
transferred product technology could immediately upgrade the technological level of the
acquirer’s product as well as improving quality compared with existing products.
However, it requires a longer time to achieve a reduction in production costs and increase
local market sales, so the supplier’s objectives may not be immediately satisfied. This in
turn often results in a gap between their perceived value of the transferred technology.
The worse result of this from among the case studies was the complete severing of a
partnership when the official contract ended. Therefore, in order to judge the value of
technology there should be an assessment of transfer benefits focusing on the shared joint
benefits from the whole process of transfer in relation to their relative importance to each
party.
ASSESSING AND SHARING COSTS AND RISKS
Technology transfer incurs costs both to suppliers and acquirers. From a supplier’s point
of view these are mainly associated with technology development, manufacturing,
distribution and the activities associated with transfer. They can often form the main basis
of the contract price, which is a substantial part of the total acquisition cost to the acquirer
(normally over 70%). Apart from this there are usually some additional (consequential)
costs associated with acquisition as shown in Table 3.
Table 3 Structure of costs associated with technology transfer
Supplier’s costs Acquirer’s costs
• proportion of development cost • contract price
• manufacturing cost - cost of purchasing equipment
• distribution cost - cost of purchasing drawings
• transfer cost (e.g. training and
technical supervision etc.)
- cost of purchasing parts
- cost of training
• consequential costs • consequential costs
- technology updating costs - purchase of fitting equipment and spare parts
- further investment - marketing cost
- organisational change cost
The major difference concerning costs between suppliers and acquirers is that the
substantial part of an acquirer’s cost (i.e. the contract price) is actually the supplier’s
immediate financial return if the whole contract price is paid ‘up-front’. In such cases
acquirers would need to pay a high financial price and bear a high risk for the acquisition
of technology. If the price and risk are too high acquirers may doubt the worth of
acquiring the technology or may be uncertain about the payment being covered by their
captured future benefits from the transfer. Acquirers may therefore prefer a greater
sharing of financial costs and risks with suppliers through other forms of payment
arrangement. Suppliers, on the other hand, may have a different preference depending on
their perceptions of local market potential and the acquirer’s capability as well as their
overall strategy for technology collaboration. Table 4 shows suppliers’ and acquirers’
assessments of the suitability of different terms of payment and indicates their relative
preference for sharing costs and risks. Table 5 shows an assessment of the main risks
associated with technology collaboration. The case studies suggested that many technical
risks can be reduced through a solid collaboration with more technical support provided
by the supplier. Market risk is the greatest concern of both sides. Suppliers and acquirers
both need to be aware that the amount of risk sharing must be related to the sharing of
future benefits.
Table 4 Preference for terms of payment by suppliers and acquirers
Terms of payment Assessment by
UK companies
Assessment by
Chinese companies
No sharing - one-off payment 3.67 2.41
Part sharing: - initial payment plus royalty 4.50 2.82
- instalment 4.67 4.00
Greater sharing - payment for key components 4.00 3.57
- share of return from sales 3.00 4.42
Table 5 Assessment of technical, market and collaboration risks based on actual transfer
experiences (Note: risk assessments are based on the gap between actual experience and
complete satisfaction, i.e. the higher the percentage the greater the risk)
Assessment
by UK companies
Assessment
by Chinese companies
Suppliers’ specific risks:
control of the technology being transferred
29%
cost advantage for the transferred product 56%
partner’s ability to win orders 56%
partner’s absorption of technology 33%
Acquirers’ specific risks:
absorption of technology 31%
effective use of technology 31%
supply of key components 45%
solution to technical problems 39%
Common risks:
quality of end-product 58% 29%
competitive product (quality & price) 54% 50%
customer’s confidence (quality & reliability) 44% 34%
meeting customers’ needs (performance) 39% 34%
market sales of the end-product 56% 36%
‘goodness’ of collaboration 29% 41%
financial stability of partner 38% 35%
TRANSFER ARRANGEMENTS
Table 6 shows the UK and Chinese companies’ assessments of the suitability of different
forms of collaboration. The value of technology is not only dependent on the upstream
costs of production and distribution but also on the future gains to be derived by using the
technology to add value further downstream. The total gain to be shared from the
transferred technology is therefore dependent on the effectiveness of use of the
technology and its realisation in local and other markets. There are a number of important
technology and contributory features that can influence effective use, which in turn
depend on different transfer arrangements. Potentially, more advanced technological
knowledge and training as well as supervision can be provided, and consequently more
suppliers’ advantages can be shared, if there is a close form of collaboration. Arguably
this leads to a higher degree of effectiveness in using and realising transferred
technology. Therefore acquirers in general are in favour of collaborations with higher
commitment and more technical support from their partners.
Table 6 Suitability of forms of collaboration assessed by the experienced companies
Assessment by UK
companies
Assessment by Chinese
companies
One-off purchase of technology 3.67 3.22
Licensing agreement 3.50 3.49
Subcontracting 3.00 4.36
Co-production 3.75 4.39
Equity joint venture 3.00 4.58
On the other hand, Table 6 also shows that suppliers consider it less suitable to have such
a close arrangement and this is borne out in many of the case studies. From the supplier’s
point of view the preference for a particular transfer arrangement appears to depend on
their willingness to release control of the technology, which is determined by their
strategies, perceptions on local market potential, characteristics of the technology and the
local partner’s competence. On one hand, arrangements that involve less sharing will
reduce their costs and risks; however, on the other hand, they may reduce the opportunity
of creating greater joint value as a result of making more effective use of the technology.
CONCLUSIONS
The advantages from technology collaboration are derived from the enhancement of
opportunities for generating greater joint benefits and an improvement in each party’s
capability to capture the benefits created. The value of the technology being transferred is
dependent on the owners’ and acquirers’ viewpoint so technology valuation should be
based on a broad perspective by considering joint value and how it is shared between
partners. This has proved to be the fundamental basis for a successful collaboration.
Defining the objectives and maximising the scope for convergence are crucial for the
success of technology collaboration. An appropriate transfer arrangement is the key to
effectively using and realising technology in the market and, as a consequence, has
substantial influence on creating the total amount of joint value as well as the shares of
the value between partners. Sharing costs and risks need to be assessed in comparison
with transfer benefits, taking into account the enhancement of opportunity for generating
greater future gains.
REFERENCES
Bennett D J, Vaidya K G, Zhao H Y and Wang X M, Technology Transfer to the China
Machine Tool Industry: The Need for a Technology Valuation Model, Industry and
Higher Education, 11, 1, 1997a, pp. 35 - 39.
Bennett D J, Zhao H Y, Vaidya K G and Wang X M, Transferring Manufacturing
Technology to China: Supplier Perceptions and Acquirer Expectations, Integrated
Manufacturing Systems: The International Journal of Manufacturing Technology
Management, 8, 5, 1997b, pp. 283 - 291.