Content uploaded by David Bennett
Author content
All content in this area was uploaded by David Bennett
Content may be subject to copyright.
1
Analysing technology based relationships between foreign
and Chinese firms
David Bennett, Zhao Hongyu and Kirit Vaidya
Aston Business School
The British Academy of Management Annual Conference
8-10 September 1997
[Correspondence to: Kirit Vaidya, Aston Business School, Aston University, Aston
Triangle, Birmingham B4 7ET (Tel: 0121 359 3611 x 5051, Fax: 0121 333 3474, e-
mail: k.g.vaidya@aston.ac.uk)]
2
Analysing technology based relationships between foreign and
Chinese firms
Abstract
This paper draws on concepts and literature on strategic alliances, to
analyse different forms of technology based relationships (ranging from
a one-off sale of product technology to an equity joint venture) between
manufacturing companies from industrialised countries and Chinese
enterprises in the machine tools industry. Technology transfer is
preferred over its exclusive use by the owner for an established
technology, threat of competing suppliers, possible cost advantages of
local manufacture, lack of market knowledge or high degree of market
uncertainty and high barriers against imports of final products. The
analysis and case study observations indicate that a formal legal
agreement by itself is not adequate to (a) deal with the complexities and
costs associated with transferring technological capability and making a
commercial success of it and (b) protect the knowledge embodied in the
transferred technology. Evolution of relationships between firms can also
be interpreted as repeated games in which trust and reputation develop
over time through a sequence of agreements with increasing levels of
commitment.
1. Introduction
Many manufacturing companies in industrialised countries have either entered into or
are considering different forms of technology based relationships with Chinese firms.
For foreign enterprises, the major attractions offered by China are low labour costs,
the large actual or potential Chinese market and tax incentives for joint ventures.
Chinese enterprises seek to improve technological capability and competitiveness
through collaborations with foreign firms. In seeking to convert from traditional
central planning to something akin to the South East Asian “developmental state”
model, attracting foreign capital and technology is an important part of China’s
industrial strategy. Striking features of the export led industrial development in the
Far East have been the successful acquisition of technology and cross-border alliances
including sub-contracting (Dicken, 1992). The Chinese strategy appears to be
following a similar pattern.
The term “technology based relationships” in the title of this paper represents any
form of transaction or collaboration between firms in which transfer of technology is
an important element. Such a relationship may be a one-off transaction or the creation
of a continuing relationship in one of a number of forms described in the next section.
The main aim of this paper is to outline a framework to explain and analyse the
rationale for different forms of technology based relationships and the value of
technology within them.
3
The paper addresses the following questions relating to technology transfer
relationships between firms from an industrialised country and an industrialising
country:
- What are the motivations for sharing a part of a company’s knowledge and
capabilities (technology) with a foreign enterprise ?
- What are the likely gains in return ?
- How effective is the technology collaboration likely to be ?
- What value should be put on the technology being transferred ?
- What form should the technology collaboration take ?
While the above questions have a wider relevance, the context here is technology-
based relationships between UK based (including UK subsidiaries of foreign
companies) and Chinese machine tools manufacturers. The empirical data for this
study are being collected, through case studies and surveys, from three groups:
machine tool manufacturers in the UK; machine tool manufacturers in China, and
machine tool users in China (mainly in the automotive and machinery sectors). The
case study information has been collected through semi-structured interviews and
plant visits either from single company visits or a sequence of visits over time
providing a longitudinal view. The main longitudinal case studies are of four pairs of
UK and Chinese companies involved in transfer agreements, giving an opportunity to
observe the evolution of the relationships from both sides over a period of about three
years.
The questionnaires surveys seek information on the attributes of products and
processes influencing transfer value and, for these attributes, the perceived differences
between foreign technology based and Chinese technology based machine tools, their
implications for the value of technology and the actual and preferred forms of
technology relationships. The aim of this paper is primarily to outline a part of the
explanatory and analytical framework to be used in analysing the evidence. Some
case material is used here to illustrate the framework. Further discussion of some of
the case studies has been presented in Bennett D J, Vaidya K G, Wang X M and Zhao
H Y (1997) and partial evidence from the surveys in China are in Bennett, Zhao and
Vaidya (1997). The framework will be modified and elaborated in the light of the case
study and survey findings.
The paper concentrates on horizontal transfers of product technology by UK based to
Chinese machine tool manufacturers who have at least some complementary
capabilities and could be actual or potential competitors. However in most such
transactions, there will be a varying level of transfer of process technology and other
organisational knowledge depending on the closeness of the relationship, openness of
the supplier and the capabilities and motivations of the acquirer. In the following
discussion, the technology supplier is referred to as the “owner” (of the technology)
and the recipient as the “acquirer”.
2. The rationales for technology transfer and transfer modes
Gee [8] defines technology as a set of knowledge contained in technical ideas,
information or data; personal technical skills and expertise, and equipment,
prototypes, designs or computer codes. Transfer of technology therefore can be in any
4
of the above forms or their combinations, some embodied in the equipment supplied
while other in the forms of expertise, training and software. The technological
capability supplied could be
(a) a production process or part of a process which improves production
efficiency, reduces costs and/or improves quality control;
(b) a product which is of better quality, has greater functionality or better
appearance, or
(c) a combination of process and product as production of a better product
often requires changes in processes.
Companies enter into collaborative ventures to attain goals which are impossible,
difficult or too costly to attain by themselves. Such collaborations fall between the
pure market and pure hierarchy forms (see Richardson (1972) and Buckley and
Michie (1995) for the general development and elaboration of the concept of the
market to hierarchy continuum and Lorange and Roos (1992) for its discussion in the
context of international collaborations). The technology transfer arrangements shown
in exhibit 1, with the exception of one-off transactions, are different forms of
collaborative ventures to attain goals which each partner would find difficult or too
costly to attain on its own.
According to transactions costs theory (Williamson, 1985) a form of governance
structure is chosen (in this case from among the options of not sharing the product
technology and the different forms of collaborations available) because it minimises
transaction costs which are discussed further in section 4 below. Choice on the basis
of cost minimisation implies that the aim is to attain a given outcome, for example a
given level of sales in the market, and that this outcome could be attained by all the
alternative forms but at different costs. As the total benefits and the owner’s share
may also be different under different forms of agreements, the objective of
maximising transaction value (Dyer, 1997) in making the choice is more appropriate.
Therefore, an owner sells a product technology or more accurately shares it with the
acquirer, in a one-off transaction or as a component in a specific collaboration form,
because the net benefits of the chosen form of transaction and the precise terms are
perceived to be greater than (a) not transferring the technology or (b) any available
alternative forms of transfer and partners. The eclectic paradigm framework
(Dunning, 1988) has been used here to outline the different forms of technology based
collaborations and the conditions under which each is preferred.
Exhibit 1 Technology based relationships in the market-hierarchy context
Market Hierarchy
Direct
exporting
One-off
transaction
Licensing Co-production Sub-
contractin g
Contract
joint
venture
Equity
joint
venture
Wholly
owned
subsidiary
According to the eclectic paradigm, technology owned by a firm is a part of its
ownership specific advantages from which it will seek to maximise benefits through
the mode of international operations it chooses. The two extremes of the market-
hierarchy spectrum in exhibit 1, direct exporting to a country and setting up a wholly
5
owned subsidiary in it, do not require technology transfer outside the firm. Direct
exporting is chosen because, given the location specific characteristics, it is more
beneficial to exploit the ownership specific advantage offered by the technology
within the firm by combining it with the firm’s complementary assets.
Direct exporting is favoured if the market is open, the firm has access to market
knowledge and marketing and sales services at acceptable cost, local production does
not offer cost advantages and the need for local responsiveness can be met without
presence in the market as a producer. Small firms lacking international experience
may prefer direct exporting even if the location specific advantages for this course of
action are not so strong. However, advantages of local production would swing the
balance in favour of setting up a wholly owned subsidiary, especially for large firms
with international experience.
Using the technology transfer modes for gaining the advantages offered by China as a
market or a production location raise concerns about the loss of the ownership
specific advantage embodied in the technology. However, China offers a large and
expanding market for established technologies which are at a mature stage of the life
cycle in industrialised countries. In determining (a) whether to enter into a technology
transfer arrangement and (b) the appropriate form of arrangement, foreign companies
have to balance the benefits of extracting value out of such knowledge by sharing it
with Chinese enterprises against the risk of misappropriation resulting from sharing
this knowledge. The seriousness of this risk is considered further in the next section.
The complementary assets offered by Chinese enterprises, tariff and tax advantages
related to different modes of transfer and the threat of competitors making more
successful entry into the Chinese market are also important considerations.
The technology transfer arrangements in exhibit 1 (i.e. all the modes between direct
exporting and wholly owned subsidiary) are closer collaborations the nearer they are
to the hierarchy end. Each mode clearly implies different levels of commitment
(broadly defined as the determination to commit effort and other resources to ensure
the success of a venture) by the technology owner. The relationship with the
technology acquirer and the nature and levels of benefits, costs and risks also differ
correspondingly. Selling product technology in a one-off transaction implies that the
seller has very limited, if any, interest in the relevant market or market segment. The
technology is also likely to be old if not outdated. However, one-off sales can initiate
a longer-term relationship or be a part of a package which includes closer
collaborations for other technology. The supplier can also gain from component sales
even if the acquirer has no contractual obligation to purchase them from the owner.
6
A licensing arrangement grants permission to the licensee to use the technology
within restrictions such as geographical regions in which sales are. Payment for this
technology usually consists of an initial amount (including any fees for
complementary services such as training) and royalties on sales. While one-off sales
are typically for old technology, licensing is the preferred mode for more advanced
technology especially by smaller firms with limited international experience and
market knowledge. It may also be a prelude to a closer collaboration in the future.
Co-production can be broadly defined as an arrangement in which each partner
undertakes a part of the production, though within this broad framework there are a
number of variants. In addition to the objective of market access, such arrangements
typically seek to configure the production activities of the partners to minimise costs.
Movement towards such a configuration is often phased over time to ensure (a)
effective development of the technological capability of the acquirer, (b) local
sourcing of components and (c) building up a working relationship between partners.
The contract is typically for provision of training and product design drawings and the
supply of near complete machines, knocked down kits or key components over a
fixed period of time. The acquirer is usually responsible for marketing and sales in the
domestic market. Unless the technology owner is accommodating, and payments for
the services and products are reasonably phased and conditional upon market success,
the acquirer faces high risks under this arrangement.
Sub-contracting is also referred to as a buy-back agreement in the machine tool
industry. The owner supplies the technology (sometimes free or at a low cost) and an
agreement is made on the price at which the technology owner can purchase the
product from the technology acquirer. The owner may undertake to buy back an
agreed number of machines or keep the purchase quantity open. Clearly, in this case
the owner’s objective is to benefit from the lower cost of manufacture. This may be
necessary for a mature product subject to more testing price competition in
international markets. Co-production and buy-back are sometimes combined, with the
acquirer obtaining the technology relatively cheaply and benefiting from sales in the
domestic market.
In an equity joint venture, the owner’s benefit depends on the profits of the enterprise.
Therefore, the technology owner is likely to have much greater commitment to the
success of the collaboration than in the preceding forms. The owner may have chosen
this mode because of greater confidence in the success of the venture or the desire to
retain control over the technology and the enterprise overall. The owner’s capital
contribution may include the value of technology and control over the venture
depends on the relative shareholdings of the partners. A contractual joint venture is a
more flexible arrangement ranging from a licensing arrangement with foreign
participation in management to an arrangement not much different from an equity
joint venture. However, equity joint ventures are favoured with a more attractive tax
regime. As both forms usually have a degree of management autonomy and both
partners share in the profits of the enterprise, no distinction has been made between
these forms in the later discussion.
7
The preceding account explains the different forms of technology based relationships
and indicates the broad objectives underlying their choice. However, some important
questions remain. Technology is an important part of the organisational knowledge of
an enterprise. There could therefore be concerns about the sharing of proprietary
knowledge with an actual or potential competitor. The rather bland assumption in the
preceding discussion is that the two parties in each form are bound by a contract
which is sufficient to protect proprietary knowledge. Further, there are numerous
uncertainties and unknowns associated with government policy, market conditions,
the partner’s technological and marketing capabilities and the propensity for
“opportunistic behaviour” (defined by Williamson, 1985 as “self interest seeking with
guile”) on the part of the technology acquirer.
The issue of technology as organisational knowledge is considered in the next section.
Subsequent sections look at the nature of the benefits, costs and risks associated with
technology transfer under different forms of collaborations and their implications for
successful outcomes.
3. Implications of technology as organisational knowledge
According to the “resource based” view of the firm, for the owner, technology is a
part of its organisational knowledge, a key source of economic rents, which gives it
distinctive capabilities and competitive advantages (see, Barney, 1986 and
Wernerfelt, 1984 on the resource based view and Grant and Baden-Fuller, 1995 and
Conner and Prahalad, 1996, for the focus on knowledge as the key competitive
resource). Giving away an important source of economic rents would indeed be a
serious matter. Before jumping to this conclusion, it is necessary to distinguish
between the core organisational knowledge and the product technology knowledge
that is shared in a technology based relationship. In discussing the importance of
knowledge for an organisation, Schendel (1996) refers to “the process by which
knowledge is created and utilised in organisations” as the “key inimitable resource”
and an important source of economic rents.
Evidently, through the process of technology transfer the owner reveals product
technology knowledge to the acquirer. This type of knowledge is embodied in a
product (a machine tool), the design drawings for its production and any tacit
knowledge about the process of production. We argue here that product technology is
the type of knowledge which is of a lower order of importance than that defined by
Schendel (1996) and other authors on the resource based view as a core resource. It
does not include the tacit and explicit technological capabilities of the firm which
enable it to develop new processes and products to maintain and enhance its
competitiveness.
Further, even if the technology is not transferred, there are limitations on the degree to
which “revealed” technology or other product knowledge can be protected. When a
product is put on the market without technology transfer, the knowledge embodied in
it can be appropriated by others. Liebeskind (1996) gives the example of Japanese
imitation of Western clockmaking technology in the eighteenth century by simply
dismantling the clocks to observe the workings. However, as the following discussion
shows, the ease of such appropriation depends on the complexity of the knowledge,
8
the extent to which it is explicit and the existing knowledge base and capabilities of
the appropriator.
Knowledge, whether revealed by putting a product on the market or sharing the
technology is not always easy to protect by formal legal methods. Liebeskind (1996)
notes that property rights in knowledge are narrowly defined and costly to write and
enforce. While, in principle, it is possible to impose legal restrictions on the use of
knowledge by others, such restraints are difficult to enforce in practice as technology
and other forms of knowledge can be used with modifications to circumvent the
restrictions. Further, protection through a patent is unsatisfactory as it reveals to rivals
precisely the knowledge that the owner seeks to protect.
Therefore, for product technology transactions, especially those involving an
established technology with similar technology available from competing suppliers,
benefits of protecting the proprietary knowledge are diminished and there could be
greater advantages in sharing the technology to steal a march on competitors or to
counter competitors’ moves. Further, given the difficulties outlined above of
protecting knowledge, a longer term and closer relationship with the technology
acquirer as a means of limiting misappropriation may be preferred over exclusive
reliance on formal contracts.
Paradoxically, while the technology owner’s major concern is with losing exclusive
ownership of knowledge, its loss may not necessarily correspond to its full and
effective acquisition by the technology acquirer. Further, selecting a technically and
commercially competent technology recipient is important for effective exploitation
of the technology. However a competent recipient is more likely to pose a competitive
threat. In general, the effectiveness of the transfer depends on the nature of the
knowledge, the mode of transfer, the effort and commitment of the owner and the
capability and commitment of the recipient.
At one extreme, the technological knowledge for manufacturing a product could be
fully “explicit” in the sense that it can be acquired from a combination of written
instructions, design drawings and prototypes. At the other extreme, it could be fully
“tacit” knowledge which exists on the skills and knowledge of persons in an
organisation (or even if it exists in other more tangible forms it cannot be readily
acquired by others). Transfer of such knowledge typically requires closer long-term
collaboration between the partners. In practice, most technologies are not at one
extreme or another but include varying combinations of explicit and tacit knowledge.
It has been recognised that developing technological capabilities is not a one-shot
effort. It is a complex and long-term process with various levels of technological
competences such as ability to use the technology, adapt it, stretch it and eventually to
become more independent by developing, designing and selling it (see Lall, 1992,
Bohn, 1994 and Barbosa and Vaidya, 1997).
The above discussion has highlighted the importance of knowledge for an
organisation, the difficulty of protecting it and at the same time the difficulty of
transferring it effectively. As a consequence, for the owner, development of relational
or implicit contracts (Kay, 1993) under which the parties rely on mutual
understanding and cooperation to foster commitment, trust and reputation with
9
competent partners appears to be the best means of protecting knowledge as well as
making its best use. Further, close collaboration is also needed to transfer more
complex knowledge. The next section discusses the sharing of benefits, costs and
risks and the commitment by the two parties under the different forms of technology
relationships described in section 2.
4. Benefits, costs and collaboration structures
In transferring technology, firms have different types and levels of objectives which
influence the choice of the transfer mode. For example, licensing may be suitable if
the objective is to access a market with limited commitment. Co-production may be
preferred over licensing because of the technical complexity of the technology
requiring closer collaboration during the transfer process. In some cases, there are no
longer-term objectives beyond gaining and maintaining market access whereas in
others, the limited relationships could be initial steps from which longer lasting
relationships may develop depending on favourable reputation building and the
development of trust. Such initial collaborations are also processes of learning about
the location specific characteristics as defined in the eclectic paradigm framework
(Dunning, 1988).
Even if a collaboration is a part of a firm’s longer term strategic vision, a phased step
by step approach with relatively short term horizons for each step may be preferred.
One reason for such an approach may be that it has the structure of a repeated
prisoner’s dilemma game within which trust between the partners and collaborative
commitment are strengthened through positive reputation (Dollinger, Golden and
Saxton, 1997).
A further important factor in the structuring of contracts is to do with the distribution
of risks and costs implied by them especially if the intended consequences of the
collaboration do not materialise. If the structure of the collaboration is such that one
party is likely to end up with a much heavier burden of costs in the event of a failure,
it may be reluctant to engage in such a collaboration and seek a partner offering a
better structure. Further, the more risky the venture is the more reluctant each party
will be to make a heavy commitment.
The more analytical work on explaining joint ventures as collaborations and games
has defined the joint and separate benefits of collaboration partners as “utilities”
derived by the parties from different collaborative and non-collaborative actions
(Dollinger, 1990). This abstraction is understandable as the benefits and costs to the
players contain quantifiable and non-quantifiable elements, both of which cannot
always be specified objectively. Some reasons for collaboration such as the owners’
“we ought to be in China” or the acquirers’ “we must acquire CNC technology” are
very broad though underlying them is the expectation that there will be some tangible
gains.
Among our four longitudinal case studies of paired companies, the two closer ones
(an equity joint venture and a co-production) are of relatively recent origin. The two
others are licensing arrangements which have been in operation longer but have
remained limited in scope. While three of the four companies have the intention to
10
maintain a longer term strategic collaboration in China, two of them have taken a step
by step approach with attention to the detailed working of the specific relationship, its
technical and organisational problems and the financial position.
From the case study evidence, we have attempted to identify the nature and source of
the main quantifiable financial benefits. The longer term strategic objectives and other
non-quantifiable elements and their relationship to the quantifiable elements have also
been discussed. The benefits associated with a technology transfer arrangement which
are quantifiable in monetary terms could arise from:
(a) higher additional revenues from increased sales in existing markets (adjusted
for loss of revenue from sales in the markets which would have taken place
without the technology transfer);
(b) higher additional revenue from sales in new markets or market segments;
(c) lower manufacturing and other costs as a result of the shift in location, or
(d) a combination of some or all of the above.
Imported CNC machine tools have made large inroads into the Chinese market taking
65 per cent of the market share in 1996. This is in spite of their prices being much
higher. Preliminary examination of evidence from case studies (Bennett, Zhao and
Vaidya, 1997) indicates that machine tool manufacturers and users expect the prices
of domestically produced machines to be less than half those of imported machines.
The reason for such large price differences and the large and growing market share of
imported machines is that users rate imported machine tools much higher than
Chinese machine tools on reliability, processing consistency, accuracy, productivity,
functionality and appearance. The aim of the collaborators is to manufacture foreign
technology based machine tools in China to specifications and quality similar to
imported machines but, because of cost savings from increased localisation, sell them
at prices between those of imported and Chinese machines. Customs duties on
imported machines are also expected to increase the advantage in favour of
production in China.
The incremental costs associated with the transfer are:
(a) the costs of communications and transport and payment for consultancy and
legal services required for the completion of the transfer arrangements;
(b) technical and other training and the purchase of other necessary equipment or
spare parts and fittings, and
(c) the cost of organisational changes such as establishment of joint venture.
The first category of costs broadly represents the “contracting costs” component of
transactions costs (Williamson, 1985). The second represents transaction specific
investments. According to transactions cost theory, if the costs of such transaction
specific investments are high, the party undertaking such investment faces higher
transaction costs in the form of high risk of opportunism by the partner. However,
such threats could be reduced by the sharing of the investment costs. Some of the
costs of organisational changes, such as establishment of a joint venture, are described
by Dyer (1997) as “governance set-up costs” and are a part of the contracting costs.
However, the form of governance also affects the “monitoring” and “enforcement”
components of the transactions costs born by the two parties.
11
Transaction costs have a bearing on the choice of the form of transaction or
collaboration and will therefore be considered in examining the alternative forms of
collaborations. However, there are costs and uncertainties not related to transactions
costs. For example, not all the costs of organisational changes are related to the
monitoring and enforcement aspects of the governance of a collaboration. Chinese
firms may have to improve their management, marketing and after sales service
organisation to improve efficiency.
While we have identified the types of benefits and costs associated with a technology
transfer arrangement, it may not be possible to estimate them with any accuracy as
there will be a number of risks and uncertainties. The main risks can be categorised as
technical, market related or collaborative. Technical risks are to do with the ability of
the acquirer to absorb the technology and use it effectively to produce the final
product to the required specifications. Market risks are to do with (a) market
conditions which may also be affected by government policy, for example on tariffs
and taxation, and (b) the ability of the partners to market and sell the product.
Marketing of a product based on technology transfer often requires overcoming buyer
resistance. Customers currently purchasing Chinese made cheaper products may lack
the resources to switch to the superior but more expensive technology transfer based
products. Customers purchasing the more expensive imported products (often joint
ventures with foreign partners) need convincing that a product made in China with
foreign technology is a cheaper but effective substitute for imported equipment. The
collaborative risks are to do with the breakdown or poor working of the relationship
which reduce the technical and commercial effectiveness of the venture.
The non-quantifiable elements which have a bearing on valuing technology include
strategic advantages. These are objectives such as attaining a strong market position,
acquiring capabilities in certain technologies and gaining a technological lead over
competitors. Another type of strategic benefit is related to the experience of the
technology transaction. The quantifiable benefits of the specific transaction or
collaboration come to an end either when the technology advantage is lost (for
example, as a result of the emergence of superior products in the market) or when the
agreement ends. However, the experience of the collaboration may have enabled the
two parties to build up intangible assets which include each partner’s technical and
commercial knowledge base as well as “collaborative” assets (for example,
commitment, trust and reputation) which may lead to a further similar collaboration or
a closer collaboration which enables adaptability to changing market conditions. The
collaborative assets of experience and favourable reputation may also enhance the
ability to form relationships with other partners.
In many cases, there will be congruence between the quantifiable benefits and longer
term strategic objectives. For example, the quantifiable benefits are directly related to
market success which also improves the market position and is based on effective
transfer of technology and its use. The success also increases the collaborative assets.
However, in some cases the quantifiable benefits may not look promising or be highly
uncertain but the technology collaboration may still be undertaken for presumed
strategic advantages (for example, based on the broad argument that “we ought to be
in China because it is the future” or “because all our competitors are there”). In
12
such cases, entering into the technology collaboration would be a matter of judgement
and the analytical approach cannot say very much about the value of technology.
There are also likely to be non-quantifiable and hidden costs. These are principally
unanticipated costs or problems which may either reduce the net benefits or more
drastically prevent continuation of the collaboration. It is reasonable to group them
with risks and uncertainties.
Even if the perceived quantifiable joint benefits net of costs justify the technology
transaction or collaboration, the two sides may not be able to reach an acceptable
agreement for a number of reasons. The issues regarding the sharing of benefits, costs
and risks and other relevant issues in different forms and their implications for the
acceptability of an agreement to both parties have been analysed below for each type
of transaction or relationship.
The potential partners have to make decisions on whether to collaborate and in what
form, based on their assessment of the expected net benefits, the share of benefits, the
implications of the precise arrangements for the actual ex post sharing of benefits,
costs and risks not only if the collaboration is successful but also if it is a failure
either because of opportunism by the partner or because of technology and market
problems. Therefore, exhibit 2 summarises for each mode of transfer (a) the sources
of the owner’s and acquirer’s gains, (b) the consequences of failure for the owner and
the acquirer, (c) based on these, the owner’s and acquirer’s likely commitment to the
success of the venture and finally (d) very broadly, the type of game implied by the
structure of the relationship and the pay-offs related to success and breakdown of the
relationship.
In exhibit 2 and the following discussion, it is assumed that all transactions or
relationships are based on a formal legal agreement, also known as a classical
contract. However, our earlier discussion has emphasised the significance of
relational elements (Kay, 1993) for effectively implementing, protecting (for the
owner) and benefitting from a technology related relationship. Therefore, the exhibit
indicates the extent to which relational elements are important in each form of
relationship.
Each form shown in exhibit 2 is discussed below with brief illustrations from case
studies. In the pure one-off transaction, the seller is paid a set price and therefore has
no uncertainties or commitments beyond the obligations in the contract. The acquirer
takes all the benefits of success but would have to bear all transactions and
operational costs and the risks of failure. In such cases, classical contracts with legally
enforceable terms and conditions are adequate. In practice, the situation may not
always be as clear cut. For example, a Japanese company supplied technology free of
charge to one of the Chinese case study companies to produce conventional lathes
with complete rights to sell the product in the Chinese market. The benefits to the
Japanese company were from supply of components and an open buy-back agreement
which enabled it to purchase the product at a price lower than the cost of own
manufacture to sell in the world market. Effectively, this was a combination of a one-
off supply (at zero price) and buy-back.
13
Licensing agreements again have limited risks for the owner who gets an initial
payment for the licence, designs training and consultancy and can presumably recoup
any other contracting costs in the initial charge. The owner’s risk is associated with
the level of royalty payments. These depend on the acquirer’s technological and
commercial success and royalty payments according to contract. Clearly, within a
purely classical contract, the monitoring and enforcement efforts on the part of the
owner are to ensure that the royalty payments due to them are paid to them during the
contract period. Such costs are greater than for a one-off transaction.
Having made the initial payment, the acquirer runs the risk of not recouping the cost
and earning a reasonable return. However, the owner can introduce a higher level of
commitment by keeping the initial payment low with higher royalty payments.
Commitment may also be increased by complementing the formal contract with a
relational element through which more technical support is provided to ensure
product quality and improve production efficiency than specified in the contract
possibly leading to higher pay-offs for both parties. Another relational element is
flexibility in royalty payments. Such a closer relationship could also decrease the
monitoring and enforcement costs by providing better access to information on sales
and development of trust between the two parties.
Licensing is a suitable mode for transfer of technology which has a high explicit
content and can be readily transferred. Our case study involving a licensing
arrangement cited here is not a success story partly because of the nature of
technology. The technology transferred was for an advanced product requiring a high
level of customisation and where reliability and accuracy in performance were very
important. Customers demand a guarantee of high reliability because break-downs
lead to stoppages of complete production lines. There is a significant tacit element in
the know-how which cannot be transferred simply via drawings and a short period of
training. The present owner had inherited the agreement from an acquisition and
recognised that it was based on low expectations and commitment and was bound to
have limited success. With the increased market potential in China resulting from the
growth of the Chinese automotive industry, the owner is reconsidering its position. In
view of the previous problems, however, it wishes to form a much closer
collaboration with a new Chinese partner.
A co-production arrangement phased over time can be appropriate for transferring
more complex technology with a high tacit content. The phased approach may also be
appropriate for reputation building. However, in a phased approach the risks can be
unevenly distributed. The owner in our co-production case study decided to transfer
its technology for manufacturing CNC machining centres to deepen and protect its
access to the Chinese market. The Chinese partner was chosen for its technological
capability rather than marketing strength. The owner supplied technology (designs,
training and the supply of parts and assemblies for an agreed number of machines) for
its best selling machining centre from its latest product range at an agreed price.
In this case, the acquirer took the greater commercial risk as it was committed to the
payment of the agreed contract sum (in phases) irrespective of whether the machining
centres could be sold. At each of the four phases, it was intended that the local
content should be increased, until eventually the owner supplied only key
14
components. After three years of collaboration the acquirer was able to produce a
good quality product but, in the first two years, sold very few machines and could
have ended up with a substantial loss from the collaboration with no incentive for
either side to continue the relationship. The situation improved when the acquirer
changed its marketing strategy from selling single machines to selling groups of
machines as parts of production lines which it designed for its customers. As a result
the acquirer has been able to show a profit on the collaboration, the joint value of the
collaboration to the two partners is positive and a further collaborative agreement
with greater commitment on the part of the owner, possibly a joint venture, is being
negotiated.
In spite of the complexity of phased co-production arrangements, for the owner,
monitoring and enforcement are well defined and primarily concerned with ensuring
payment for the supply of services, machine tools and components. Within the
contract, the main risk for the owner is that the acquirer may not pay for services and
products supplied. However, sticking rigidly to the formal contract and not
developing a relational element, for example flexibility in payment and closer
technical collaboration, could reduce benefits from higher sales within the contract
and the possibility of long term collaboration with a successful partner beyond the
contract.
In a pure sub-contracting arrangement, the owner’s main benefits arise from buying
back products or components at a lower price than the cost at which the owner can
produce or procure from elsewhere. The owner is likely to be more committed to the
arrangement with a closer collaboration than set out in the formal contract to ensure
that the expected cost savings are being attained and the product to be sold in foreign
markets under its own name is technically sound. For the acquirer, the risks could be
lower because of the higher commitment of the owner and as the latter undertakes to
buy the products. An important aspect of the owner’s monitoring is to ensure that the
buy-back price incorporates an acceptable proportion of the cost savings attained by
the acquirer.
A project or equity joint venture, requiring greater commitment on the part of the
technology owner than the forms of relationships discussed so far, is typically based
on a phased confidence and reputation building approach as illustrated in the above
discussion of the co-production. The joint venture governance structure also implies
that the more detailed management including monitoring are delegated to the
management team of the venture with broad control of strategy being shared by
representatives of the partners. However, for a successful continuing collaboration, a
relational element is important for dealing with strategic issues such as new
investments, new product development and organisational changes in the venture.
In principle, the risks of opportunism are reduced in a joint venture arrangement as
the two parties share the ownership of assets. However, the potential for opportunism
by either party depends on the relative resource commitments to the venture by each,
the importance of the commitment to each party in relation to its other activities and
any independent competing ventures that each partner might be engaged in.
15
In one of our case studies, the companies went straight into a joint venture in which
the Chinese company has a majority shareholding and the value of the technology was
included as the foreign company’s initial contribution to the venture. As a result of a
number of problems, mainly to do with the market, management and commitment of
the partners to the venture, partly related to the other interests of the partners,
progress in establishing the new company was slow, manufacturing costs are high and
the level of sales has been very low.
The previous discussion and an overview of exhibit 2 indicate that in all the cases
with the exception of the joint venture, the acquirer takes the greater commercial risk.
Owners may consider this to be reasonable as they provide the product technology,
the core input in such collaborations. However, acquirers have a strong incentive to
develop closer forms of collaboration to benefit from the technological and other
capabilities of the owners and to share the costs and uncertainties with them.
5. Qualifications and conclusions
The forms of technology based relationships examined here are typical of
relationships between enterprises from industrialised and industrialising countries at
different levels of technological capability. They are primarily static agreements for
the manufacture of a specified range of products and not intended to adapt and
respond to changes in the external environment. The paper does not consider issues
facing firms in industrialised countries, typically at the same or similar levels of
technological capability looking for longer term mutual benefits from sharing
knowledge, capabilities and resources recognised in the “dynamic capabilities” view
of the firm in which a strategic alliance is an important source of organisational
learning (Harrigan, 1988 and Hagedoorn and Schakenraad, 1990). The more
successful of the technology transfer arrangements of the type considered in this
paper have the potential of developing into more dynamic technology based
collaborations.
The analysis shows that aspects such as commitment, reputation and trust are
important in examining the formation of relationships. However, the paper does not
deal with the implications of cultural contexts, broadly defined as national differences
and differences in company cultures and business practices, for international
collaborations. Sharpe (1996) is a recent example of a study of the implications of
cultural differences on the formation and evolution of international joint ventures.
Based on theoretical discussion and observations from case study evidence, this paper
puts forward three main propositions which require more detailed examination and
more formal testing.
(a) In technology based relationships, and other forms of joint ventures, classical
contracts by themselves are rarely enough. A strong relational element is
required (i) for effective technology transfer and its commercial exploitation
and (ii) to provide some degree of protection of the knowledge embodied in
the technology by reducing the dangers of opportunism by creating a repeated
game structure in which reputation is established and trust and commitment
are demonstrated (also see Mowery, Oxley and Silverman, 1996).
16
(b) While closer relational forms of collaboration work better, learning about the
environment and the partner and building a relationship require an
evolutionary process in which the partners appear to be playing a repeated
cooperative game.
(c) Collaborative ventures are risky with high failure rates and therefore to enable
reaching mutually acceptable agreements and reduce future conflicts, the
structures of agreements must take account of the distribution of the burden
of risks and costs if the arrangement fails.
References
Barbosa F and Vaidya K (1997) “Developing technological capabilities in an
industrialising country: The cases of two Brazilian steel companies” Technology
Management, Vol 3, No 3, 1997.
Barney J (1986) “Strategic factor markets: Expectations, luck and business strategy”
Management Science, Vol 32, pp. 1231-1241.
Bennett D J, Vaidya K G, Wang X M and Zhao H Y (1997) “Globalised
Manufacturing and Technology Transfer Strategies - The Development of a
Technology Valuation Model” presented at MOT 1997 Sixth International
Conference on Management of Technology, Gothenberg, Sweden, June 1997.
Bennett D J, Zhao Hongyu and Vaidya K (1997) “International manufacturing and
technology transfer: considerations of transfer value”, International Symposium on
Manufacturing, University of Cambridge, September.
Bohn R E (1994) “Measuring and managing technological knowledge”, Sloan
Management Review, Fall.
Buckley and Michie (1995) Firms, Organisations and Contracts: A Reader in
Industrial Organisation, Oxford University Press, Oxford.
Conner K and Prahalad C K (1996) “A resource based view of the firm: Knowledge
versus opportunism” Organisation Science, Vol 7, No 5, pp 407-501.
Dicken P (1992) Global Shift, Paul Chapman, London.
Dollinger M J (1990) “The evolution of collective strategies in fragmented industries”
Academy of Management Review, Vol 15, pp 266-285.
Dollinger M J, Golden P A and Saxton T (1997) “The effect of reputation on the
decision to joint venture” Strategic Management Journal, Vol 18, No 2.
Dunning J H (1988) Explaining International Production, Unwin Hyman, London.
Dyer J H (1997) “Effective interfirm collaboration: how firms minimise transaction
costs and maximise transactions value” Strategic Management Journal, Vol 18, No 7,
pp 535-556.
17
Gee R E (1993) “Technology transfer effectiveness in university-industry co-
operative research”, International Journal of Technology Management, Vol 8, Nos
6/7/8 pp 652-668.
Grant R M and Baden-Fuller C (1995) “A knowledge-based theory of inter-firm
collaboration” Best Paper Proceedings 1995, Academy of Management, pp 17-21.
Harrigan K (1986) Managing for Joint Venture Success, Lexington Books, Lexington,
MA.
Hagedoorn J and Schakenraad J (1990) “Interfirm partnerships and cooperative
strategies in core technologies” in C Freeman and L Soete (eds) New Explorations in
the Economics of Technical Change, Francis Pinter, London, pp 3-37.
Kay J (1993) Foundations of Corporate Success, Oxford University Press, Oxford.
Lall, S. (1992) Technological Capabilities and Industrialisation, World Development,
Vol 20, No 2, pp 65-186.
Liebeskind, J P (1996) “Knowledge, strategy and the theory of the firm” Strategic
Management Journal, Vol 17 (Winter Special Issue), No 2.
Lorange P and Roos J (1992) Strategic alliances: formation, implementation and
evolution” Blackwell, Cambridge, Mass.
Mowery D C, Oxley J E and Silverman B (1996) “Strategic alliances and interfirm
knowledge” Strategic Management Journal, Vol 17 (Winter Special Issue), No 2.
Richardson G (1972) “The organisation of industry”, Economic Journal, 1972, pp
883-96.
Schendel D (1996) “Knowledge and the firm: editor’s introduction to the 1996 winter
special issue” Strategic Management Journal, Vol 17 (Winter Special Issue), No 2.
Sharp D R (1996) Working with organisational complexity and diversity: An
empirical study of the formation an evolution of an Italian - Japanese international
joint venture Working Paper No 319, Manchester Business School, Manchester, UK.
Wernerfelt B (1984) “A resource-based view of the firm” Strategic Management
Journal, Vol 5, No 2, pp 171-180.
Williamson O E (1985) The Economic Institutions of Capitalism, Free Press, New
York.
18
19
Exhibit 2 Features of different forms of technology transactions and relationships
Features
One-off transactions
Licensing agreements Co-production (single-
and multi-phased)
Sub-contracting or buy-
back (single- and multi-
phased)
Joint venture (contract
or equity)
Technology owner’s
gains
Price paid by the purchaser.
Possibly revenue from sales
of components to purchaser.
Initial payment for licence,
designs, training and
consultancy.
Royalties on future sales.
Possibly sale of components.
Initial payment for
designs, training and
consultancy.
Revenue from
subassemblies and
components.
Initial payment for designs,
training and consultancy.
Revenue from sub-assemblies
and components.
Buying back product at lower
cost.
Share of profit.
Possibly revenue from
sale of components to
JV.
Possibly royalty on
future sales.
Technology owner’s
consequences of
failure
Very limited.
Possibly competing sales
outside areas agreed in
contract.
No downside financial risk.
Royalty payments vary
(depending on market
conditions, owner’s support
and competence of
acquirer).
Loss of reputation if product
quality and service are poor.
No downside financial
risks assuming payments
agreed in contract are not
dependent on market
sales.
Loss of reputation if
product quality and
service are poor.
No downside financial risks
assuming contract payment is
not dependent on market
sales.
Loss of reputation if product
quality and service are poor.
Buy back advantages may not
materialise.
Share of losses.
Loss of equity value.
Loss of reputation in
market and as
technology supplier.
Owner’s commitment
to success of transfer
Non-existent or very low. Limited because of low risk,
unless initial payment is
“subsidised” and there are
long-term objectives.
Limited because of low
risk, unless initial
payment is “subsidised”
and there are long-term
objectives.
Significant if initial payment
is “subsidised” and buy-back
is important for owner’s
market position.
High but depends on
share of equity.
20
Exhibit 2 Features of different forms of technology transactions and relationships (continued)
Technology acquirer’s
gains
Net profits from future sales
and strategic benefits less the
initial price paid.
Net profits from future sales
and strategic benefits less
the initial payments and
royalties on sales.
Net profits from future
sales and strategic
benefits less payments to
owner for services and
components.
Net profits from future
market sales and strategic
benefits less payments to
owner for services and
components.
Net profits from selling to
owner.
Share of profit.
Possibly revenue from
sale of components and
services to JV.
Technology acquirer’s
consequences of
failure
Financial loss on transaction,
seriousness depends on the
size of the losses.
Financial loss on transfer,
seriousness depends on the
size of the losses.
Loss of reputation in market
and as technology acquirer.
Financial loss on transfer,
seriousness depends on
the size of the losses.
Loss of reputation in
market and as technology
acquirer.
Financial loss on transfer,
seriousness depends on size
of initial costs, sales volume
and selling price.
Loss of reputation in market
and as technology acquirer.
Share of losses.
Loss of equity value.
Loss of reputation in
market and as
technology acquirer.
Technology acquirer’s
commitment to success
High depending on initial
price.
High to medium depending
on initial payment and
profitability after deduction
of royalties.
High to medium
depending on initial
payment and profitability.
High to medium depending
on initial payment and
profitability.
High but depends on
share of equity.
Structure of
relationship
One-off zero-sum game with
a certain pay-off for owner,
uncertain pay-off for
acquirer.
Very limited relational
element.
Formally one-off zero-sum
game with uncertain pay-
offs for both partners.
Greater relational element
could reduce risk of failure
and improve performance.
Prisoner’s dilemma with
uncertain pay-offs for
both partners if single
phased; repeated
prisoner’s dilemma with
uncertain pay-offs for
both partners offering
better chance of
developing commitment
and trust
Prisoner’s dilemma with
uncertain pay-offs for both
partners if single phased.
Repeated prisoner’s dilemma
with uncertain pay-offs for
both partners offering better
chance of developing
commitment and trust if
multi-phased.
Culmination of a
repeated prisoner’s
dilemma game (JV based
on developed
commitment, reputation
and trust) or start of a
sequence of repeated
games with pay-offs
defined by terms of JV
agreement.
