Identify various Mechanisms of Transfer of Technology.
Broadly, the various mechanisms of transfer of technology may be grouped into two:
- Equity form of technology transfer.
- Non-equity form of technology transfer.
Equity Form of Technology Transfer:
Under this firms which transfer technology, invest in a firm which is recipient of technology. TNCs are technology-intensive companies which have subsidiaries and affiliates in a number of countries. It is in the interest of TNCs to transfer its technology to its subsidiaries and affiliates. TNCs generally transfer their most recent technology to their affiliates. Hence, it is argued that foreign direct investment may be the only way for only developing countries to gain access to the latest technology.
Non-equity Forms of Technology Transfer:
Under non-equity forms of technology transfer firms which transfer technology do not invest in a firm which is a recipient of technology. Instead of investing, the firm uses various other mechanisms to transfer technology.
Following are some important non-equity forms of transfer of technology:
- Outright sale/ purchase of technology.
- Management contracting.
- Strategic alliance.
- Turnkey contracts.
Outright Sale/Purchase of Technology: Under this mechanism, transfer of technology transfers the proprietorial right of technology to the transferee.
Following are the advantages of this mechanism:
- The purchaser gets technology at one go, and, can use it without interference of the seller.
- It is economical for the purchaser.
Following are disadvantages of this mechanism:
- A purchaser does not receive the support of the seller.
- A purchaser will be deprived of advances that would be subsequently made.
Under sub-contracting, the TNC’s affiliate assists the local firm technically and provides information which is important in increasing its ability to coordinate the production of components and other intermediate products. In this way, technology is transferred to sub-contractors in the form of technical assistance, material handling, product and process technology and general information relating to production, finance etc. Sub-contracting is popular in automobile industry, radio, television, shoe etc.
Under management contracting, the firm provides the management know how without any equity stake in the enterprise. In a management contract the supplier brings together a package of skills that will provide an integrated service to the client without incurring the risk and benefit of ownership.
According to Philip Kotler, management contracting is a low-risk method of getting into a foreign market and it starts yielding income right from the beginning. The arrangement is especially attractive if the contracting firm is given an option to purchase some shares in the managed company within a stated period.
Management contract enables a firm to commercialize existing know-how that has been built up with the significant investments and impact of fluctuations can be reduced by making use of experienced personnel. The client receives the organizational skills not available locally, management contracting has disadvantages under certain conditions.
Management contract may prevent a company from setting up its own operations for a particular period. One of the disadvantages from the point of view of the client is over-dependence and loss of control. Some Indian companies Tata Tea, Harrisons Malayalam and AVT have contracts to manage a number of plantations in Sri Lanka.
Under franchising the owner of a specific technology (franchiser) permits a firm in another country (franchisee) to use its specific knowledge of a franchise fee. Thus franchising is a form of licensing in which a parent country grants another company the right to use its intellectual property.
Franchising is a widespread practice in foods industry, hotels etc. Franchising may be used by the parent company as an entry strategy in the foreign market. Parent company earns fee by exploiting research and development already committed.
From the point of view of franchisee, franchising provides the great advantage of entering the market with a proven technology without having to run the risk of research and development failures. It also reduces the investment requirements.
One of the important risk of franchising is that the franchiser would be developing a potential competitor the franchisee would become a competitor after the expiry of the franchising agreement. The franchisee may even develop a better technology. Some companies are, therefore, hesitant to enter into franchising agreements.
Exporting is another method of technology transfer by TNCs and small and medium enterprises. National firms will be able to acquire technology through exports. There are a number of cases showing positive impact of learning through trade in association with TNCs. There is great potential for learning through initial exposure to trade in association with a TNC.
Strategic alliance has been becoming more and more popular in international business. This form of strategy seeks to enhance the long-term competitive advantage of the firm by forming alliance with its competitors, existing or potential in critical areas, instead of competing with each-other.
The goals are to leverage critical capabilities, increase the flow of innovation and increase flexibility in responding to the market and technological changes. There are high risks and heavy research and development costs (especially in the area of new technologies) and the rapid obsolescence of new products.
These factors have forced many TNCs to form technology-based strategic alliance so that TNCs can share development costs, acquire new technologies and make better use of scarce qualified personnel.
Following are the different types of alliances according to purpose:
- Technology development alliances such as research consortia, simultaneous engineering agreements, licensing or joint development agreements.
- Marketing, sales and service alliances.
- Multiple activity alliances.
Technology development and operations alliances are usually multi-country since these kinds of activities can be employed over several countries. The purpose of strategic alliances is to maximize marginal contribution to fixed cost.
Licensing involves minimal commitment of resources and effort on the part of transferor under licensing, a. firm in one country (licensor) permits a firm in another country (licensee) to use its intellectual property (such as patent, trade mark, copyright etc.). The monetary benefits of the licensing firm is that royalty or fees which licensee pays.
A licensing agreement may also be one of cross-licensing wherein there is a mutual exchange of intellectual property right. Licensing provides an opportunity to exploit research and development already committed to by licensor. Licensing reduces the risk of exposure to government intervention.
Licensing also serves a stage in the internationalization of the firm by providing a means by which foreign markets can be tested without major involvement of capital or management. From the point of view of licensee, licensing provides the great advantage of entering the market with a proven technology or marketing intangible without having to run the risk of research and development failures.
It also reduces investment requirements. One of the important risks of licensing is that the licensor develops a potential competitor the licensee would become a competitor after the expiry of the licensing agreements. The licensee may even develop capabilities to introduce better products.
Transfer of complex technology often takes place through turnkey project. Contracts, which include the supply of such services as design, creation, commissioning or supervision of a system or a facility to the client, apart from the supply of goods.
Turnkey project contract is an agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer’s personnel who will be trained by the seller.
Turnkey contracts are common in international business in the supply, erection and commissioning of plants, as the case of oil refineries, steel mills, cement and fertilizer plants etc. construction projects and franchising agreements. Many turnkey contracts involve government/ public sector as buyer.