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Technology Transfer Methods

The choice of a technology transfer method should be based on technology analysis, future strategy of cooperation with a company’s supplier, investment resources and technical capacities of the company to implement the technology.

When choosing a transfer method, it is necessary to understand that the more complex is the technology, the closer should the connections be between the buyer and the supplier. As noted earlier, technology transfer doesn’t end with equipment delivery. In itself, equipment doesn’t generate new competences. The real changes in the company’s work can be introduced by transfer of knowledge, skills, and intellectual property rights.

Let’s try to consider main technology transfer methods, their strengths and weaknesses:

Licensing

Licensing is an agreement under which the owner of a patent, trademark or other intellectual property gives permission to another company to use the technology developed by him (her), in a certain area during a certain period of time.

There are two main types of licenses: 1) one which grants an exclusive right to use the technology; 2) another with non-exclusive right, which implies that the patent owner may transfer the right to use the technology to other companies in the same area.

Additionally, the licensing agreement could include a sublicensing clause which permits the licensee to grant to someone else the right to use the technology.

The advantage of buying a license/patent is that it has lower costs, compared with other technology transfer methods. However, the purchase of a license requires sufficient knowledge, experience, relevant expertise and manufacturing base for the further in-house technology implementation.

Support Contract

According to this agreement, the technology owner participates in the technology implementation, providing at each stage of the transfer technical support, as well as personnel training.

The involvement of technology developer in the technology transfer process ensures a closer cooperation between two parties which favors a complete transfer of all knowledge and skills related to the technology. In this way, the support contract may be a part of the licensing agreement, in order to improve the transfer efficiency.

 Joint Venture

A joint venture is an agreement concluded between two or more companies in order to execute a particular business. The joint venture implies mutual assets, management, risks, profit sharing, co-production, services and marketing.

Benefits from a joint venture in case of technology transfer are the following: long-term cooperation between the parties, motivation of all participants in the successful transfer, lower costs than if the companies have been working separately.

The disadvantages of a joint venture are often associated with the different vision and goals of both partners, their inability to be independent in management. Also, companies are not always able to determine objectively the value of capital contributed by each of them and, therefore, subsequent profits distribution. (The foreign company provides innovative technology and management competence, while the local company is familiar with the market and regulation. Finally it is difficult to determine the value of each asset).

Franchising

Franchising is an agreement where one company grants to another the right to use its trademark and business model. The buyer of the franchise starts manufacturing and selling the goods according to the seller’s specification. Normally, the company owner of a trademark also shares its experience in operating and managing the franchised product/technology.

The main advantage of franchising is the fact that the company gets an already-made brand. With the franchised product, the company acquires a proven business model, knowledge in management and marketing.

The disadvantages are the company’s dependence on the technology owner. In most cases, the company has to purchase raw materials, equipment and other products from specific vendors. It must follow internal rules and procedures of the technology owner. Generally, the company cannot bring the product to other markets as well as sale the franchise. In addition, the decline of the franchise owner reputation could have an impact on the company that has bought its franchise.

 Strategic Alliance

A strategic alliance agreement is usually concluded between two or more big companies in order to use specific skills of each of them in the development of new innovative technologies. Strategic alliance could be in form of joint laboratories, research programs, production and promotion of a new product.

Typically mutual efforts of different partners give better results than an independent development of a new technology. During joint operations, each company can get the needed experience in new areas and in different forms of management.

The major weakness of strategic alliances is the complexity in managing companies with different cultures. There will be at least two teams of managers with different approaches. The companies may have different goals and strategies in further business development of the new technology.

Turnkey Agreement

In case of a turnkey agreement, the general contractor is responsible for all the procedures related to technology transfer, such as technology design, financing, equipment supply, construction and commissioning.

The advantages of a turnkey agreement are that the company concludes a contract only with one supplier who takes full responsibility for the project execution; except a force majeure, the project will have a fixed price; the supplier guarantees the performance and the efficiency of technology.

The disadvantages could be the following: company should know in advance all the features and output parameters which the technology should have after its launch; a complex or large-scale technology requires a deep knowledge in the corresponding field (in this case an independent expert organization could be employed to determine the technology’s features and output characteristics); transfer price under a turnkey agreement is generally much higher than with any other method (the more risks the supplier takes, the higher the price is); during the transfer implementation, a company doesn’t have full control over the progress and quality of each stage of the transfer; contractor’s financial problems may lead to the project suspension (it is difficult for company to determine supplier’s financial capacity and its ability to self-finance all stages of the transfer).

One of the ways to reduce the risks of the turnkey agreement is to involve the supplier in the capital of the new entity. This will motivate the supplier to ensure the quality of the new technology, as well as it will bring the supplier’s experience in the further operational processes.

Equipment Acquisition

Equipment Acquisition is a simple and, therefore, one of the most common methods of technology transfer. The main disadvantage of this method is the fact that the company limits itself to mere technical knowledge incorporated in the equipment and does not get any new competences in the management and production. Moreover, equipment available on the market does not give unique privilege to the buyer, as this equipment may be purchased by any other competitor.

Management Contract

Technology can be transferred through a competent expert, who could be “entice” from another company.

This method of technology transfers involves minimum costs. But, generally, it can be effective only for small projects with relatively simple technology. Furthermore, technology should not be patented.

Foreign Company Acquisition

A company may acquire a foreign startup which is developing a new technology. As a result, the company will not only get the technology, but also a team capable to develop it in the future. Moreover, the acquisition of a foreign firm automatically places the company on the new international market.

Among the main risks of buying an existing firm, is the possible resignation of key employees after the acquisition. Besides, the founders of the successful startup would agree to sell it only for a price significantly higher than the market. This increases the risk of the profitability in the future.

Direct Foreign Investments

Direct foreign investments is one of the main methods of technology transfer at the state level. Generally, a foreign company invests in developing countries in order to create a new market, remove export barriers and get an access to cheap labor.

In this case, a developing country gets all the benefits of technology transfer, particularly the development of its own research environment. Besides, it is a way to create new jobs and raise taxes.

However, to attract foreign investors, the developing country’s government, generally, has to make some concessions in its policy. As we can see in practice, without these concessions large international corporations are not motivated in long term investments in developing countries.

Buy-Back Contract

A buy-back contract is a form of agreement between developing countries and large foreign companies. Under this agreement, a foreign company supplies industrial equipment in exchange for profits derived from the sale of raw materials or goods produced on this equipment. This kind of technology transfer is often used in the construction of new plants in the developing countries. In that case the state becomes a shareholder in the created enterprise.

For a developing country this represents a possibility to get a high-tech equipment without direct investment in it. Moreover, the foreign company is responsible for the performance of supplied technologies.

Potential disadvantages of a buy-back contract are the motivation of the foreign company to start production at least costs which, certainly, will affect the execution quality. Typically, under a buy-back agreement the price for a new technology is much higher than in case of direct investments.

Original equipment manufacturer (OEM)

OEM can be considered as a form of subcontracting, where a local firm starts manufacturing according to the foreign company specifications.

A foreign company transfers a part of its technologies and equipment. It conducts training and management reorganization. Afterwards, the foreign company sells produced goods through its own channels and under its own trademark.

OEM agreement enables local companies to absorb new technologies and to reorganize their production. With new equipment and skills, these firms can produce new goods for the domestic market under its own brand.

The main drawback of this agreement is the obligation to supply to the foreign company products at a fixed price which is normally much lower than the market one.

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