Most foreign firms engaged in transferring technology to a host country need to protect their core technology from misappropriation by local partners when attempting to strengthen their competitive advantage through the establishment of a strategic alliance. Technology transfer to a strategic alliance means that its absorption can in the longer term create new competitors unless measures and procedures are implemented that prevent leakage of product know-how, and the technology transferor firms can stay ahead in the technological race through their own tech- nological development. Many foreign firms are international players that have to develop global production systems, and they see China as a huge potential market as well as a base for production and source of raw materials. One of the main reasons for the establishment of manu- facturing, sales, service and R&D in China is to access a new source of highly motivated, technologically well-educated people that are scarce in any part of the world. As part of the process of technology transfer, a technology transferor firm may face the risks of leakage of its proprie- tary technology and know-how to a strategic alliance partner. To safe- guard against potential inter-firm spillage, strategic alliance partners need to specify in agreements what each partner’s obligatory duties regarding joint outcomes are and create incentives for both partners to work primarily towards ‘common benefits’ (see Table 7.2).
Incentives for both partners to work primarily towards ‘common benefits’ create situations in which partner firms jointly gain or lose from the performance of the strategic alliance. In emerging economic regions, local and foreign firms have quite different interests and expect- ations for a strategic alliance. Local partners try to access or acquire technology and may seek to use it in other products, services or geographic markets. Typically, foreign firms bring advanced technology and strategic expertise to a strategic alliance and try to appropriate maximum earnings by exploiting the transferred technology in the local market- place. The existence of such asymmetric interests and expectations
often promotes opportunistic behaviour by a partner, and such free riding on the alliance provides a strong incentive for the aggrieved partner to seek control over a strategic alliance’s operations. Performance assessment and the economic valuation of technology transfer are difficult since actual product know-how is usually an intangible input in the production process.
Technology royalties are based on usefulness or effectiveness. However, the willingness of firms from a developed country to exchange techno- logy with firms from developing countries often depends crucially on the existence of a legal framework for intellectual property rights that protects the interests of technology owners locally. The protection of intellectual property in the form of patents, trademarks, service marks, design registrations and copyright is now at the forefront of the global- ization of markets for ideas, technology and economics. With the exception of a few areas of technology where trade secrets are adequate protection, intellectual property laws need to be strong, effective and, most importantly, enforced if the technology transfer from the host country is to be encouraged. The Chinese legal system is based on the premise that it protects the interests of the state and society as a whole.
Its emphasis on harmony and self-governance has given rise to huge concerns from technologically advanced nations about technology protection.
Table 7.2 Identification of the primary technological activities that affect the performance of technology transfer
Technological activities Typical implications for the establishment
Typical implications for the
implementation On-going existing
technological activity
Identification of general technological plans only.
Formulation of specific plans and tasks.
Predictable outcomes
and direction with limits.
Monitoring undertaken against the experience of previous activities.
New technological activity
Careful, detailed plans.
Perhaps selective.
Staged release of funds for the new technological activities.
Monitor the
programme in depth.
Use detailed progress reports.
Ensure the validity of the new technological activity projections.
Whether technology transfer is successful or not depends in part on the availability of supporting infrastructure. Where the effectiveness protection of a technology transfer is unknown, a firm may become more averse to the financial risks of investment. As a consequence, it is more likely to reduce its levels of technology transfer commitment and delay entry, unless there is a well-established legal method whereby it can resolve intellectual property rights uncertainties. There are many difficulties in defining and measuring the technology gap between the partners in a strategic alliance, and it is even more of a challenge to measure how the gap is diminished by inward investment because tech- nology development cannot be limited to defined channels, it is inter- active, and technology transfer is multifaceted. The transfer of specific technological components can be shown to result in the stimulation of local firms due to the transfer of products and equipment. This is particu- larly visible where an existing product is updated and equipment supplied as the result of technological investment leads to new products of novel design and high quality being subsequently produced from highly automated equipment to a high production standard. The main stimulus to the creation of new products by local Chinese firms comes as a consequence of their acquisition of external technology as this leads them to pay more attention to R&D activities. Technology is one form of intangible asset that can serve as a source of competitive advantage, particularly when it is valuable, non-imitable and non-substitutable, but this advantage must be sustained as existing technology diffuses into the market or competitors will start to gain market share.
Summary
This chapter summarizes how an international strategic alliance with high-technology intensity may prefer to have complete control over its proprietary product know-how in order to preserve and/or best exploit the product know-how, given imperfections in the external markets for technology development. The management of international technology transfer is complicated as it is not only a combination of technical matters, capital and personnel, but is also influenced by different cultures and social systems around the world. The ownership determinants required in a strategic alliance will define the extent to which a firm’s resource advantages are perceived as highly competitive in a host coun- try’s market.
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Exercising the Strategic Role of the Board and Management
Introduction
This chapter describes how a firm’s equity investment in an international strategic alliance may allow privileges such as veto rights and how it enables management influence through representation on the board of directors. A wide range of control strategies are available to an inter- national strategic alliance including the board of directors, an array of contractual agreements concerning the firm’s non-capital investments, the appointment of key managerial personnel and formalized reporting relationships. Foreign firms’ investments may adopt a particular governance strategy in China, such as concentrated ownership in a strategic alliance that enables them to leverage their superior technologies or managerial expertise as well as to protect their proprietary assets. State ownership in a strategic alliance is frequently used as a means to achieve public-policy objectives. The actual equity share of the partner firms may serve as an adequate indicator of the extent of its influence on a strategic alliance’s management and the level of a partner firm’s management involvement.