155512

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International Technology Transfer in Services Author(s): Robert Grosse Source: Journal of International Business Studies, Vol. 27, No. 4 (4th Qtr., 1996), pp. 781-800Published by: Palgrave Macmillan JournalsStable URL: http://www.jstor.org/stable/155512Accessed: 26-07-2015 05:21 UTC

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INTERNATIONAL TECHNOLOGY TRANSFER IN SERVICES

Robert Grosse* American Graduate School of International Management

Abstract. This study examines the nature of technology and the process of its transfer in five service industries from parent companies to foreign affiliates. Three principal research questions are posed: What is the key technology in each industry? What are the main methods for transferring this technology? How and why do technology and transfer methods differ across firms, industries and countries? The empirical analysis shows that key technologies were generally knowledge of/experience in the industry and methodology for producing the service. Transfer of the technology was mainly done through the training and transfer of experts: and organizational forms were wholly owned subsidiaries and international partnerships. More technology transfer occurred when firms were more international, when affiliates were more recently-established, and when parent ownership was lower in the affiliate. Some evidence exists that more firm-specific, jointly produced technology leads to higher ownership percentage and greater transfer to affiliates.

INTRODUCTION Technology is a fundamental competitive advantage of firms in business today. From creation of new products to knowledge of markets or industrial processes, technology plays a major role in the success of both domestic and transnational firms. Likewise, technology is an important base for economic growth and development, so governments need to pursue policies that optimize its creation and use. This study examines the key technologies that drive competition in several service sectors, namely: advertising, commercial banking, computer software, hotels, and management consulting. The purpose of the study is to explain the key technologies involved in each sector; to describe processes by which transnational firms transfer technology to their

*Robert Grosse is Director of Research at Thunderbird, the American Graduate School of International Management. He writes about the theory of the multinational firm, international banking and international business in Latin America. I would like to thank a number of MBA and Ph.D. students who carried out interviews in Argentina (several students from the Universidad del Salvador); Brazil (Ana Lidia Gresenberg of the Fundacao Getulio Vargas); Colombia (Martha Osorio of Universidad de los Andes); Ecuador (Valerie Merino of the Universidad Catolica del Ecuador); Peru (Fernando Diez Canseco and Rene Cornejo of ESAN); and Venezuela (Maria Jimena Rodriguez of IESA); and who did data analysis at the University of Miami (Nancy Yeldezian, Kumar Venkataramany and James Siegal). This project was undertaken for the United Nations Program on Transnational Corporations (then carried out by UNCTC, now part of UNCTAD), and funded by the Government of Germany.

Received: December 1993; Revised: June 1995, January & June 1996; Accepted: July 1996.

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782 JOURNAL OF INTERNATIONAL BUSINESS STUDIES, FOURTH QUARTER 1996

foreign affiliates; and to analyze the company, industry and country characteristics of this technology transfer.

Since services now constitute the vast majority of economic activity in industrial countries, and more than half of GDP in many less developed countries as well, analysis of their structure and functioning is a precondition for defining appropriate government policies and corporate strategies. The technology that drives service sector competitiveness often is not the same as that which drives manufacturing or extractive sector competitiveness. While product-producing sectors often demonstrate competitive advantages based on proprietary products, service sectors show advantages based on 'soft' technology, that which is managerial or information-based. Other contrasts in technology management and technology transfer demonstrate that services differ importantly from manufacturing, and thus the implications need to be explored. These issues are examined in some detail in the analysis below.

TECHNOLOGY AND ITS TRANSFER The business literature generally refers to at least three types of technology: product, process and management.I Product technology is the knowledge used to produce any product - the information that specifies the product's characteristics and uses. Process technology is the knowledge used in production to organize the inputs and operate the machinery - it relates to the process by which a given product or service is produced. Management technology is the knowledge used in operating a business - the managerial skills that enable a firm to compete by using its resources effectively. Each of these types of technology can create a competitive advantage for the firm that possesses it. That is, although all firms possess each type of technology, an advantage accrues to firms that are able to obtain and deploy superior technology.2

International technology transfer is the diffusion of technology from the place of its introduction to other markets around the world. This diffusion may take place through market transactions, with one firm selling a product, process, or skill to another. Alternatively, it may be carried out within a firm through its network of affiliates. Also, technology transfer may take place through strategic alliances between firms which agree to mutually use that technology, as in a joint venture or a cross-licensing agreement.3 Technology transfer may be categorized as vertical or horizontal, depending on whether the process moves from basic to applied research or to development (vertical transfer), or from use of a technology in one place to its application in another place (horizontal transfer).4 In the present context, the transfer is primarily horizontal, with a given technology taken from the home office of a TNC service firm to an overseas affiliate. Even so, when adaptation of the technology to local needs is carried out, the process may be viewed as partly vertical as well.


INTERNATIONAL TECHNOLOGY TRANSFER IN SERVICES 783

CHARACTERISTICS OF SERVICE SECTORS Service industries can be categorized as producer services, where users are primarily other firms - for example, accounting and management consulting, advertising, and engineering, and consumer services - such as hospitals, hotels and retail stores. Some of these industries are quite high-tech - such as computer software and telecommunications, while others are decidedly low- tech - such as insurance and public utility provision (though even these often have high-tech segments). And some of the industries cross the boundary between consumer and producer services - such as commercial banking and hotels. Even this fairly neat distinction between consumer and producer services fails to capture the essential complexity of defining service industries.5 Much of the service provided by these industries includes physical products as well as 'service'. It is easy to see that airline flights provide a service to the user, namely, transportation from one place to another. It is much more complicated to draw the line in computer software. The software itself is a product, typically recorded on an electronic medium such as a disk or a tape; however, the adaptation of that software to a client's particular needs is a service that involves interaction between the seller and the buyer, and may be intangible (i.e., training in the use of a computer program).6 Given the difficulty in separating service from product in many instances, let us define services in a simple manner for use as a basic term of reference. A service is an intangible item that depends to some extent on interaction between the buyer and the seller for its provision. A product or good, on the other hand, is a tangible item that may or may not depend on interaction between buyer and seller. Thus, an airplane ride is intangible because the buyer does not retain any product from the seller after the trip and because the buyer must sit in the seller's airplane to receive the service. An airplane itself may be sold as a good (product), and it obviously is quite tangible; the degree of interaction between buyer and seller depends on whether or not the buyer wants modifications to the standard airplane that the seller offers. For a second example, computer programs such as Microsoft Word or Lotus 1-2-3 are products when sold by retail stores to typical buyers. However, computer programs that are sold in modified form (e.g., a specially tailored version of Lotus 1-2-3) involve service to the buyer; and training in the use of any program is a service as well. Thus, sale of computer software always includes a product, and when special adaptation or training is involved, it also includes a service.7 The technology used in each service sector must be defined, and the process of using that technology understood, before the analysis can move to the evaluation of technology transfer. For example, to understand the importance of technology in an industry such as management consulting, it must be



understood that the key technology is generally not a high-powered computer, but rather a system of information analysis and information transfer.

There have been few studies of the international transfer of technology in service industries, outside of those sponsored by the United Nations Center on Transnational Corporations (e.g., UNCTC [1989a, 1989b, 1989c]; UNCTAD [1994]). Other studies that have focused on international competition in services [U.S. Congress OTA 1987; UNCTAD 1991] have considered technology transfer in some sectors as a secondary issue. Studies that examine service industries in economic development [Shelp, Stephenson, Truitt and Wasow 1984; UNCTAD 1984] likewise offer some insights into technology transfer, but without a focus on this issue. The UNCTC has sponsored research into technology transfer in some sectors (e.g., commercial banking and construction engineering), and it has looked in detail at the structure of service sectors where TNCs commonly operate (such as financial services and hotels). The present paper extends the UNCTC work on technology transfer in services by presenting a detailed analysis of service-sector TNCs operating through affiliates in Latin America

The analysis is structured as follows. First, the principal research questions are posed. Next, the data sources and analytical method are described. Third, the empirical results are presented and analyzed. And finally, the implications of these results for company managers and other decisionmakers are considered.

PRINCIPAL RESEARCH QUESTIONS Three basic areas are examined as research questions in this analysis. Since technology and its transfer in service industry TNCs has not been explored adequately in the literature, the first question establishes the terms of reference:

Research Question 1: What is the key technology in each of these service industries?

This question is asked first at the level of the aggregate group of industries and firms, and then divided into parts to examine different stages of the value- added chain and to permit comparison with manufacturing industries. Inter- industry comparisons are made later in the paper. The second question looks at the transfer process:

Research Question 2: What are the main mechanisms and organizational forms used to transfer this technology?

Since it is found that most of the key technology is 'soft' - personal skills and knowledge - the transfer mechanisms for moving the skills and knowledge to foreign affiliates are elaborated in some detail. Likewise, the transfer process for each stage of the value-added chain is examined. With the terms of reference established, the third question pursues more specific analytical goals:



Research Question 3: How and why do technology and its transfer differ across firms, industries and countries?

This question is obviously complex, so in the discussion below, a series of hypotheses are stated, and their tests are presented as the detailed response.

METHODOLOGY AND DATA Primary data compiled for this paper come largely from a series of interviews at home offices and Latin American affiliates (i.e., subsidiaries, branches, partnerships, and other kinds of affiliates) of transnational corporations in five service industries: advertising, commercial banking, computer software, hotels, and management consulting. Initial interviews were carried out at the Latin American headquarters of several banks, computer software firms, hotels, and management consulting firms. Additional interviews were done by telephone with the Latin American executives of three advertising agencies. All of this input was used to refine the questionnaire that was subsequently employed in interviews in the region. The interviews at TNC affiliates were conducted with the general manager or designated alternative, following a structured format and generally lasting for approximately one hour.8

During the spring and summer of 1991, approximately eighty interviews were carried out at TNC affiliates in seven countries (Argentina, Brazil, Chile, Colombia, Ecuador, Peru, and Venezuela). In each country the objective was to obtain three interviews in each industry, including at least one firm not based in the United States. Firms were identified from lists of the largest TNCs in each industry (see UNCTC [1990]). Because of the relatively limited presence of TNCs in these service sectors in three of the seven countries, almost all of the TNC local offices were contacted to try to obtain the desired fifteen interviews per country. Due to unwillingness of a few affiliates to participate in the study, and inadequate availability of local offices of TNC firms in some industries, the actual number of interviews was approximately twelve in each country. The empirical data are used to examine the phenomenon of technology transfer through the production process (value-added chain) in each service sector. Interviews were used to establish the key elements of technology and the contractual form of transfer at relevant stages of the production process. This method of structuring the analysis seeks to cover all important kinds of technology and transfer that may appear in each industry.

BROAD COMPANY CHARACTERISTICS An overview of the company characteristics is presented in Table 1. Hotels are by far the largest employers in the group, with more than 600 employees on average working in each hotel. Advertising agencies are the most 'top-heavy' industry in staffing, with almost one manager or officer per staff member in their offices.



TABLE 1 Characteristics of Firms in the Five Industries

Commercial Computer Management Measure Advertising Banking Software Hotels Consulting

Number of firms 14 16 16 10 17 Average number of employees 142 172 138 658 245 Officers/staff ratio 1/1.1 1/2 1/5 1/17 1/4 Percent of global business done in Latin America 10% 11% 14% 16% 17% Median ownership 100% 100% 100% 100% 100% Average year of establishment 1954 1970 1968 1972 1956 Key technology Experience Experience Experience Experience Experience

Creativity Mgmt skills Mgmt skills Methodology Methodology Fin skills Comp skill Service Tech Info

Note: Almost half of the consulting firms are operated as partnerships. Source: Interviews at seventy-two TNC service firm affiliates in Latin America, 1991

All of the industries conduct approximately 100/o-20% of their global business in Latin America. These firms have been operating in Latin America for an average of more than two decades; the consulting firms and advertising agencies have longer experience than the software firms, banks and hotels.

All of the industry sectors show a preference for 100% parent-company ownership in their affiliates, though some differences are noteworthy. The consulting firms frequently prefer a partnership structure or association agreement; a significant number of hotels are locally owned franchises of TNC chains; and almost half of ad agencies are joint ventures or other contractual forms. These ownership forms are very similar to the same firms' structures in other countries.

EMPIRICAL RESULTS Each of the research questions is pursued here through hypothesis tests and/or descriptive statistics produced from the empirical data.

Research Question 1: What is the key technology in each of these service industries?

According to the interview responses, the key technology in every one of the service sectors under study was some kind of personal knowledge held by employees. The top five items that were cited include, in descending order:

1. Knowledge of/experience in the business (33%) 2. Methodology for producing the service (10%) 3. Management skill (9%) 4. Technical/specialized information (7%) 5. Financial skills (7%)



In addition, some of the executives interviewed stated that creativity, marketing skills and client relationships were a key technology for their firms. Less than 5% of those interviewed stated that computer systems or the firm's international network of affiliates were the key technology; these were the only references to company or machinery characteristics, rather than to personal knowledge or skills.

These responses identify the key technology in the five service sectors as 'soft' skills, embodied in people rather than in machines or other physical products. Interestingly, if specific services provided to clients were considered as 'products', then the technologies examined here can be categorized in the same manner as for industrial firms: namely products/services themselves; processes for producing the services; and management of the service business. The skills noted above then can be divided into product technology (knowledge and experience); process technology (methodology and technical information), and management technology (management and financial skills). By far the most frequently cited was product technology - knowledge of and experience in the particular service. Thus, in concept, the services have a similar technology emphasis as do physical product industries, though the services themselves are quite different from products in numerous ways.

Since technology differs along the value-added chain,9 a similar question was posed for each major stage of the chain: purchasing, production, selling, and after-sale service. As may be expected, the upstream part of the chain was more dominated by technical knowledge and skills, while the downstream, customer-related part emphasized more the relationships with clients. Table 2 compares the results through the value-added chain.

TABLE 2 Key Technology Ranking through the Value-Added Chain

After-Sale Stage Purchasing Production Selling Service

1. Knowledge/ Knowledge/ Market Contacts/ experience experience knowledge, relationships (28%) (29%) research (24%) (18%)

2. Training (17%) Methodology Contacts/ Market (11 %) relationships knowledge/

(20%) research (18%) 3. Computer Technical Company image After-sale

systems (11 %) information (9%) research (9%) (9%)

4. Technical Financial Selling skills Knowledge of information skills (9%) (9%) clients (9%) (9%)

5. Financial/ Creativity (8%) Knowledge of Technical forecasting clients (7%) information skills (6%) (7%)



Employees' knowledge of the particular service and experience in the industry dominated all stages of the value-added chain. The methodology for operating an affiliate's analytical work ranked very high in the production stage, but did not appear in the ranking for the other stages. Existing client relationships rivaled knowledge and experience as the leading technology at both of the downstream stages of the chain.

Among the five service industries studied, the key technology varied to some extent according to the degree of firm-specific, jointly provided knowledge. That is, in cases where the firm operated on a highly integrated basis, with shared knowledge and skills from different affiliates frequently used in service provision by the local affiliates, the key technology often reflected this integration. The technology was jointly provided by several people in the firm, and thus was specific to the context of that firm. This type of technology is difficult to copy by outside firms, since it is not embodied in one person, product or manual. Badaracco [1991] has termed this technology to be "embedded" in the firm, or resident in complex social relationships among people within the firm.'0 For example, in the sectors that relied more on joint provision of the service between the Latin American affiliate and the home office (or other affiliates), the importance of methodology was greater. Advertising agencies, management consulting firms and computer software firms demonstrated greater linkages between the home office and affiliate in the development and provision of the service (and greater emphasis on training of their officers) than did banks or hotels. Two of these three - advertising agencies and management consulting firms - rated methodology as one of the top two technologies in their business, while none of the other three groups of firms did. This result tends to support the notion that these firms have emphasized different technology due to their ability to benefit from firm-specific, jointly provided technology. It is difficult to compare these findings with what has been found in studies of manufacturing and extractive industries. One noteworthy difference is that the technology viewed as key in services is almost always not protected by patents or copyrights, but rather by secrecy. This contrasts with the key technology in many manufacturing applications, where patents are obtained for products and/or processes used to make products. The key technologies in services tend to be skills that are not capable of being protected by legal means, so the firms resort to keeping them internalized. II

In manufacturing, technologies relate to the production of a physical product, as well as to management of the business. The literature on non-service industries divides the managerial technology from the product and process technologies almost exclusively. Some exceptions, such as Behrman and Wallender [1976] and Robinson [1988], discuss the full range of technologies that may be transferred in manufacturing industries. Behrman and Wallender



found that 'soft' technology was the key in manufacturing industries, and that it was highly firm-specific, just as the present study finds for services. They found that the knowledge of how to produce a product or how to deal with problems in the production process was more important than possession of machinery or other physical goods that embody technology. Marton's [1986] discussion of the transfer of industrial technology by transnational firms to LDCs likewise emphasizes the 'soft' nature of the technology, viz., knowledge, skills, techniques, experience. These similarities lead to the conclusion that manufacturing and services may not differ so much as to the nature of key technology, but rather as to the application of that technology to physical goods or to intangible services.

At another level, it could be argued that the same emphasis on the transfer of product and process technology, rather than managerial technology, dominates services as well as manufacturing. That is, while managerial issues may be non-trivial in the success of any business, the key technology transferred in all of the industries seems to be that for producing the product/service and creating products/services that can be sold successfully.

Research Question 2: What are the main mechanisms and organizational forms used to transfer this technology?

This question must be pursued by dividing the issues into the means of transfer, and the vehicles or arrangements for transfer, each of which is analyzed below.

The Means The product, process, or managerial knowledge that is created or obtained by a firm can be used entirely internally to produce a product or service. In this case, technology would be transferred out of the firm through sales of its product/service to customers. Also, as people who work in the firm leave and take jobs elsewhere, some of the knowledge will be transferred with them. Similarly, a firm that undertakes to sell in an overseas market via its local sales subsidiary becomes a vehicle for international technology transfer to that country. Once again, the knowledge that is transferred may be moved through the simple sale of the product/service in which the knowledge is embodied or through the movement of employees to other firms, or through other means (such as copying by competitors). And finally, the firm may choose to sell its technology as an input to another firm(s), thus transferring it externally to additional markets. This paper looks only at the ways through which technology can be transferred from the home country of an international firm to its affiliate in a foreign country. Following Brooke's [1985, p. 62] view of the 'technology package' in service industries, a series of transfer types can be identified, as shown below.



Means of Technology Transfer

* Hardware (machinery) * Software . People transfer . People training * Documentation * Communication * Agreements (permissions)

These means are not mutually exclusive, of course. They may be used in varying combinations in different industries and at different stages of the value-added chain. In the empirical survey, the mechanisms used to transfer technology from the home office and other affiliates to the Latin American affiliates were typically multiple, including in descending order of importance: training programs, manuals, visits by experts, and employment of expatriates. Physical machinery was seldom noted as being important in the transfer process, nor were formal agreements between home office and affiliate. There were no significant differences in rankings of service transfer means among the industries studied, nor were there differences at different stages along the value-added chain.12

A noteworthy aspect of all of these service sectors is that the full service was largely produced locally in each affiliate. That is, the production process was not segmented to put only final processing or assembly in the local affiliate. This is largely due, of course, to the reality that services generally must be provided at the point of sale, rather than 'imported' from elsewhere. Nevertheless, this means that technology transfer is largely horizontal in these services, passing from one location of full-service activity to another. This contrasts with many manufacturing situations, where the value-added chain is more divided across affiliates of the firm.13

Vehicles or Arrangements14 for Technology Transfer

The arrangements for carrying out the transfer range very broadly from externalized forms to those that require some degree of parent-company equity presence in the host country. The main vehicles are listed below:

Vehicles for Technology Transfer

. Foreign direct investment . Exporting * Licensing * Franchising * Technical assistance contract * Management contract * Training contract * R&D contract * Turnkey contract . Co-production agreement * Representation contract . Subcontracting

In principle, every one of the transfer arrangements can be used between affiliates of a TNC, and all except foreign direct investment can be used between a TNC affiliate and an unrelated company. In fact, only a few of these



TABLE 3 Organizational Forms Used by TNC Service Firms in Latin America

* Wholly owned subsidiary (47%) * Partnership (13%) * Joint venture (10%) * Management contract (8%) * Association agreement (7%) * Licensing agreement (6%) * Representative office (4%) * Other (5%)

Source: Interviews at seventy-two TNC affiliates in Latin America, 1991

arrangements appeared among the sample firms. Table 3 presents the survey results on organizational form. Wholly owned subsidiaries were the most common organizational form, appearing in 47% of the cases. Partnerships in which global partners shared in the ownership of the affiliate were the second most common form (13% of the cases). Partnerships generally included one or more of the local executives in the global firm's partner group, so that ownership could arguably be viewed as joint between partners overseas and locally."5 Association agreements were similar to licensing or management contracting agreements, in which the local firm had a contractual, fee-based tie to the transnational parent, but existed as an independent legal organization. These arrangements demonstrate the firms' use of ownership as a means of controlling their technology and in general controlling the performance of affiliates in Latin America. This finding is consistent with other studies of TNC manufacturing firms in developing countries [Kobrin 1987; Grosse 1992], where the dominant organizational form is the wholly owned subsidiary. It may be hypothesized that the firms that relied more on firm-specific, jointly provided services would have greater need to maintain full ownership and control over their foreign affiliates. Dividing the seventy firms in the sample into those using more firm-specific technology (advertising, management consulting, software) versus the others, a simple regression model of percentage ownership by the parent showed a highly significant, positive coefficient (p = .0000) for the independent variable (firm-specific technology) and an R2 = .42 (F = 45.99, p = .0000). Measuring the degree of jointness of service production or firm specificity as officers/staff - since more officer- intensive firms were those that claimed greater use of multiple-person teams in producing their services - a similar model showed a highly significant, positive coefficient (p = .0006) for the independent variable (officers/staff) and an R2 = .18 (F= 13.13, p = .001). With both measures, greater degree of firm specificity was correlated with greater ownership percentage in the affiliate.

Research Question 3: How and why do technology and its transfer differ across firms, industries and countries?



It was expected that both technology and transfer methods would differ between firms with different characteristics and possibly also between countries with different economic and legal characteristics. The primary emphasis was placed on examining inter-firm differences.

The key technology itself was expected to differ for firms in different industries. This turned out to be true only to the extent that all sectors rated 'experience' as the most important technology, while advertising and consulting firms rated 'methodology' as the next most important technology, and the others rated various technologies in their orderings. No statistical inferences were drawn on this point.

Next, the amount of technology transfer was explored, using several measures of the transfer. In principle, what is sought is a measure of the value of the technology transferred. This presents a complex valuation problem, since the value of the transfer depends on how the technology is used by the affiliate.16 Alternatively, it could be argued that since the technology is principally people-embodied skills, then the greatest transfer will occur when the greatest skill level is achieved, for example, through training or transfer of experts.

In the empirical analysis, several simple measures of the quantity of technology transferred were used: the number of training days per year for officers and staff, the number of expatriates employed, and the number of visits by home-office experts per year.17 In each case, the argument is that more technology is transferred when more of the factor is observed (e.g., more training days or visits per year). The amount of technology transferred was hypothesized to be a function of a series of contributing factors, based on company, industry and country characteristics. In simplest terms, technology transfer was expected to be greater when the cost of carrying out the transfer was lower, when the barriers to transfer were lower, and when the benefits of the transfer were higher. For example, when a firm has greater ability to control the technology because of its joint provision (embeddedness), or because of greater ownership and control of the affiliate, it would be more likely to transfer that technology. Likewise, when the host market is larger, the firm may anticipate greater benefits from carrying out the transfer. Also, when the firm has many international affiliates, it may have greater ease of transferring technology to affiliates and thus lower cost, so more transfer would be expected.

Factors expected to influence the amount of technology transfer include:

Ownership. Greater ownership of the affiliate, and thus greater ability to control it, is expected to result in greater technology transfer (e.g., Behrman and Wallender [1976]). Measured as a percentage of the affiliate owned by a parent firm.



Experience. The longer the affiliate has been in place, the lesser/greater the amount of technology transfer expected. In support of the first interpret- ation, it was anticipated that greater experience in the affiliate would permit greater independence from the home office and thus less likelihood of direct, measurable technology transfer. But second, it was anticipated that greater experience in the affiliate would lead to a greater level of cooperation between affiliates and thus greater transfer of technology. The direction of influence was left as an empirical question. Measured as the year of establishment of an affiliate.

Internationality. The more globally extended the firm, and thus the more previous opportunities it has faced to transfer technology to affiliates worldwide, the greater amount of technology it is likely to transfer to the affiliate (e.g., Telesio [1979]). Measured as the number of countries in which the firm has affiliates.

Joint. The more firm-specific and jointly provided the technology in an industry, the easier for the firm to protect that technology, and thus the greater amount of technology transfer expected. (e.g., Kogut and Zander [1990]). Measured alternatively as officers/staff, or as a dummy variable = 1 if advertising, consulting, or software, and = 0 if banking or hotels.

Country. It was expected that larger countries would encourage technology transfer because of desirable markets; and it was also expected that governments in such countries would be more likely to demand technology transfer in their dealings with foreign firms. For both reasons, a larger country was expected to be associated with greater technology transfer. (e.g., Stobaugh [1988]). Measured as the 1990 GDP of the host country.

These factors were used in a model to explain the amount of technology transfer. The model may be described as:

TECHNOLOGY TRANSFER = a + bi(OWNERSHIP) + b2 (EXPERIENCE) + b3 (INTERNATIONALITY) + b4 (JOINT) + b5 (COUNTRY),

where the direction of the expected relationship is positive in all instances In simple, bivariate regression models, all but one of the hypothesized factors demonstrated a positive, significant (P < .01) correlation with the technology transfer measures.18 Age of the affiliate was consistently negatively correlated with the amount of technology transferred. The full model then combined these factors. Table 4 presents the results of the full model using multiple regression analysis.



TABLE 4 Model Results, Determinants of Technology Transfer in Services

\ ~~Dependent \Variable

Indepeindent \Training Training Visits by Variables \Officers Staff ExpertSa

Age of affiliate -0.563*** -0.628*** -0.248 (-3.00) (-3.25) (-1.09)

Internationality of the firm 0.430*** 0.308* 0.186 (2.75) (1.84) (1.08)

Percent ownership by TNC -0.381* -0.108 0.171 (-1.92) (-0.50) (0.76)

Country of affiliate 0.195 0.072 0.124 (1.47) (0.50) (0.86)

Firm specificity 0.028 -0.213 0.048 (0.22) (-1.57) (0.33)

Adj. R2 0.55 0.50 0.41 F-value (prob.) 12.87 10.45 7.97

(0.000) (0.000) (0.000) Number of obs. 51 49 52

aThe model of technology transfer based on 'visits by experts' has produced very weak results. While the model has a significant F-statistic, the individual factors have insignificant coefficients. This is not due to multicollinearity since the highest correlation between independent variables is 0.38. The result is probably due to the fact that 'visits by experts' is a weak measure of technology transfer, and thus does not model well. *significant at .10 level; **significant at .05 level; ***significant at .01 level Coefficients are presented as standardized estimates.

The table presents three sets of results. Column 1 shows the model using officer training days per year as the dependent variable. Columns 2 and 3 show the full model using staff training days per year and visits by experts per year as the dependent variable, respectively.

The basic model using officer training days per year as the measure of technology transfer produced significant coefficients for most of the variables, although country size was not quite significant, and firm specificity was also insignificant but was signed as expected. The degree of internationality of the firm was strongly and consistently positively correlated with technology transfer. The age of the affiliate was strongly and consistently negatively correlated with technology transfer, supporting the hypothesis that newer affiliates needed greater support from the home office than did more-established ones. The percentage of the affiliate owned by the parent company was consistently negatively correlated with technology transfer. Apparently in these service industries, the firms with less ownership stake transferred more technology via officer training. The size of the host country as measured by GDP was positively but insignificantly correlated with technology transfer. The degree of firm specificity of the technology, as measured by the ratio of officers to staff, was also positively but insignificantly correlated with technology transfer.

The model using staff training days per year produced similar though less significant results than the first model, as shown in column 2 of the table. The



model using the number of visits by experts from other affiliates of the firm showed reasonable explanatory power, but none of the coefficients were significant. 19

Overall, these results provide some support for three of the five hypothesized relationships. Greater technology transfer does indeed occur when the firm is more international, and when the host country is larger. Also, more recently established affiliates receive more technology transfer than do longer-lived ones. Although jointly provided, firm-specific technology was positively correlated with technology transfer in two of three models, the coefficient was never significant. Only the percentage ownership of the affiliate by the home office showed a relationship to technology transfer that was opposite to that which was hypothesized - one could possibly conclude that ownership forms such as franchises and management contracts required more input from the home office to ensure successful technology transfer than more closely controlled forms such as wholly owned subsidiaries. This in itself is an interesting finding, since studies of manufacturing industries have shown the opposite relationship, due apparently to firms' unwillingness to share as much technology with partners in joint ventures or contractual agreements as they share with wholly owned subsidiaries.20 It was expected that greater technology transfer (or at least more successful transfer) would be associated with better performance of the affiliate. This idea was examined only tangentially, by comparing the affiliate's market share for its main product/service with measures of technology transfer. Simple regression models of market share based on the four measures of technology transfer produced all significant positive coefficients and significant regressions, all at the .001 significance level (except for number of expatriates assigned to the affiliate, which was significant only at the p = .02 level). Using this measure of performance, greater technology transfer was indeed associated with better performance.

CONCLUSIONS The key technology in the five service industries under study was in all cases 'soft' technology: knowledge of or experience in a business; a methodology for producing a service; or special skills of the firm's employees. This technology tended to be first product-specific, second process-specific, and third management-specific. In the value-added chain, key technologies in upstream activities such as purchasing and production were technical skills and knowledge, while key technologies in downstream activities such as sales and after-sale service were client relationships and market knowledge. The technology that these firms employ, beyond the non-proprietary equipment such as personal computers and telecommunications gear that are available to any firm in these industries, tends to be firm-specific and jointly



provided (embedded in teams of people within the firm). That is, each firm develops its own global information-processing system and methodologies for carrying out its work that link affiliates worldwide and that tie users to that firm's system. Advertisement design and development are not identical among ad agencies, and information about each firm's process is possessed by its professionals and guarded internally. The methodology for carrying out a particular management consulting analysis is tied to the computer software of the TNC firm and to experts in various locations of the firm who can provide advice in using the given methodology. Even the methodology for client service in an ad agency is tied to the agency, through procedures that require in-house expertise for computerized designs and even for conducting relations with the media where ads are placed. Across the five industry sectors, the importance of methodology for producing and/or delivering a service was greater for the sectors that rely more on joint provision of the service between the local affiliate and the home office (or other affiliates). The means for transferring key technologies were varied, emphasizing people- transfers, that is, training programs, visits by experts and the employment of expatriates. The vehicles or arrangements for transferring technology principally involved the use of wholly owned affiliates, though other arrangements such as joint ventures and management contracts were also found. The sectors characterized by more joint provision of their services were more disposed to use wholly owned affiliates.

In the attempt to identify factors that contribute to a greater degree of technology transfer, it was found that a more international firm, a larger host country, and a more recently established affiliate were positively correlated with the transfer of technology. Surprisingly, the lower the percentage of parent-company ownership, the greater the transfer of technology. This last point contrasts notably with the experience of manufacturing industries, and it may be due to the need for service firms to better control or indoctrinate contractually linked (not wholly owned) affiliates in the global firm's technology. These service-sector results contrast in a number of ways with the characteristics of manufacturing and extractive industries. Technology in the case of services is much more often soft, rather than embodied in physical goods. The technology is most often transferred horizontally in service sectors, since most affiliates produce most of the service locally rather than segmenting the production process across affiliates as occurs with some frequency in manufacturing. Greater technology transfer takes place between affiliates with lower parent-company ownership in services, while the opposite is found in manufacturing studies. Similarities do exist: for example, the key technologies in both kinds of industries tend to be divisible into product (service), process and managerial categories, and people-embodied technologies seem to be most important in both cases.



Additional study is needed to extend these results to more countries, though the evidence taken from other studies does support the findings here. The present author's discussions with managers in industrial-country affiliates of these service firms suggest that the process of technology transfer is similar in those countries. Better measures of technology transfer also are needed; the challenge is to capture the cost of the transfer and the benefit to the firm of realizing that transfer. The relationship between technology transfer and corporate performance is similarly a key issue that is largely beyond the scope of the present study. Given the importance of both technology as a competitive advantage and service industries as employers and income-generators, these issues clearly call for additional analysis.

NOTES 1. See, for example, Chudson [1971]; also see, Baranson [1978, p.13]; Marton [1986b, p. 4]; Robock [1980]. The UNCTC [1988] follows a similar definition in Figure 1, p. 178. 2. Even this statement is too strong, since possession of superior technology does not imply an advantage if the firm has to pay so much for superiority that its benefit is canceled by the additional cost. 3. For a discussion of interfirm vs. intrafirm technology transfer, see Contractor [1989]; Davidson and McFetridge [1984]; and United Nations CTC [1987, pp. 12-16]. 4. Mansfield [1975] draws this distinction, which is quite useful in service industries as well as for manufacturing. When the technology is primarily management skill, it still may be transferred horizontally from parent firm to affiliate, and/or it may be developed further abroad when applied there and thus constitute a vertical transfer. 5. Several other distinctions among service industries are made in the literature. See, for example, Quinn [1987, pp. 119-20]; also see Miles and Wyatt in UNCTAD [1991, para. 48, 70-86]; and Boddewyn et al. [1986]. 6. To complicate the discussion even further, one could distinguish between services in which production and consumption can be decoupled and those where they cannot. For example, management consulting firms and computer software firms could conceivably produce their services in the home country and deliver them to clients in the host country. Hotels and restaurants, on the other hand, need to produce and deliver the service in the same location, generally speaking. See Erramilli and Rao [1990]. In the current context, all of the service providers are largely producing and delivering the service in the host country, although in most cases there is some degree of jointness of production of the service between the local affiliate and the home office of the firm. 7. This paper's examination of the computer software industry focuses on software that is adapted to clients' needs, and to other services provided to clients by the software vendors interviews were carried out using a structured questionnaire with ninety-six questions, mostly closed-ended. (e.g., How many expatriates work in your affiliate?) 8. The head of the local TNC affiliate was contacted by phone to arrange the interview, and either that person or a designee answered the questions. All questionnaires were written and answered in Spanish, except those translated into Portuguese and used in Brazil. The questionnaire is available from the author upon request. 9. Any firm's business activity can be divided into the components that comprise the process between the purchase of necessary inputs to the provision of the final product or service. A commercial bank, for instance, buys office equipment, rents or buys office space, hires personnel, and obtains a variety of other inputs to its business. A bank produces financial services such as depository instruments and loans, plus a range of other services such as



investment advice, credit analysis, and guarantees. After the sale of one of these services to a client, the bank may provide after-sale service until the loan, deposit, or other instrument matures and is redeemed or canceled. The value-added chain is discussed in detail in Porter [1985, Chs. 2, 5] and applied to international business in Grosse and Kujawa [1992, Ch. 2]. 10. He discusses embedded knowledge that arises from teamwork within the firm, from craftmanship that is developed by members of the firm, from inter-firm relationships such as keiretsu and federations of firms in the same business, as well as from geographical concentrations of firms such as in Silicon Valley. Our focus is on the teamwork form of embeddedness. l1. This point is illustrated tangentially by UNCTAD [1986], in which it is found that Portuguese affiliates of TNCs use technology contracts with parent firms principally in the form of licenses for manufacturing firms and in the form of service contracts for service firms. 12. Virtually all of the firms responded that they transferred key technology through 'various means', including training programs and manuals and often other ways. It was not possible to separate out one or two of the mechanisms as being more important than the others. 13. This point is illustrated by a UN study that shows that service-sector TNC affiliates in developing countries have employee compensation levels similar to those in parent companies, whereas manufacturing affiliates have much lower compensation levels. [UNCTAD 1994, pp. 58-59]. Similar findings in the U.S. Department of Commerce Benchmark Survey on FDI abroad show that service-sector affiliates have much closer compensation levels to those in the parent firm than manufacturing affiliates [USDOC 1989]. These results imply that similar activities and skill levels are used in the services affiliates and parents, while manufacturing firms have delegated lower-tech and lower compensation activities to affiliates. 14. The UNCTC defines "arrangements" for commercial technology transfers in UNCTC [1987, pp. 2-6], using a classification system very similar to that presented here. The contractual vehicles for transferring technology are also compared and analyzed in Bonin in Safarian and Bertin [1987, pp. 73-84]. Robinson [1989] discusses these transfer arrangements ('mechanisms' in his terms), along with legal forms (such as subsidiary, branch, partnership, and joint venture) used by TNCs to effect the transfers. Erramilli and Rao [1990] examine foreign market entry modes used by service firms, thus examining the vehicles through which technology and other company assets are transferred to host countries. Finally, Davidson and McFetridge [1984] examined internalized (FDI) vs. externalized (licensing) modes for technology transfer by TNCs, comparing empirical strategies of thirty-two U.S.-based TNCs in a wide range of host countries over time. 15. In fact, the local affiliates in partnerships were usually viewed as wholly owned parts of the global firm. The fact that one or more local people were partners did not detract from the logic that the firm's global earnings accrued to the global partners, though of course local work for clients would produce local earnings as well (e.g., billable hours of the people involved). 16. This problem has been studied, for example by Galbraith [1990]. 17. Another measure of technology transfer that could be used in this context is royalties paid by the affiliate to the home office. This measure is meaningful in manufacturing industries, where technology often is embodied in machines or patented processes, but much less so in services. Very few of the firms in this sample paid royalties at all, so statistical tests were not performed using this variable. 18. All of the bivariate regressions produced significant coefficients for the independent variable and a significant F-value for the regression. Two of the models using visits by experts' as the dependent variable proved significant only at the .05 level. 19. The model using number of expatriates per firm as the dependent variable produced no significant coefficients and poor explanatory power. It is not clear why this result was so weak; in fact very few expatriates were employed by these firms except for hotels and banks.



20. Alternatively, one could hypothesize that greater technology transfer may be carried out through expatriate assignments in wholly owned affiliates, while in more contractually tied affiliates formal training and contractually stipulated visits by experts may be used more often.

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Issue Table of ContentsJournal of International Business Studies, Vol. 27, No. 4, 4th Qtr., 1996Volume Information [pp. 843 - 848]Front MatterValuation of the Operating Flexibility of Multinational Corporations [pp. 633 - 653]Foreign Direct Investment by Japanese Electronics Firms in the United States and Canada: Modelling the Timing of Entry [pp. 655 - 681]Foreign Direct Investment in Hungary: Resource Acquisition and Domestic Competitive Advantage [pp. 683 - 709]Expatriate Performance Appraisal in U.S. Multinational Firms [pp. 711 - 738]A Cross-National Study of Managerial Values [pp. 739 - 752]Culture and Congruence: The Fit between Management Practices and National Culture [pp. 753 - 779]International Technology Transfer in Services [pp. 781 - 800]Book Reviewsuntitled [pp. 802 - 807]untitled [pp. 807 - 811]untitled [pp. 811 - 815]

Dissertation Abstracts [pp. 817 - 839]International Business Books/Publications Received between July 1 and September 30, 1996 [pp. 841 - 842]Back Matter [pp. 801 - 840]

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