MANAGERIAL AND DECISION ECONOMICS, VOL. 13, 539-541 (1992)

Note: Some Differences between Licensed and Internalized

Transfers of Machine Tool Technology: An Empirical Note

Howard Davies Head of Business Studies, Hong Kong Polytechnic

This note uses survey evidence drawn from the machine tool industry in three countries to identify some of the differences in form between technology transfers which are internalized and those governed by licensing contracts between independent firms. The results show that, consistent with transactions cost theory, the internalized mode of governance leads to the transfer of a much broader range of information and skills than licensed transactions.

INTRODUCTION

One broad hypothesis drawn from transactions cost theory (Williamson, 1985) and the theory of internalization (Buckley, 1985; Buckley and Cas- son, 1976) is that technology transfers organized by management fiat within a company will differ in predictable ways from those organized through contracts between independent firms. This note provides empirical evidence in support of that assertion, for the particular case of the machine tool industry in three countries-the USA, Germany and the United Kingdom.

THEORETICAL ANALYSIS

A firm which finds it profitable to transfer techno- logy from one location to another has to choose whether to do so through a contract with an independent firm or through its own internal hier- archy. According to transactions costs analysis (Hennart, 1989), the choice between these ‘modes of governance’ depends upon a number of factors, which determine their relative efficiency.

The first set of factors concerns the information available to potential partners to a contract. If the technology which is being transacted is poorly defined, or consists of ‘know-how’ distributed among individuals, then there will be a problem of ‘recognition’ (Williamson, 1986). The technology

cannot convincingly be offered for sale to buyers and an internalized transaction is required. The second problem which arises is the problem of ‘disclosure’ (Arrow, 1962) whereby a purchaser of information does not know its value until it has been disclosed to him, in which case he has acquired it without cost.

These problems are not wholly intractable be- cause they can be overcome if the technology being transacted is clearly codified or ‘non-tacit’ (Teece, 1981) and if the legal system provides sufficient protection for a technology seller who discloses valuable information to potential buyers. The ana- lysis suggests, therefore, that licensing agreements will involve relatively simple transfers of well- defined, easily codified and protected information, in comparibn with internalized transfers, where less tacit ‘know-how’ and ‘corporate skills’ (Gabriel, 1967) may be involved.

DATA AND RESULTS

In order to test the hypothesis, data were collected through a postal survey of all metal-cutting ma- chine tool firms listed as members of the major trade association in each of the USA, Germany and the United Kingdom. This met with a response rate of 39%, giving 204 usable responses. In order to identify whether or not technology transfers were taking place, each firm was asked whether it was

01 43-6570/92/060539-03$06.50 0 1992 by John Wiley & Sons, Ltd.

540 HOWARD DAVIES

currently licensing out products or processes to a firm having no ownership links with itself and whether other establishments, related by owner- ship, were currently producing products or pro- cesses which originated in the responding establishment. The responses showed that 73 re- spondents (36%) were involved in either outward licensing agreements (24%) or internalized transfers

In order to characterize the scope and nature of the technology transferred in each case, the survey collected information on three key features of the technological assistance provided, i.e.:

The areas of expertise involved The objects of the transaction The forms in which the technologies were embodied

Each of these may be examined in turn. Table 1 shows the areas of expertise involved in

the different forms of technology transfer. Con- sistent with the hypothesis, it shows that licensing agreements were almost exclusively concerned with expertise in ‘Engineering’, while internalized trans- fers more frequently involved ‘Management Skills’ and ‘Marketing Information’.

The second aspect of technology transfer which was examined concerned the object of the transfer, distinguishing between complete machine tools, controllers or software, sub-assemblies/compo- nents and processes. If the theoretical analysis is correct, it is to be expected that licensing would be better suited to the one-off transfer of information concerning complete machines, being less well suited to the transfer of processes or components whose integration into the recipient’s production requires extensive collaboration and mutual disclo- sure of information between supplier and buyer. As Table 2 indicates, again there were marked differ- ences between the two forms of transfer. Licensing agreements were most frequently concerned with the transfer of complete machine tools, with only

(23%).

small proportions of the agreements being con- cerned with either processes or sub-systems. Intra- group transfers, on the other hand, involved sub-assemblies and components in more than 60% of the cases covered.

The third aspect of the technology transfers which were investigated concerned the nature of the technological assets transferred and the scope of the package of assistance provided, If the theoretical analysis is correct, it is to be expected that licensing transactions would concern relatively simple pack- ages of assistance, containing codified information and patents, while internalized transfers would be less restricted. In order to examine that hypothesis, respondents were asked to describe the tangible assets transferred to the recipient of the technology, as shown in Table 3.

Part (a) of Table 3 confirms the hypothesis in that patents featured more frequently in licensing agree- ments while personnel and equipment were more often included in internalized transfers. Part (b) of the table shows the scope of the packages of assist- ance provided under each ‘mode of governance’, drawing distinctions between ‘limited’, ‘intermedi- ate’ and ‘comprehensive’ packages of assistance. As the figures show, the hypothesis is again supported in that ‘comprehensive’ packages of assistance featured more frequently in intra-firm transfers than in licensing agreements, while ‘limited’ pack- ages were most frequently associated with licensing.

SUMMARY AND CONCLUSION

The evidence cited here has supported a series of hypotheses drawn from the theory of transactions costs. Internalized transfers of technology have been shown to involve different areas ofexpertise, to have different objects and to provide different pack- ages of assistance from licensing agreements. If the

Table 1. Areas of Expertise Involved in Technology Transfers Liccnsing-out Intra-firm transfers

No. 70 No. %

Engineering 48 98 40 a7 Management skills 1 1 22 25 54 Marketing information 12 24 23 50 Information on sources of supply 1 1 22 19 41 Total number of cases 49 too 46 100

Source: Author’s survey.

LICENSED AND INTERNALISED TRANSFERS 54 1

Table 2. The Objects Agreements

Complete machine tools Controllers/software Sub-assemblies/components Processes Other Total number of cases

Source: Author’s survey.

of Technology Transfer

Licensing No. %

42 86 2 4 9 18 3 6 6 12

49 100

Intra-firm transfers No. Yo

32 70 12 26 28 61

8 17 11 24 46 100

Table 3. The Package of Assistance Provided Licensing

No. %

(a) Technological assets provided Patents 30 61

Examples of product 24 49 Personnel on secondment 26 53

Total number of cases 49 100

Specifications/drawings 49 100

Equipment 5 10

Intra-firm transfers NO. %

16 35 40 87 20 43 34 74 19 41 46 100

(b) The scope of the package transferred Limited 22 45 8 17 Intermediate 23 41 22 48 Comprehensive 4 8 16 35 Total number of cases 49 100 46 100

Note: A ‘Limited’ package is defined as one containing any combination of patents, drawings/specifications or examples of the product but neither personnel or equipment. A ‘Compre- hensive’ package is defined as one containing both personnel and equipment. An ‘Intermediate’ package is one which is neither ‘Limited‘ nor ‘Comprehensive’. Source: Author’s survey.

evidence points to any single conclusion of signi- ficance it must be that, in the machine tool industry at least, the internalized transaction is the most powerful and flexible medium through which tech- nology may be transferred. Companies or countries which seek to acquire technology through licensing agreements need to be well aware of its limitations as a mode of governance.

Acknowledgements

The author acknowledges research assistance from Alan Jones and David Reece of Humberside Polytechnic and financial assistance provided by the Economic and Social Research Council under Award No. F00/23/2240. Thanks are also due to those executives who assisted with the survey and to the journal’s referees.

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