Management of Tradable Technology

Introduction

Technology is one of the most important factors for a firm to achieve above-average profit. A firm with better technology in an industry can provide products of  higher quality, or provide products of  standard quality at lower prices. Technology is also one of the most important ways to create new market.  Innovations provide consumers new products and  new way of living, working and entertaining.

Among all the technologies, information technology  is creating the most profound impact on economy and society. With the information revolution in the last a few decades, information flows faster and faster. The market information is now easily accessed and processed by firms so that the firms can respond to the market faster. Because of detailed and timing market information,  technology and innovation are more and more active in all walks of business.  New businesses are innovated under the name of reengineering the corporate; New operations are innovated such as just-in-time management and massive tailored consumer goods; New products are innovated from electric game to derivatives of  financial products.

Technologies and innovations provide new products and service.  These new products and services change the market.  The changing market introduces severe competitions, and the competitions  stimulate further application of technology and innovation. The use of  technology creates a new market or fragments the existing market, which expand the range of competition. The market competition and technology progress interact with each other and escalate together. This strengthens the competition in the market and shortens the product cycles. Companies that do not upgrade its technology will be squeezed out of the market sooner or later. Companies that do upgrade its technology but do not manage the technology wisely may also loss profit.

To manage technology, it is important to understand the character of knowledge based products. Knowledge is one of the important components of  technology. A basic character of knowledge is that the use of it by one does not diminish the use of the same knowledge by the other. This character is a two-edges sword.  Rapid expend and application of technology could produce premium profit and the real economic profit without increasing cost more than copying the knowledge. However, competitors can easily entry the same market if a knowledge is leaking to another hand without controlling.

One aspect of managing technology is therefore the trade of technology – letting a known technology be applied to as many areas as possible and be used as many users as possible in such a controlled way that will maximize the profit of both the owners and users of the technology. The trade, of  course, is not ordinary buy and sell. It refers all the transactions that the owner of the technology gains some compensation while the user of the technology will share some cost or risk.  In technology market, there are many forms of trades: ordinary trade, turnkey consulting, licensing and joint venture. A better understanding of how technology is traded in the market will enable a manager to use technology and innovation wisely and strategically.

Technologies on the market

Technology in a common sense is the application of science and knowledge to industry and or commercial objectives. It may include the entire body of the methods, ideas, and materials to achieve the human objectives. Technology consists of learned knowledge and  plans for action which are manifested in the tools, techniques, and skills employed. In the growth sense, technology can hardly  be separated from economy, nor can it be separated from human civilization evolution.  When human used stone and stick for hunting, he invented a hunting technology. They used their tools, skills, and knowledge.

 

Technology used to be transferred and  exchanged from place to place and from culture to culture without being regarded as a tradable property.  There have been many inventions in the human history that were fatally important, such as the use of fire, knife, wheels, paper, printing, agriculture, pottery, rope, etc. Technologies have spread without being regarded as tradable property until modern history.

 

When society evolved into market economy,  property is transferred by means of trade. But event today, not every technology is traded by its own property right. Most technologies are  transferred as part of the goods traded. The person who buys a vehicle acquires the technology of wheels. The person who buys a grocery store also acquires the basic know-how by observing the operation during the transaction.  Some technologies are so easy to acquire that it can be copied by mere observation.  So the intellectual property rights (IPR) legislation is established  by governments to ensure that the producers of technology reap the rewards of their investment, effort, and creativity. With the emerging of many knowledge based companies such as Microsoft, with the increasing investments and technology transfers in the global market, and with the electronic information flooded on the World Wide Web, IPR becomes a really hot issue these days.

 

Intellectual property right is a new concept in the last hundred years or so. Perhaps the earliest idea of IPR was expressed by Thomas Jefferson in 1813:

If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of everyone, and the receiver cannon dispossess himself of it.

 

IPR regulations differ from country to country. It reflects the  technology policy of that government. Most common legislature on IPR is copy right, paten, and trade mark. Some countries may also include industry design.  Technology trade in the world, therefore, will arouse dispute between countries because the difference of laws. To facilitate the technology trade internationally, conventions may be reached among multiple countries by negotiation. Among the  conventions established in the past are the Paris Convention (1883), Berne Convention (1886), and the Universal Copyright Treaty (1952). The most recent agreement reached is Uruguay Round Agreements of 1994, after 8 years of negotiation of WTO. The Uruguay Agreements covers IPR in copyright and related rights, trademarks, geographical indications, industrial designs, patents, layout-designs (topographies) of integrated circuits, protection of undisclosed information, and control of anti-competitive practices in contractual licenses.

 

Copyright is a form of protection to the authors of "original works of authorship" including literary, dramatic, musical, artistic, computer programs, compilation of data, and certain other intellectual works. Copyright protects expressions but not to ideas, procedures, methods of operation or mathematical concepts as such. Before computer applications, copyright is more in the field of art than in technology. With the increased use of computers in business, however, copyright plays an indispensable role in technology transfer nowadays because it protects copyright of software that is inseparable part of many technologies.   

 

Trademark is any sign, or any combination of signs, capable of distinguishing the goods or services of one undertaking from those of other undertakings. Such signs, in particular words including personal names, letters, numerals, figurative elements and combinations of colors as well as any combination of such signs,  can be registered  as trademarks.  Trademark is just a symbol, not a technology. However, it protects the reputation of a company that uses advanced technology to produce competitive products.

 

Geographical indications are indications which identify a good as originating in the territory of a Member, or a region or locality in that territory, where a given quality, reputation or other characteristic of the good is essentially attributable to its geographical origin. Geographical indications are protections of the reputations of goods, service, and technology of specific firms or region. 

 

An industrial design is any new or original shape, pattern or ornamentation applied to a useful article of manufacture, such as textile designs, the shape of a table or the decoration on the handle of a spoon. It looks  like a copyright in a non-publishing form or in physical forms.

 

A patent is a grant of a property right to the inventor to exclude others from making, using or selling the invention for a period of years. It requires the full disclosure of the invention. Patent is most important in technology trade. Innovations and inventions of new technology are protected by patent in the trade. 

 

Undisclosed information refers to the so called trade secret. The protection of it may be let to business ethic, enforcement of contract between employer and employees, or under criminal law, depending on local business and law practices.  Most of trade secrets are business or technology know-how, so it is very important in the trade of technology.

 

Governments use control of anti-competitive practices in contractual licenses to prevent the abuse of intellectual property rights which has an adverse effect on competition in the relevant market.  For example, the lengths of period granted to patents are only a finite number of years. It is 20 years in Canada, 17 years in US, and 15 years in China. This means that the owner of a patent could not monopoly the technology for more than that period. On the other hand, trademark and geographical indications are used to protect fair competitions.

As we can see, the trade of technology is very complicated. It is a series of legal procedures one has to take for managing technology. Some procedures have to be taken even a owner has not intention going into technology market, such as that you may want to apply a paten for the protection of the technology you have no intention to trade.  To what extend the owner of the technology could be protected depends on the local legal system, how enforceable are those laws, and how the owner manage the technology.

Purchasing verses Developing in House

To manage technology, we must view technology as an asset of the company and aim to maximize the return on this asset. To buy it or to develop it is the first issue about technology strategy. It is the issue about where and how to source corporate technologies.

First is the cost of acquiring technology. Some technology is available in the market, such as software. Because overhead of R&D of a software is very high compare with the material cost in producing a copy of software, there is a positive economies of scale in the software industry. Volume of sale is very important for market available software. If a market available software fit to company’s technology specification, it is usually much cheaper to purchase it than to develop it in house. If a software is not available in the market, there exist other ways to acquire it other than to develop it in  house. If economies of scale, outside specialist,  or learning curve effect are significant in reducing cost, one can contract a consulting firm to develop it, or outsourcing the corresponding business.  Merger with other companies is a quick and fast way acquiring technology that exists but not available in the market.  In house development of technology is important if the technology provides the company a strategic competitive advantage. In such a case, market performance is more important than cost. Companies should develop its own technology if the technology provides monopoly in the market, develops a new market, enable the company response to the market quickly and proactively. 

Market consideration is another factor to determine the technology strategy. Acquiring technology outside may be a suitable way responding to market demand. On finds the needs of market, defines a product for the targeted market, resort to available technologies that support the production of the product. This is market pulled strategy that applies technology even it is beyond a company’s engineering resources. This strategy is goods for companies that have comparative advantage of natural resources and some tangible assets. However, these firms may also develop technology in house, because of the uniqueness of some technology. For knowledge-based company that have comparative advantage of intangible intellectual asset and strong engineering power, the technology-push strategy should be more attractive. The company should consider how to explore all their existing and potential advantage of their technology. What  is the other utility of their technology? What kind of products could be produced by the technology, and what they can develop in their house. These companies develop technology in house, use their technology to create new market and to target some niches of market segments.

Timing is also a vital strategic consideration. If the technology of firm is below industry average, outsourcing may be a quick way to catch up with industry standard. However, if time allows and the firm has the promise to develop most advantaged technology, develop in house may give a firm the jump of technology competitiveness. When a firm has the most advantaged technology, keeping developing in house will provide the firm the value of option when and where to roll out the technology, so the firm has control on responding the market at the right time.

Products mix and life cycle is an important consideration to maintain in house development. If the life cycles are too short and there is no enough cash cow products to finance the R&D, the firm may have to resort to acquiring technology out side the organization.

To trade verses not to trade

There are two ways to make profit from a technology: used the technology to produce goods or service, and to provide (to sell) the technology for clients to enhance their profitability.  Because selling technology is different from selling goods or service, mere price is not enough to determine a selling.  There are more factors to be considered to decide which way make more profit for a company.

Some technologies are invented to sell, such as software. Others are to provide a company the competitive advantage.  In the later case, a company aims to monopoly the technology. However, there are cases that monopoly may not be achieved without trade the technology to other parties.

If the market sector is geographically fragment and the technology is about service, for example, monopoly of the technology might not be feasible to reach all the market. The management of such business based on this kind of technology may have diminished return on increasing geographic scale. In such a case, licensing the technology may be considered. Licensing  decreases the agency cost in managing geographically scattered businesses because the local managers use their own equity on the local business. That is the reason that licensing prevails in fast food industry. 

Because new technologies develop new market, the speed of the market development will also determine whether a corporate should transfer its technology.  Licensing is desirable when the technology generates no enough cash flow to finance expending production that could catch up with the market development. Licensing is desirable to prevent new substitutes from entry the market and to monopoly the whole market before the expiration of the patent.

Some over sea markets are not profitable to access due to high tariff.  Direct investment may then be considered. If direct investment is regulated by local government, then join venture has to be used to penetrate the tariff and regulation barriers. Even there are no barriers of tariff or regulation, joint venture or merger could produce synergy, saving the firm large cost to develop new market. In short, transfer a technology makes more profit in some situation even that technology is the core competitive advantage of the corporation.  In a joint venture, technology is transferred to more users, in return of new market or existing distribution channels.

Turnkey, Licensing, and Joint venture.

Different ways of trading  technology have different degree of ownership transfer, and different degree of investment commitment on the proliferation of technology. The retained ownership of  a technology transferred is increasing from turnkey to licensing, to joint venture, so the commitment to the business using the technology will increase correspondingly.

For equipment manufacturers,  proliferation of the technology using the equipment is a way of expending their market of equipment sale. They may provide turnkey transfer for their clients, and have no commitment for the investment of the turnkey project. Mastering the technology by clients is important for the sale of the equipment. The market of the product produced by the equipment is not the concern of the turnkey providers. They concern about the market of the equipment only.  The technology in this sense is more like a service: making sure the clients know how to use the equipment. Some software providers also use the similar strategy: letting user know the technology of spread sheet is the key to sell the corresponding software.

Therefore, two markets should be considered: the market of the technology itself, and the market of the products by the technology. When owner of a technology is competing with other on the first market, they are competing on technologies that producing the same or substitutable  commodities or services, and  turnkey or licensing should be used. The competition is on whose technology  are used. When owner of technology is competing on the second market, they are competing on the end goods and service by the technology, and direct investment or joint venture should be used. The competition is on market of goods and services that can be differentiated from others in quality, service, and other attributes.

On the other hand, joint venture or even direct investment is preferable to turnkey and licensing when a technology is still in a stage of progressing with many potentials of growth.  The owner of the technology may want more controlled of the technology in trade, preventing  the trade partners becoming future competitors.  If one licensing a technology in a rapid progress, the licensee will compete with licenser on new developed products by slightly  different technology after the license expired.

To patent verses not to patent

If the trade of technology is considered, the technology should be patented to establish the property right.  Sometime, event a technology is not intended to be traded, patent is necessary as a barrier for new entry.

However, patent means public disclosure of the technology. It provides others the knowledge of the technology.  There may be new technology compete with the disclosed technology.  If a company cannot commercialize a technology immediately after the patent is registered, it is better to keep it as trade secret.

If one has monopoly of  a technology well advanced to competitors, trade secret is a better means to prevent others from catching up.  However, if competitors have similar level of R&D activities, to patent earlier is desirable to avoid the risk of losing the ownership of any possible new technologies.

If a technology  is no easily understandable from its end product, then keeping it as trade secret is possible by internal control through company’s policy of information management. However, if the knowledge of a technology can be acquired from its end product, patent is necessary to protect the ownership.

Legal  Caution of Technology Transfer

Because technology has many intangible aspects, trading of technology relies heavily on legal procedures. Joint venture is especially more complicated  to reach a good contract.

Some procedures are not controlled by law and require more cautions. Releasing information to public is one of them. To trade technology, the first thing the owners want to do is to tell  prospects what he can offer. If the transferor let the prospect know every details of the technology before signing a contract, he might lost some of his unprotected knowledge such as trade-secret or know-how.  However, a prospect hardly can go into any contract unless he knows enough of what he could get for what will cost him in a technology transfer. It is therefore an art how much of what kind of information should be released to prospects. The point is to releasing enough technical information to interest prospects, but not so much as to risk the proprietary aspect of the technology.

Because of the complexity of technology transfer, misunderstanding may happen easily. It is therefore very important to communicate what a technology transfer means for both sides.  The letter of intent, memorandum of understanding, and detailed record of conversation on meeting, phone calls, and events of the corresponding negotiation are all very important besides the final contract. Without real understanding, disputes will inevitably come up in the implementation of technology transfer. It is, of course, hardly possible to eliminate every dispute about a contract, but it is definitely necessary to reduce as many disputes as economically possible and make later disputes easy to be solved so that business partnership could be maintained. 

In the contract, therefore, there must be clear definitions of language and terms used, clear definition of management structure and responsibility. A contract should include procedures for resolving disputes, procedures for terminating the contract such as how to distribute corresponding rights at the expiration of the contract.  It is better that legal service be used in negotiating and signing a contract.    

Management of Technology Transfer

Many  transactions of technology transfer are a complex process such as turnkey, joint venture, and some licensing.  Furthermore, a transaction of technologies may be a prolonged period with many uncertainties. 

As a result, tactics of project management are usually used in technology transfer. Market investigation, partner-selection, budgeting and engineering planning  are all fatal steps in the management. Poor planning may prolong the transaction time which increases cost that erodes profit. 

As technology transfer may be a very dynamic operation, collaboration and cooperation of all parts are necessary.  Relations with creditors and governments or other regulators have to be considered in addition to that with shareholders and partners. Teams work may be needed in facilitating the implementation.  So manager’s leadership and communication skills are required.  

Conclusion

Unlike management of other resources or assets, management of technology and innovation has its unique characters.  Because of the large risk and cost of R&D, and because of the relatively small cost in duplicating a known knowledge, trading technology has a great profit potential.

Unlike material, technology could be obsolete but not be used out. So a technology trade seldom takes the business form of repeated transactions of a supplier-client relation. Rather, project is the frequent form of business in trading technology.  Trading of technology is therefore needs more dynamic approach such as team management.

Because of the impact of technology on a business, trading technology could be disguised in many different forms.  If trading progressive R&D information is hindered by potential conflicts of market interest, as both sides of the trade are competitors to each other, the merging  of the companies could be a better way resolving  the dilemma.  Merging could also be a form trading technology of one company with market or distribution channels of another. Unlike other trade, the trading parties lost their independent legal identities in a merging.  If a trade benefits both parties, then a merge benefits the shareholders of both pre-merge companies. Limited trading of information and technology may also take the form of  consortium. It is a pool of technology and capital in a specific venture, without losing the legal entities of all parts.  This is very similar to barter operation in material trade.

In short, trading of technology is important in management of technology.  One have to understanding the mechanism of technology market to optimizing the profit on companies’ technology assets.

Bibliography

1.       James a. Dobkin, ed.,   International technology ventures in the countries of the pacific rim, Butterworth & Co. 1988.

2.       http://ra.irv.uit.no/trade_law/documents/freetrade/wta-94/art/iia1c.html

3.        http://apollo.gse.uci.edu/chsmun/WIPO.HTML

4.       John Manley, Industry, Trade, and technology: the frontier for action

5.       John de la Mothe, Canada and the National System of Innovation

6.       Duane Hall, The International Join Venture, Preager Publishers, 1984

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