Buying technology for product development in smaller firms

Buying Technology for Product Development in Smaller Firms Kwaku Atuahene-Gima This artccle exammes the underlymg dlmenslons and relative importance of the perceived cost3 and benejits of new product technology hcensmg by small Austrahan engmeermg firms It also mvestlgates the cmpact of the$rm’s satlsfactlon with the performance of Its licensed new products on Its cost and benejt perceptions We found that the need to gam competltlve advantage and Improve the firm’s techmcal skdls are the two most important perceived benejts for llcensmg In terms of costs, the complexity of the hcensmg process and entrylexlt costs are the major lmpedlments for small firms We also found that firms sat@ed and dassat@ed with their hcensed technology differ slgmjicantly mainly zn their perceptlons of the costs of hcensmg A dlscusslon of the results and several lmphcatlons for managers and researchers are presented

New product development IS regarded as crucial for a firm’s competltlveness and success This fact necessitates understanding of each of the various altematlve methods by which firms acquire new products One such method

Address correspondence to Kwaku Atuahene-Glma, Dept of Management, Umverslty of Wollongong, P 0 Box 1144, Wollongong, NSW 2500, Austraha

1s technology hcensmg Technology hcensmg 1s defined as a contractual agreement by which a firm (licensee) acquires the rights to product, process and/or management technology from another firm (hcensor) for a lump sum payment and/or royaltles [ 1 I] A number of authors have observed an mcreasmg trend toward New Product Technology (NPT) hcensmg among firms Clarke et al. [l] found that NPT hcensmg 1s the most important source of new products after internal R&D With mcreasmg technological change, market competltlon and internal R&D costs, many see this trend contmumg m the future [l, 191 Not surpnsmgly, Morehead [13] calls NPT hcensmg a “commg revolution m new product development ” Despite its growmg populanty as a new product acqulsltlon method among firms, only a few studies have emplncally exammed NPT hcensmg from the small firm’s perspective Yet research suggests that small firms are more hkely to find NPT most appealmg because they lack resources to develop products Internally [2, 10, 181 In fact, Svennson [ 181 suggests that the acqulsltlon of foreign technology through hcensmg can serve as “a viable tool for accomphshmg product development and technical renewal m small firms ” Although a number of studies have contributed slgmficantly to the body of knowledge m NPT hcensmg, to

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Industrml Markehng Management 22, 223-232 (I 993) 0 Elsevxr Science Pubhshmg Co , Inc , 1993

655 Avenue of the Americas,, New York, NY 10010

0019.8501/93/$6

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date no study has mvestlgated the relative Importance of its perceived costs and benefits to small firms A key managenal questlon for the hcensor concerns the specific perceived benefits to promote and the perceived costs to overcome when selling technology to small firms Yet, the relative importance of the benefits and costs of NPT hcensmg remam a matter of conjecture m the hterature For examy:e, Lowe and Crawford [lo] speculate that “while speed of product mtroductlon may be crucial m many cases, costs are probably a more Important factor m many firms’ decision to use hcensmg ” Addltlonally, the lists of costs and benefits provided by previous authors suggest that they might have underlymg dlmenslons However, empmcal studies have yet to investigate these dlmenslons A further hmltatlon of the hterature IS that there has been no theoretlcal framework proposed for orgamzmg the benefits and costs of NPT hcensmg In other words, the factors that impact on managerial beliefs about the benefits and costs of NPT hcensmg have not been examined Such an mvestlgatlon 1s important to allow technology marketmg firms to tailor the promotlon of specific benefits to match prospective licensee firms In a related study, Peterson and Dant [ 161 found that factors hke number of years, level of sales, and pnor busmess experience are key determmants of management evaluation of the advantages of franchlsmg Then research suggests that firms that have experienced superior franchising outcomes make more posltrve evaluations of the method than those with inferior outcomes Thus, we hypothesize that small firms with greater satlsfactlon with the performance of their licensed new products are more likely to have lower perceived costs and higher perceived benefits of NPT hcensmg than their less satisfied counterparts In bnef, this article attempts to provide addltlonal msight mto managerial perceptions of the benefits and costs of NPT from the vlewpomt of small manufacturmg firms The article has three mam specific purposes 1 To empmcally examme the relative importance of the perceived costs and benefits of NPT llcensmg from unaffiliated firms,

KWAKU ATUAHENE-GIMA IS a Semor Lecturer m Marketmg, University of Wollongong, Australia

224

2

to mvestlgate the common factors underlymg managerial behefs about the costs and benefits of NPT hcensmg, and 3 to assess the Impact of the small firm’s NPT hcensmg expenence on the perceived benefits and costs

LITERATURE

REVIEW

Lowe and Crawford [lo] mvestlgated the reasons behmd the use of hcensmg as a new product development method among small firms and reached the conclusion that the pnme motlvators for the declslon to hcense related to the need to reduce R&D, marketing and leglslatlve risks, speed of market entry, and cost reduction advantages In an effort to extend Lowe and Crawford’s findings, Crawford [2] conducted m-depth case studies of the role of hcensmg m the dlverslficatlon strategies of small firms He concluded that small firms hcense NPT mainly to overcome internal resource llmltatlons such as finance, product design skills, and time, to reduce risks and costs, to ensure speedy market entry, to fill product gaps, to acquire new products when m-house R&D falled to produce new products to meet the orgamzatlon’s obJectlves, and to ensure survival In a slmllar vem, Svensson [ 181 asserted that the NPT hcensmg decision 1s “usually evoked by a recogmtlon of a need on the exlstmg market of the hcensee, or by the recogmtlon of a problem wlthm the licensee’s own orgamzatlon ” The needs to concentrate scarce resources on Incremental product Improvements and to catch up with competltlon, for access to patent protection, trade secrets and hcensor support, to adopt an Industry standard, keep abreast of new technological developments, upgrade internal technical skills and to utilize spare capaclty have also been found to be other reasons why firms hcense NPT [6-91 Besides its benefits, research suggests that NPT hcensmg mvolves numerous costs and risks to small firms McDonald and Leahey [I I] note that a firm Incurs NPT hcensmg costs such as hcensor-imposed restrlctlve conditions on purchase of matenals, hmltatlon on exports and grant-back provIsIons that require the hcensee to transfer improvements back to the hcensor free of charge Sen and Rubenstem [ 171 suggest that NPT hcensmg mvolves loss of control over strategic declslons such as pncmg, production quantity, and quality control that may reduce the capacity of the licensee to generate revenues

from the licensed NPT In addition, the licensed NPT may be mature and less competltlve because hcensors are sometimes reluctant to license-out their latest mnovatlons for fear of direct competltlon NPT hcensmg also has adverse effects on the morale of internal R&D staff since it may be seen as an mdlcatlon of top management lack of confidence m their ability to develop new products [ 11, 171 Fmally, emplncal research findings by Ford [3] and Klllmg [8, 93 show that acqulsltlon and lmplementatlon costs such as adaptation of the licensed technology, overseas travel, negotiations, and licensee-hcensor conflicts are problems that hinder NPT licensing METHODOLOGY The sample The data used m this study were obtained by means of a mall survey of engmeermg firms m Australia The engmeermg industry was chosen because of its relatively higher incidence of NPT hcensmg [3] The sample was drawn from companies listed m the Engrneermg Du-ectory 1990

A pretested questionnaire was sent to 721 firms, addressed to the CEO Fifty-seven questionnaires could not be delivered, resulting m an effective sample of 664 One hundred and eighty three usable questionnaires were received for a response rate of 27 6% A t-test analysis revealed no slgmficant differences between early and late respondents, mdlcatmg no nonresponse bias problems Descnptlve data show that 88 of these firms have acquired NPT licenses while 95 firms have no licenses The analysis presented here uses the mformatlon collected from the 63 licensee firms m the sample with less than 500 employees, which were classified as small firms This definition of small firms 1s consistent with the operational definitions of small firms adopted by other researchers [e g , 121

Data Collection Many issues were addressed m the questlonnalre but the data used m the present analysis relate to the 17 perceived benefit and 16 cost Items These items are denved from the works of Ford [3], Gold [6, 71, Klllmg [8], and McDonald and Leahey [ 1 l] The benefit Items asked for the importance respondents attached to each factor m hcensmg NPT on a scale rangmg from 1 “moderately important” to 7 “extremely important ” The 16 cost items were measured on a 7-pomt scale ranging from 1 “strongly disagree” to 7 “strongly agree ” One item was employed to measure the nature of management’s expenence with NPT product hcensmg Respondents were asked to indicate the extent of their agreement or disagreement, on a 7-pomt scale, with the statement “top management 1s very satisfied with the performance of the new products licensed by this company ” RESULTS AND DISCUSSION The results of the survey show that the sample had, on average, 2 2 NPT licenses. Seventy-five percent of firms had between l-2 licenses, 15% had between 3-4, and 10% had between 5-10 licenses In terms of contnbutlon of the licensed products to the firm’s overall sales revenue, for 54% of firms, licensed products accounted for less than 10% Thirty percent of firms denved between 11% and 30% of sales from licensed products Finally, for 16% of firms licensed products accounted for over 30% of sales Respondents generally felt reasonably satisfied with the performance of their licensed products (mean = 4 9) Perceived

Benefits of NPT Licensing

Table 1 presents the number of responses to, and mean values of, each of the 17 benefit Items The table shows that the pnmary reasons why small firms license new

Primary reason is internal resource limitations.

225

TABLE 1 Percetved Benefits of New Product Technology Llcenslng Benefits

N

Mean’

SD

Rank

Gam competltlve advantage

63

58

16

I

Increase sales and market expansion

63

55

16

2

Sam techmcal knowledge qmckly

62

53

18

3

Fdl product portfoho gaps

63

51

20

4

Upgrade mterr-I

skdls

Reduce new product development nsk

62

50

18

-5

60

50

19

-5

Gam speedy market entry

63

49

18

Keep pace with competltlon

63

46

19

-8 -8

I

Dlverblfy product range

63

46

20

Cam fdbt return on Investment

63

44

2 I

Access to llcensor holds patent

63

43

23

-11

10

Sdve resources for other mtemdl developments

63

43

21

-11

Access to a proven product

63

43

20

-11

Lower cost of new product hcensmg

63

38

20

14

3 7

2 2

15

Access to future new product hcensmg opportumtles 62 Access to an Industry standard

62

34

22

16

Utdze

63

29

I9

17

spare cdpaclty

*On a 7-pomt scale

I

“moderdtely Important” to 7 “extremely important ”

are to gam competltlve advantage (5 S), to mcrease sales and market expansion (5 5), to gain techmcal knowledge quickly (5 3), to fill gaps m the firm’s product portfoho (5 1), to upgrade Internal technical skills (5 0). to reduce new product development nsk (5 0), and to enhance speedy product mtroductlon (4 9) This pattern of responses clearly indicates that small firms turn to NPT hcensmg due to internal resource hmltatlons [2, 91 Unlike large firms, small firms lack the resource base to compete, increase sales and expand markets, and to shoulder the risks of mtemal development Confirmmg previous research, it appears that NPT hcensmg allows small firms an altematlve avenue to reduce product development risks, gam advanced techmcal knowledge quickly, and ensure speedy market entry [ lo] Table 1 shows that benefits reflecting the speed advantage of NPT hcensmg, such as “gain technical knowledge quickly, ” “gain speedy market entry,” and “gain faster return on investment” have very high mean values In contrast, benefits pertaining to the low cost of NPT hcensmg such as “access to a proven product,” “lower cost of new product hcensmg,” and “use of spare capacity” reglstered lower mean scores Contrary to Lowe and Crawford’s [2] proposltlon, this evidence suggests that the need for speed m new product development 1s of greater importance to small firms in licensing new products than the need to lower costs This conclusion 1s strengthened by the high rankmgs given to benefits that products

226

are likely to be enhanced by speedy mtroductlon of the licensed product to market such as “gam competltlve advantage, ’ ’ ‘ ‘increase sales and market expansion, ’ ’ “keep pace with competltlon,” and “dlverslficatlon of product range ” In order to gam insight mto the underlying dlmenslons of managerial beliefs about the benefits of NPT hcensmg, we performed a factor analysis with vanmax rotation On the basis of the magnitude of the elgen values and factor mterpretablhty, a 6-factor solution reflected the perceived benefit items These factors accounted for 68% of the total variance Table 2 displays the factors and their respective loadmgs greater than 40 (for the sake of clarity) and commonahtles As the measures of commonality mdlcate, with the exceptlon of the item “save resources for m-house developments,” over 60% responses to each of the benefit Items 1s explained by the common factor structure The first factor captures responses to four benefits faster return on investment, access to proven product, lower cost of development, and speedy market entry These items appear to reflect the ability of the NPT IIcensmg method to allow low cost and speedy market entry For example, by facihtatmg access to products proven m the hcensor’s market, hcensmg allows the small firm to benefit from the hcensor’s marketing and production expenences This advantage ensures lower cost of production and speedier product mtroductlon, which lead to faster return on investment We label this factor faster low cost market entry This factor accounts for 29 3% of the variance The second benefit factor explains 9 4% of the vanante This factor 1s made up of four items These Items seem to represent NPT licensing benefits that allow the small firm to match competitor offerings Gold [7] suggests that firms hcense new products to keep pace with threatening competltlon It seems that hcensmg faclhtates this effort by allowmg access to products that are industry standards, to technologies developed m the future by hcensors, and to save internal resources for m-house mcremental developments These advantages allow the small firm to keep abreast of emerging and changing technologies that enhances Its ability to catch up with competitors [7, 91 This factor 1s termed access to future technology Factor 3 defines three items that reflect Improvement m the jirm’s techmcal skdls provided by the hcensmg method, such as quicker acquisition of advanced knowledge, reduction m new product development nsk, and

TABLE 2 Factor Analysis: Perceived Benefits of New Product Technology Licensing Benefits Faster/low cost market entry Faster return on Investment Access to proven product Lower cost of hcensed new product Gam speedy market entry Access to future technology Industry standard Keep pace with competltlon Future hcensor technology Improvement m techmcal skdls Save resources for m-house developments Acquire advanced knowledge qmckly Reduce new product development nsk Upgrade techmcal skdls Dlversrficatmn advantages Dlverslfy product range Fdl product gaps Utlhze spare capacity Gam competltlve advantage Gam competltlve advantage Market protectlon advantage Gam access to hcensor patents Increase sales and market expansion Elgen value Percent of vanance explained

Factor 1

Factor 2

78 72 62 59

Factor 3

Factor 4

Factor 5

Factor 6

702 785 652 618

49 48 75 71 64

632 652 662 49 80 15 62

474 784 673 681 83 68 65

771 668 736 750

83

50 29 3

16 94

upgradmg of the firm’s technical skills The explanatory power of this factor IS 9 3% Stmrlarly, three items define factor 4, which appears to reflect the dzvers@atlon advantages behind the firm’s dectsron to license new products The first two items of this factor, “dtversrfy product range” and “fill product portfoho gaps,” are clearly associated However, a degree of ambtgmty 1s associated with the thud item, “utrhze spare capacity ” The conceptual linkage of the need to use spare capacity with the other two items appears to indicate that by allowing the use of excess internal resources, NPT hcensmg facthtates the explortatton of untapped market opportumttes Factor 4 accounts for 7 4% of the variance Unlike all the other benefit factors, factor 5 contams only one item, gum competltwe advantage The smgularrty of this factor 1s not surprtsmg since this item appears to be a global one that captures the overrtdmg tmportance

CommonaMy

16 93

13 74

1 1 66

62 - 59 10 60

670 654

of competmve advantage to small firms The vartance explained by this factor IS a respectable 6 6% Finally, factor 6 lmks two Items, access to hcensor’s patents and increase sales/market expansron Patent protectton provided by licensed products allows the small firm to mcrease sales and expand its markets [ 1 l] SIX percent of the variance IS explained by this factor, which we term market protection advantage. The relative importance of the foregoing benefit factors was assessed by comparmg thetr mean scores The mean score for each factor was obtamed by summmg the mean scores of the respective Items contained m the factor and dividing by the number of items On the basis of thts cntenon, tt IS clear that small firms attach the greatest importance to the need to gum competltwe advantage (5.8) m licensing new products. Improvement m the jirm’s techmcal skills (5 1) 1s rated second m tmportance,

The most important competitive advantage. 227

TABLE 3 Perceived

Costs of New Product Technology

costs Difficulty of entermg and exctmg hcense agreement Grant-back provlslons lead to loss of future competltlve advantage Lower margms on lrcensed products due to restnctlonb Loss of control due to restrlctlons Choosmg altematlve new products for hcensing I$ a complex process High termmatlon coqtq High search colt\ Discourages mtemdl R&D staff Long and costly negotlatlons Uncertamty of correctness of the declslon to hcense High cost of hcensmg new products Ovewhelmmg paperwork Difficult to gam competitive advantage High adaptation costs New product licensing involves too many restrIctIons to make it worthwhile New product hcensmg too comphcated to be bothered with *On a 7-point scale

I “strongly

dlqagree”

Llcensmg

N

Mean*

SD

Rank

61

42

18

I

60

41

17

2

61 61

38 36

18 16

-4

60 61 61 61 61

36 34 33 3 1 30

15 I7 14 19 I3

-4

61 60 61 61 61

29 27 25 25 23

I6 I5 I2 16 I5

- 12 - 12 - 14

61

23

I3

- 14

61

20

I2

16

to 7 “strongly

3

6 7 8 9 10

II

agree ”

with market protection advantage (4 9) a close third Fasterllow cost market entry (4 4) and dlverxjcatzon advantages (4 2) rank fourth and fifth, respectively It appears that small firms attach the least importance to access to future technology (4 0) as a benefit m NPT hcensmg decision making Perceived

Costs of NPT Licensing

Respondents were presented with a list of 16 statements relating to the costs and risks of NPT hcensmg Table 3 displays the mean scores for each of these cost items Small firms see the difficulties m entermg and exiting new product license agreements (4 2) as the smgle most important cost This finding corroborates assertions m the literature that the major bottleneck to small firms m hcensmg 1s the lack of resources and skills to search for,

evaluate, and select suitable new product hcenses [5, lo] The next three important cost items appear to reflect the problems or risks associated with hcensor-Imposed restnctlons such as “loss of future competltlve advantage” (4 l), “lower margins on hcensed products” (3 8), and “loss of control over the hcensed product” (3 6) Surprlsmgly, many of the perceived problems m usmg the licensed product, such as “high cost of licensed new products” (2 7), “cost of adaptation” (2 3), “new product hcensmg mvolves too many restnctlons to make It worthwhile” (2 3), and “new product hcensmg 1s too complicated to be bothered with” (2 0), all received low mean scores This finding suggests that although small firms m this study see many problems m the NPT hcensmg process, especially regardmg its complexity and hcensor-imposed restrlctlons, these problems do not m general deter them from engagmg m the process One plausible explanation for this apparent paradox lies m Parry’s [ 141 assertlon that most hcensor-imposed restnctions are “nominal” restrictions That is, they are restrictions that appear m the license agreement but have no “binding” effect on the hcensee firm that 1s incapable of engaging m the actlvltles restricted For example, a license agreement may prohlblt the export of the licensed product However, if the licensee firm has no capacity or intention to export, such a restrlctlon ~111 not be perceived as an important cost or risk Slmllar to the perceived benefit items, a factor analysis was performed to uncover the underlying dlmenslons of the perceived cost Items The analysis mdlcated a 5-factor solution based on elgen value of one or greater and factor mterpretablllty The factors, their loadings greater than 40, and commonahty measures are presented m Table 4 The first factor underlymg managerial perceptions of the costs of NPT hcensmg contams six items These items clearly pertam to respondents’ concern about hcensorimposed restrictions and their adverse effects on the hcensee firm’s ablhty to exercise maxlmum control over the hcensed product, on mternal R&D staff morale, and on the firm’s future competltlve advantage A number of authors suggest that restrlctlons on the licensee place costly lmpedlments m its ability to derive maxlmum rev-

Difficulty in entering and existing. 228

TABLE 4 Factor Analysis:

Perceived Costs of New Product Technology

Llcensmg

Benefits Loss of control Loss of control due to restrlctlons New product hcensmg mvolves too many restrlctlons to make It worthwhde High cost of hcensmg new products Difficult to gam competltwe advantage Loss of future competltlve advantage Dlscourages Internal R&D staff Entryiexlt costs Difficulty of entenng and exltmg hcense agreements High termmatlon costs Uncertamty of correctness of the declslon to hcense Search costs High search costs Overwhelmmg paperwork Long and costly negottatlons Adaptation costs High adaptation cost New product hcensmg too comphcated to be bothered wth Complexity of hcensmg process Choosmg new products for hcensmg IS a complex process Elgen value Percent of variance expamed

enue from the licensed product [ 11, 171 The label loss ofcontrol appears to capture the essence of the SIX items m this factor The factor explams 30 7% of the variance The second factor connects management responses to three perceived costs, the difficulty m entermg and exttmg license agreements, high termmation costs, and ongoing uncertainty with the decision to license An exammatton of Table 4 shows that these items load quite heavily on this factor, with the lowest loadmg being 6 1 Accountmg for 11 9% of variance explamed, thts factor therefore captures the perceived entry and exzt costs of NPT hcensmg We call the third factor search costs since it reflects respondents’ beliefs about the extensive and costly search required to locate hcenseable new products, the perceived overwhelmmg paperwork involved m the process, and the lengthy and costly negottations required This factor explams 11 1% of the vartance For an effective market mtroduction, the hcensed product usually requires some adaptation by the licensee firm The process of adaptation usually involves extensive mteractton between hcensor and licensee personnel, leadmg to confltcts [3]. Factor 4 appears to capture these problems with two items “htgh cost of adaptation” and “new product hcensmg is too complicated to be bothered with ” We note, however, that some ambtgutty is as-

Factor 1

81 73 71 69 67 64

Factor 2

Factor 3

Factor 4

Factor 5

714 643 800 562 475 804

51

-

50

691 660 492

79 75 61 79 71 70

4.5

46 30 7

758 135 710 84 49

48

18 II 9

Commonality

17 II 1

13 89

803 679 93 10 69

895

soctated with the relationship of the latter item Wtth an 8 9% contrtbution to explamed variance, the factor is labelled aduptutzon costs Finally, factor 5 captures only one item that reflects the perceived complextty associated with the process of NPT hcensmg for small firms This factor makes 6.9% contributton to explained vartance We label the factor complexity of the kensmg process Using the same criterion as m the case of the benefit factors, we find that the “complextty of the hcensmg process” (3 6) seems to be the major impeding factor m NPT hcensmg for small firms This is followed closely by the perceived “entry and exit costs” (3 5) Three factors “loss of control” (3 l), “search costs” (2 9), and “adaptation costs” (2 2) follow m order of importance It is particularly noteworthy that the high rankings given to the complexity of the process and the entry and exit cost factors were not unexpected, given the prevtous finding of the high importance that small firms place on speed of product mtroduction and competmve advantage as benefits for NPT hcensmg Perhaps the most surpnsmg finding is the low ratings given to adaptation costs factor (2 2), the lowest among the five cost factors. This result supports Parry and Waston’s [ 151 argument that new products licensed from unaffiliated firms may need little or no adaptation Unhke

229

NPT hcensmg between affihated companies where a parent company can impose a product on a subsidiary, m nonaffiliate licensing, firms are more careful to evaluate and select new products that are compatible with their resources, skills, and markets The relatedness of the licensed product to the functional capablhtles and markets of the licensee firm ensure low adaptation costs [2, 81 Impact of Satisfaction on Perceived Benefits and Costs In order to test the hypothesis that management’s satisfaction with the performance of licensed products affect their evaluations of the benefits and costs of NPT hcenanother split sample analysis sing, we performed Twenty-three firms that scored their satisfaction with the performance of their licensed products from 1 to 4 on the 7-point scale were labelled “dlssatlsfied” The remammg 40 firms with scores from 5 to 7 were categorized as “satisfied ” The mean scores of these two groups on each of the benefit and cost items were compared Table 5 displays the Items on which the two groups differ slgmficantly at 10 or better As the table shows, the two groups of firms differ slgmficantly on only one benefit variable, gazn speedy market entry ( 09) The dissatisfied group appears to have a higher perceived speedy market entry advantage than the satisfied group The import of this finding 1s that dissatisfied licensees are more likely to look very unfavorably toward any hcensmg restrlctlon that has the effect of slowmg down speedy market mtroductlon of the htensed product The low level of slgmficance associated with the dlf-

TABLE 5 Comparison

of Percewed

Benefits and Costs between SaMfled

and Dissatisfied

Variable Perceived Benefits

1 Cam speedy market entry 1 2 3 4 5 6 7 8

Percewed Costs Overwhelmmg paperwork Long and costly negotlatlons New product hcensmg IS too comphcated to be bothered with High adaptation costs New product hcensmg mvolves too many restnctlons to make It worthwhde High cost of hcensmg new products Loss of future competltlve advantage Loss of control due to restnctions

230

ference in the foregoing variable and the lack of significant differences between the two types of firms on the other 16 benefit vanables lead us to conclude that these two groups of firms have similar and enduring opmlons concerning the benefits of new product licensing In other words, perceived benefits of llcensmg are not hkely to be influenced by the management performance expenence This conclusion suggests that satisfaction and dlssatlsfactlon with NPT hcensmg performance 1s more likely to be explained by the perceived costs and risks associated with the method Table 5 indicates that the satisfied and dissatisfied hcensee firms differ slgmficantly on 8 of the 16 cost vanables examined m this study It IS worth noting that m each case the satisfied group has a lower mean score than the dissatisfied group Two variables on which the groups differ are components of the search cost.s factor (1 e , overwhelmmg paperwork and long/costly negotiations) The groups also differ slgmficantly on the two variables captured by the aduptutlon costs factor The remaining four variables on which the two classes of firms slgmfscantly differ belong to the loss of control factor It 1s interesting to note that the differences between the two types of firms are more pronounced m relation to the component items of the uduptutzon costs and loss ofcontrol factors than those relating to the search costs factor This finding reinforces our earlier conclusion concerning the likelihood of dlssatlsfied licensees having very negative opmlons about costs that are likely to slow down market mtroductlon of the licensed product It appears that problems that small firms encounter m adapting the licensed product pnor to mtroductlon and the hmltatlons encountered as a result of hcensor-imposed re-

Small Licensee Firms

Satlsfled Firms (n = 40) Mean

Dlssathed Firms (n = 21) Mean

F-value

SKiI

46

54

2 89

094 1

23 27 16 19 19 24 37 33

29 34 26 32 29 32 49 43

3 3 II 13 8 3 8 6

066 1 0677 0010 0006 0052 0685 0061 0110

51 46 96 07 42 45 12 90

stnctions hinder effective performance m the use of the licensed product In brief, the findmgs m Table 5 indicate that dissatisfaction with performance in NPT hcensmg among small firms relate mainly to the costs associated with search and evaluation, adaptation of the hcensed NPT, and loss of control m the use of the licensed product. In other words, these factors hinder the effective use of licensed products among small firms

CONCLUSIONS

AND IMPLICATIONS

This study mvestigated the underlying dimensions and relative importance of the perceptions of small firms regarding the benefits and costs of NPT hcensmg At the mdividual item level, our results show that small firms use licensing to acquire new products mainly to obtain competitive advantage, to increase sales and market expansion, to acquire new techmcal skills, to access new products to fill gaps m their product range, and to obtam speedier market entry. In terms of costs, managers perceive the complex hcensmg process, entry and exit costs, and loss of control as the mam hindrances m hcensmg new products The relative importance of the benefits and costs at the factor level shows striking consistency with the results at the item level Obtammg competmve advantage and improvement m techmcal skills rank as the two most important benefit factors In relation to costs, complexity of the process and entry/exit problems appear to be the major cost factors. Our results also mdrcate that adaptation costs and restrictions that lead to loss of control appear to be the major factors that hmder small firms’ performance m their use of the licensed new product Manufacturing firms m Australia depend heavily on imported technology [ 151 The results of the study offer important implications for management of hcensor firms in North America and Europe that are the major sources of technology for Australian firms The research results suggest that technology marketing firms (hcensors) need to promote NPT hcensmg benefits such as speed of market entry, enhancement of competitive advantage and improvement m the licensee technical skills if they are to attract small firms to NPT hcensmg The findings also suggest that m order to encourage small firms to hcense NPT, hcensor firms should engage m activities that are hkely to alter their perceptions of costs of the method. For example, the study suggests that a

simplification of the NPT hcensmg process, along with reduced restrictions m NPT hcensmg agreements by technology marketing firms will enhance small firms’ interest m the method The differences between the satisfied and dissatisfied groups are of particular importance to licensers m isolating the problems that hinder a licensee’s performance Unlike small hcensee firms satisfied with their mvolvement in NPT hcensmg, we found that “dissatisfied” firms have sigmficantly higher perceptions of NPT hcensing costs relating to process comphcations, licensorimposed restrictions, adaptation costs, loss of control, and future competitive advantage This finding has relevance to the management of ongoing hcensor-licensee relationships In order to improve licensee performance and thus satisfaction, managers of technology marketing firms are well-advised to adopt strategies that help to reduce these perceived costs of the process. For example, mutual agreement on strategic objectives, commitment of financial and technological resources, and manpower to the licensed product and open communication between the hcensor and hcensee are actions that are hkely to facilitate effective adaptation and successful implementation of the licensed NPT [4] In terms of technology marketing development strategy, the relative importance of the benefit and cost vanables uncovered m this study may be used by hcensors to compare their own perceptions of NPT hcensmg with those of potential licensees firms as buyers Such a comparison will ensure that benefits that are important to buyers are promoted rather than those perceived to be important by hcensors as sellers In other words, the results provide a valuable means by which licensers may become more buyer-oriented m marketing technology For researchers m NPT hcensmg, this study shows that the mere enumeration of benefits and costs may be of little importance to practitioners d their relative importance and factors impactmg on them are ignored. This study has made the first attempt at addressing these issues m relation to small firms Future investigations will be of great benefit if they examme more factors that influence managerial evaluations of the costs and benefits of NPT hcensmg For example, since one of the pnme motivations for hcensmg is the lack of internal resources, some writers suggest that large firms and those with strong internal R&D capability are less likely to look favorably to new product hcensmg [e g., 5, 91. It is reasonable, therefore, to expect that large firms may have different perceptions of the costs and benefits of NPT hcensmg

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compared to small firms We look to future researchers to examme the impact of factors such as firm size and R&D capability on perceived costs and benefits of NPT licensing This study has hmltatlons, so caution IS advised m interpreting the findings The small sample size and the single-industry focus llmlt the external validity and the extent to which the findmgs are generahzable across mdustrles In addition, the sample was restrlcted to small firms that have licensed new products, therefore, the findmgs may not be apphcable to small firms wlthout new product licenses An mterestmg avenue for future research 1s an exammatlon of the differences m the perceptions of costs and benefits of new product hcensmg between small licensee and nonhcensee firms

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REFERENCES Clarke, K , Ford, D , and Saren, M , Corporate Technology Strategy, R & D Management 13, 215-229 (1989) Crawford, N K , The Role of Technology Llcenqmg m the Dlverstficatlon Strategies of Small Fnms, Unpubhshed PhD Thesis, Umverslty of Bath, U K , 1985 Ford, D , The Management and Marketmg of Technology, m Advances m Srrutegtc Managemenr. Volume 3 Robert Lamb and Paul Schnvastava, Eds , JAI Press, Greenwtch, CT, 1985, pp 104-134 Forrest, J E and Martm, M J C , Strategic Alhances between Large and Small Research Intensive Orgamzatlons Expenences m the Blotechnology Industry, R & D Management 22, 41-53 (1992)

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Gee, S , Factors Affectmg the Innovdtlon Time-Period, Research Management 21, 37-42 (1978) Gold, B , AlternatIve Strategies for Advancmg a Company’s Technology, Research Management 18, 24-29 (1975) Gold, B , Approaches to Acceleratmg Product and Process Development, Journal of Produc t Innovatron Management 4, 8 l-88 ( 1987) Kllhng, P J , Dlverslfication through Lrcensmg, R & D Management 8, 159-163 (1978) Klllmg, P J , Manufacturmg Under License, The Busmecs Quarterly 42, 23-29 (1977) Lowe, J . and Crawford, N K , New Product Development and Technology Licensing for the Small Fum, Industrial Management and Data SvstemT. September-October, 26-29 (1983) McDonald, D W , and Leahey, H S , Llcensmg has d Role m Technology Strategic Planning, Research Managemen? 28, 35-40 (1985) Miller, E M , Labor Productlvlty m Large and Small Enterprises,,“› Amerrtan Journal of Small Busmess 5, 30-39 (1980) Morehead, J W , Advantages of New Product Search, Journal of Llcencmg Execufrves Socfefy 19, 100-102 (1984) Parry, T G , The Multmatlonal Enterprtse and Restrlctlve Condltlons m Intemattonal Technology Transfer Austrahan Evidence. The Journal of Indusrrral Economics 36, 359-365 (1988) Parry, T G , and Watson, J F , Technology Flows dnd Foreign Investment in the Austrahan Manufacturmg Sector, Australran Economic Papers 18, 103-l 18 (1979) Peterson, A , and Dant, R P , Percerved Advantages of the Franchise Option from the Franchisee Perspective Empmcal Instghts from a Service Franchise, Journal of Small Busrness Management 28, 46-61 (1990) Sen, F , and Rubenstem, A H , External Technology and In-house R&D Faclhtatlve Role, Journal ofProduct InnovatIon Management 6, I23- 138

(1989) Svens\on, B , Acqulcltton of Technology through Licensmg m Small Fums, Unpubhshed PhD Thesis, Lmkopmg Umverslty, Sweden, 1984 19 Wind, Y , and MahaJan, V , New Product Development A Perspective for Re-exammatlon, Journal of Product Innovatron Management 5, 304310 (1988) 18