Managing international technology transfer negotiation: a social exchange perspective

Technovation,

13(6) (1993) 383-397

Managing international technology transfer negotiation: a social exchange perspective* Liming Zhao Manderson Graduate School of Business, The University AL 35487-0225, USA

N. Mohan

of Alabama,

Tuscaloosa,

Reddy

Weatherhead School of Management, OH 44 106, USA

Case Western Reserve University,

Cleveland,

Abstract international technology transfer (ITT) is an increasingly important issue in the management of technology. Most of what we know about ITT, an exchange of firm-specific technical knowhow between a technology transferor and a transferee in different countries, is posited in broad economic terms. This study attempts to investigate ITT negotiation from a social exchange perspective, with special reference to ITT negotiation between firms in the USA and China. This approach is applied to data derived from two case studies of ITT negotiation between US and Chinese firms. The ITT exchanges involved are analyzed in terms of rewards in relation to costs (both reckoned in terms of strategic and tactical advantage or disadvantage), possession of power to make things happen, expectations vs. consequences, and conflict. Results show that social and cultural factors, in conjunction with economic factors, exert influence on the eventual outcome of an ITT negotiation. This paper suggests that the application of social exchange theory should enable participants in an ITT to get a better understanding of what is happening and why, and thus to better manage the ITT negotiation process.

1.

Introduction

International technology transfer (ITT) is an increasingly important issue in the management of technology. ITT denotes the exchange of firm* An earlier version of this paper was presented at the IEEE international Engineering Management Conference at Santa Clara, California, USA, October 1990.

Technovation

Volume

13 No 6

0166-4972/93/$06.00

specific technical know-how between a technology transferor in one country and a transferee in another. Given the substantial stakes that enter

0

1993

Elsevier Science Publishers Ltd

383

L. Zhao and N. M. Reddy

into an ITT transaction, negotiation by both sides to affect the terms of trade in their favor is a key dynamic in the technology transfer mechanism. Most of what we know about the exchange or the transaction in ITT is posited in broad economic terms [l], with little attention paid to taking an integrative view of the transferor-transferee dyad that constitutes the core of ITT. It is generally agreed that technology transfer is a process of human activity [2-4]. However, given the need to include contextual or cultural-based variations to account for success or failure of ITT [l, 51, ITT research does not fully acknowledge the notion that technology transfer, as interorganizational exchange, is both a social and an economic process. This neglect of social and cultural factors that influence ITT decisions and decision makers is in part the result of the fragmented nature of research on the subject [6, 71. This paper argues that the dyadic interaction underlying ITT negotiation is as much a social process as it is an economic one, a process that may be meaningfully studied using the concepts developed by exchange theorists [8, 91. In this paper, the technology transferor and transferee involved in a technology transfer negotiation are visualized as interacting participants over an extended time frame, with the shared objective of consummating an exchange. The dimensions of exchange that this study is interested in are similar to those developed and used by the industrial marketing and purchasing (IMP) group in their interaction approach to the study of IMP [lo]. The four elements involved in an exchange between interacting parties comprise: (1) (2) (3) (4)

product service; information in support of the product; financial criteria in exchange for (1) and (2); the social exchange that underlies (l), (2) and (3), and performs the function of reducing uncertainty between the two parties [ll].

In ITT negotiation, items (1) and (2) are difficult to separate into distinct elements and item (3) encompasses more than the initial transfer price. Thus, given the .complex interaction of (1). (2),

384

and (3), ITT negotiations tend to be long and involved, making the social dimension an important aspect of the negotiation process. This paper explores the interaction of the first three elements as to their trade-offs in negotiating ITT, with implications for how the process can be managed. This research limits the context of study to two sets of transferors and transferees in the US-China dyad, to keep it manageable and to understand more about a nation, China, that is projected to affect global markets significantly for technologyintensive products by the year 2000 [12].

2.

ITT and social exchange

In the ITT negotiation process, both technology transferor and transferee have a need for the In an other party, i.e., they are interdependent. interdependent relationship, each party has an opportunity to influence the other party [13]. This complex interdependent relationship makes the management of the ITT process difficult. To better understand the aspects of interdependence in the ITT negotiation process, the social exchange approach is used in this study. Social exchange theory proposes that people anticipate or forecast the outcome of their interactions with others as a component in their assessment of the rewards and costs of the relationship. Social exchange theory is based on the assumption that we are all ‘on the take’ and that there exists a built-in calculator that is always weighing the advantages and disadvantages of any interaction. This comparison is being made, either consciously or subconsciously, in all activities and thus determines the valence of our behavior in all situations. Therfore, there is always a ‘pay-off’ to be considered. This pay-off, according to social exchange explanations, is what we all attempt to maximize. Social exchange theory assumes that individuals, or groups, tend to engage in those types of activity which they find most beneficial. Interaction among social participants is thus sustained over time, not because there exist normative expectations specifying the maintenance of such an interaction

Technovation

Volume

13 No 6

Managing

international

technology

transfer negotiation

or because such a pattern of interaction fulfills some socially required need; rather, interaction is maintained because participants find such interaction rewarding [ 141. This conceptualization of social behavior as while analogous to the economic exchange, exchanges of the marketplace, is not identical to the economist’s view of behavior as rationally motivated by the strict pursuit of profit. Social behavior cannot be explained simply by the identification of a certain profit inherent in a course of action. Often, behavior is not rationally oriented to the maximization of profits but seems affected by other considerations less attuned to the pursuit of profit [15]. An ITT project is a dyad, typically, consisting of two partners from different cultures. The negotiation process is one in which the definition and redefinition of rewards, costs and pay-offs by both parties spans a considerable time horizon. It is a process often characterized by incremental progress toward an agreement. The primary question, then, is how each party perceives the meaning of exchange in its various constituent elements.

Archival documentation was the second major source of data used in this research. Feasibility studies, reports, memos, minutes of meetings, proposals, contracts and agreements, newspaper articles, and books that were available were reviewed and the contents analyzed. These documents were collected and analyzed to identify and/ or validate data. During the data collection, special attention was given to ascertaining whether evidence from different sources converged on a similar set of facts. Guidelines in the existing literature on the enhancement of retrospective data accuracy were followed in the process of data collection. When all of the evidence had been reviewed, and after an initial case study narrative was documented, the factual portions of each case study were reviewed by the major informants in each company. Such a review was not only a minimal procedure for validating the data collection process, but also a courtesy to those who had cooperated with the research. The two cases are presented in the Appendix.

3.

4.

Research

method

A qualitative case study approach was employed to conduct this research, owing to two primary considerations. First, there was a desire to study an intended dyadic interaction in its natural setting. Second, there was the belief that, at this early stage of research, focus on quantification might result in the neglect of issues that do not readily lend themselves to quantification. Data were collected primarily through interviews and archival sources. Because of the nature of the data that was sought, a formal questionnaire was not used. Instead, semi-structured interviews were the major source of primary data. Interviews were conducted, in person, with both US and Chinese executives who were familiar with the negotiation process. The typical interview time was 80 min, the length varying from 50 min to 2 h. Seven people were interviewed in the Parker case and eight in the SIFCO case.

Technovation

Volume

13 No 6

4.1.

Analysis Perception

of resources

Exchange theory suggests that relationships are established and maintained by the provision of rewards resources by both parties. Resource is defined as anything a party may make available to the other, helping the latter to satisfy his needs or attain his goals. Resources are thus essentially a bundle of economic and social attributes that the exchange partner perceives as rewarding. In the technology transfer negotiation, as is true in most negotiating situations, some resources are perceived to be more valuable to one partner than other resources. We found that the resources perceived as more valuable by US firms include gaining entry to China’s market, having a lowcost supply base, and reaping profit in the long run. These perceptions lead US firms to place greater emphasis on cost issues in the negotiation.

385

L. Zhao and N. M. Reddy

The Chinese firms are primarily motivated by the desire not only to improve their technology but also to earn hard currency. While hard currency earning is never perceived as a problem for the US firms, the Chinese firms view the gain of hard currency earning capability as at least as important as the acquisition of advanced technology. In other words, technology improvement and the earning of hard currency are perceived to be more valuable than other resources in this exchange. Another interesting finding is that the mode of technology transfer directly affects the resource perception of the Chinese partner. Generally, technology transfer in the mode of a joint venture (TIJV) is perceived to bring much greater benefits to the Chinese employees than arm’s_length licensing. These benefits are manifested in improvement of TTJV employee social status, increase of personal incomes, enjoyment of greater decisionmaking autonomy and other benefits such as acquisition of passenger cars. Our findings do not provide enough evidence to show the perceived importance of these resources to the Chinese in determining exchange terms; however, this perception certainly gives the US firms leverage in their negotiation and selection of transfer mode. 4.2.

Power

It is often the case that one of the parties in the exchange values the rewards gained in the relationship more than the other. It is in such situations that a consideration of power becomes critical. In an exchange theorist’s view, power is derived from the imbalance in an exchange; in other words, power is synonymous with the dependence of firm A upon firm B. If the dependency upon the relationship is asymmetrical, the firm with the lesser dependency can use the resultant greater power to obtain more preferred outcomes. Thus, power is something that one participant firm has only in relation to the other participant firm in the exchange, and may be defined as the ability to affect the other participant’s outcome from the relationship. Necessary for the exercise of power, however.

386

is the possession of sufficient power resources. In our two cases, the Chinese firms had less to exchange, while the US firms possessed more power resources. The most powerful resource in the exchange is proprietary technology. The nature of imperfect competition in the world technology market generally makes a technology transferor more powerful than the transferee, i.e., makes the transferee more dependent on the transferor in this regard. In addition, the US firms’ capital, management expertise, a strong worldwide market position, and an export channel, for example, are valuable bargaining chips at the negotiating table as well. Blau [16] observed that power is attained by being able to provide scarce services. Our findings support this argument. SHDFP had been looking for a joint-venture partner who could provide technology and an export channel for quite some time until it met SIFCO. The provision of an export channel by SIFCO was certainly a scarce service that other forging manufacturers in the world were unwilling or unable to provide. This is one of the major reasons that SIFCO had great power in the negotiation and got favorable terms on the TTJV (e.g., the resultant insignificant cash investment by SIFCO). In this cross-cultural exchange process, we found that power resources are not necessarily material rewards. Power takes many forms, some economic, others social or symbolic. For example, US firms have the intangible power resources to promote the social status of the Chinese working in jointventure firms. One policy-oriented conclusion that may be drawn from these data is that the identification of the other party’s priority needs and the provision of the scarce services will give one greater power in the negotiation to obtain more preferred outcomes. The identification is critical and often difficult since many of the other party’s needs are frequently intangible, not readily apparent, and bound to culture and institutions. We also found in our study that power can be used only to the extent that the other party’s outcomes are not reduced significantly below its

Technovation

Volume

13 No 6

Managing

acceptance level. Otherwise, dissatisfaction may result, which may lead to a search for better alternatives. For instance, SIFCO preferred to have a ITJV with 450 employees; this outcome was not acceptable to SHDFP. Later, an 850employee compromise was agreed upon by both parties. A difficult methodological problem involved in ascertaining who is the least dependent and, consequently, who has more power is the measurement of perceived value. How, for example, does one measure the difference of the value that firm A places on reward x and firm B places on y? This is especially problematic in cross-cultural exchange. In our research we judge the direct measurement of perceived value to be almost impossible. However, we suggest three indirect measurements of value in our US-China exchange. One is the behavioral measurement of value by observing who is the initiator of the technologytransfer/joint-venture project. In our findings it seems that the more dependent partner is more likely to be the initiator. The second indirect measure is the regulatory measurement of value. This is derived by looking into the governmental criteria for the selection and approval of technology transfer/acquisition projects. In spite of the confusing layers of bureaucracy that characterize the Chinese economy [17-191, close attention to the priorities that govern industrial development policy will enable one to uncover areas of growth where the government is more willing to make accommodations to speed agreement in an ITT negotiation. In the two cases of this study, both Parker and SIFCO formed TI’JVs in the industries that are prioritized for development in China. The third is the motivational measurement of value. This is determined in part by inquiring and observing the major reasons why each party wants the project. Frequently, these motivations exist, invisible to outside observers, in totally unfamiliar constellations. 4.3.

Expectation, consequences

perceived

antecedents

or

One of the realities of different cultures in technology transfer is that they result in different

Technovation

Volume

13 No 6

international

technology

transfer

negotiation

expectations and perceptions of interactions. While Americans are relatively open towards foreigners, the Chinese are more guarded, since they remember the period from 1840 to 1945 when China was invaded repeatedly by foreign military powers, including the United States. Most Chinese are still concerned about possible threats from the western world. Parker and SIFCO felt impatient with the slow pace of their Chinese partners in negotiation and decision making. Part of the reason stems from the aforementioned cultural trait that applies to all Chinese firms. HAIC, SHDFP and the Chinese government agencies wanted to take more time to study the proposals carefully and make sure the foreigners were not taking advantage of them. The Chinese team’s reluctance to consider the diverse alternatives of technology payment presented by Parker in the second round of negotiation is another example of this. Proposing diverse alternatives on critical issues in negotiations is recommended by the literature since it may increase the quality of communication, showing that there is a commitment to the project [20]. However, in this case, the alternatives, which the Chinese were not familiar with in the 1980s made them more suspicious and prudent. Two more examples can be cited to illustrate this point. One example is SIFCO’s response to SHDFP’s ‘conservative profitability projection’. SHDFP thought it was an indication of its sincerity and commitment to the project, whereas SIFCO considered it a lack of cooperation. Another example is the employment issue. In the case of SIFCO and Parker, the Chinese executives were willing to lower the productivity and profitability of the proposed joint-venture companies to ensure that all the existing employees be involved in the joint venture. The Chinese executives perceived the consequences of the people issue in a manner substantially different from the American executives’ view. To the American executives, the behavior of Chinese executives was lacking in elementary business sense. In summary, a behavior may be perceived very differently when it is associated with a firm from a considerably different culture. We found that it is not so much the absolute size of the resource

387

L. Zhao and N. M. Reddy

exchange itself but the meaning ascribed to the exchange that determines whether it is perceived as a reward or a cost. 4.4.

Reward/cost

ratio and final terms

An inevitable element of any exchange process is the interaction of rewards and costs. Rewards are defined, for our purposes, as anything giving satisfaction or pleasure while costs are factors that inhibit or deter the performance of a behavior or segment of behavior [21]. Our data show that the perceived reward-tocost ratio plays an important role in determining the final terms of a technology transfer agreement. While every firm tries to maximize its own rewardto-cost ratio, there is generally a discrepancy between what one expects to receive from a relationship and what one does receive. A firm tends to negotiate until it perceives that it achieves at least a similar reward-to-cost ratio as that of its partner. In other words, the perceiver sees his own rewards and costs and compares them with the rewards and costs of the other in negotiations 1131. Regarding the first proposal by Parker, HAIC perceived its major rewards as acquisition of Oring technology, gain of hard currency earning capability (20% export ratio was considered to be insufficient), and improvement of personal benefits. The major costs as perceived by HAIC included over-payment for Parker’s technology, tensions among the employees, affecting HAIC’s social responsibilities, resulting from the suggestion of a greenfield site with a maximum work force of 50, and investment (see Table 1). Table 1 also presents HAIC’s perception of Parker’s major rewards and costs. The HAIC team perceived that their reward/cost ratio was lower. They insisted that Parker’s estimate of their O-ring technology value was wrong (decreasing costs) and asked for more technology transfer and more employees to be included in the TTJV (increasing rewards). Parker’s perception of major rewards and costs for both parties is presented in Table 2. In comparing Tables 1 and 2 one may observe that

388

Parker did not fully realize the social costs to HAIC resulting from its first proposal. In the final agreement, HAIC’s perceived rewards increased: one more piece of technology was acquired, and the export ratio was raised to 65%. From the data we found that in voluntary exchange relationships (technology transfer) one tends to get similar, if not the same, perceived reward/cost ratio as that of the other exchange partner. Cognitive solutions to inequity occur by decreasing one’s costs and/or increasing one’s rewards. Furthermore, codes of conduct, norms as to what constitutes fair play, and cultural differences are all factors influencing the nature of the exchange. Reward and cost should be viewed in the context of a given organization and its relationship to its social environment. In our case, in completing the final agreement, HAIC asked Parker to agree to allow the contract to state that Parker would provide its ‘most advanced O-ring technology’. This should not be viewed as an extra reward that HAIC got in this exchange. This language was necessary to aid the approval process by the Chinese government. Another example is that the Chinese transferees, HAIC and SHDFP, perceived the inclusion of all the existing employees (a sacrifice of productivity and profitability) as a reward rather than a cost to them. An interesting finding of this study is that efforts which attempt to change a party’s estimation of the perceived importance or value of something help to create a feeling of being treated fairly in negotiation. For example, SHDFP was convinced by SIFCO that it was paying a fair price for SIFCO’s technology value given the guaranteed $20 million in sales in eight years. SHDFP then felt more comfortable in accepting SIFCO’s technology. 4.5.

Conflict and satisfaction

Researchers have suggested that a closer relationship, having deeper commitment, often requires working through rather than avoiding conflicts [22]. Prior work by theorists on negotiating

Technovation

Volume

13 No 6

Managing

TABLE

1.

HAIC’s

perception

of rewards

and

costs (Parker’s

initial

Hard

currency

earning

O-ring

H-HAICc

Overpayment

H-PARKERa

Sales of technology

Entry

of host market

Export

Initial

investment

H-PARKERc

for

Tensions

technology

technology

transfer negotiation

proposal)

H-HAICa

Initial

technology

international

among

capability

imployees

Improvement Social

of personal

responsibility

benefits

obligation

investment

responsibility

Commission

on export

sales

Legend: H-HA&q

=

HAIC’s

perception

of rewards

H-HA&

=

HAIC’s

perception

of costs to HAIC.

H-PARKERR

=

HAIC’s

perception

of rewards

H-PARKERc

=

HAIC‘s

perception

of costs to Parker.

TABLE

2.

Parker’s

perception

P-HAICa

O-ring

P-HAICr

Fee-payment

P-PARKERR

Technology

to Parker.

and costs (Parker’s

technology

Spillover

initial

Hard

to Parker sales

effects

Technology

P-PARKER<

of rewards

to HAIC.

disclosure

proposal)

currency

earning

Initial

investment

Entry

of China’s

Global

strategy

Export

responsibility

market

capability

Improvement

Low-cost

Initial

of profitability

supply

base

investment

Legend: P-HA&

=

Parker’s

perception

of rewards

P-HAICc

=

Parker’s

perception

of costs to HAIC.

to HAIC.

P-PARKERa

=

Parker’s

perceptlon

of rewards

P-PARKERr

=

Parker‘s

perception

of costs to Parker.

to Parker.

with Chinese firms notes the importance of each side committing itself to a high degree of interaction in the negotiation process [23-261. Our findings are consistent with this argument. There were conflicts on the issues of value of technology and the export/domestic sales ratio in our two cases. However, since both sides were committed to the project, they found means to resolve conflicts. The importance of the project and the willingness to sustain a relationship of long duration that would be ‘needed after the establishment of a TTJV seemed to be key factors.

5.

Discussion

In this paper it is argued that the relationship of the transferor and transferee firms can be characterized as, above all else, a process of

Technovation

Volume

13 No 6

exchange. Going back over various elements noted in the previous section, we observe that the perception of resources that were primary motivators for the US firms included the potential for gaining access to what many consider to be the single largest market, the ability to develop a lowcost supply base for the Asian and the world market, and long-term profitability. The motivators for the Chinese were a combination of economic, social and personal goals. In addition to enhanced levels of technological capability and contributing to the hard currency coffers of their country, the Chinese negotiators were not oblivious to the potential benefits that come with employment in a US joint venture: higher personal incomes, elevated social status and a range of fringe benefits. The possession of power from the Chinese perspective emanated primarily from their perception that they provided exclusive access to at least

L. Zhao and N. M. Reddy

a regional market. The US firms possessed power because of their ability to provide advanced technical know-how and equipment, an export channel for the TTJV-manufactured product, and by the fact that both the two US firms discussed in this paper are regarded as technological and/or market leaders in their respective industries. On the expectations and perceptions dimension, the conservative aspect of the Chinese culture (in computation of profitability) clashed with the aggressive estimates the US firms made. A second the related to point of dissension productivity-employment conflict. The Chinese argued for, and in most cases won, the ‘social’ good of employment over the more ‘private’ good of productivity. Another irritant, from the US perspective, was the pace at which negotiations proceeded. One has to appreciate, however, the Chinese concerns as they sought to determine whether these firms were the appropriate ones with whom to commit to a very long-term arrangement (preempting in most cases the entry of other worldwide competitors). The speed of negotiations seems to be inversely related to the information content in possession of the Chinese. It is this imbalance that prompts them to engage in what Warrington and McCall [19] so aptly call ‘technological vacuum cleaning’. The reward/cost ratio is a complex of economic and non-economic factors combined with private (corporate) and social needs. The US firms’ motivation was to negotiate an overall package value, whereas the Chinese were inclined to press for the valuation of each piece of the package as it fitted into the overall system [19, 261. Returning to the elements of exchange noted in the introductory section of our paper, the product/service, and information in support of this product or service, are not separable into distinct components. In addition, the financial criteria from the US firm’s perspective need to take on a broader view. For example, Parker may not make any money on its joint venture as presently structured, but its learning and access may enable it to launch a series of related products at a later date. The fourth element we examined in this study

390

is the conflict and satisfaction dimension of the negotiation process. For most US firms, negotiation is, at best, a means to achieve agreement on a certain set of criteria. For the Chinese firms, negotiation is in itself one of the ends; a signal of commitment to the task at hand [27-321. If the Chinese perspective is taken further, the contract and its terms pale by comparison to the importance placed on the relationship. By implication, then, the US negotiator might broaden his ‘wrapping up the deal’ conception in US-China TTJVs to mean agreement to work on an arrangement to conduct business jointly, as opposed to the securing of a substantial legal document, detailing every minor detail, and signed in triplicate. A growing body of literature provides documentation of the complex institutional structure that characterizes the Chinese economy (see [33] and [12] for some recent work). There is a paucity of information, however, about dealings at the organizational level. From a managerial standpoint, our treatment suggests that in a US-China TTJV negotiation, a US transferor firm will have greater bargaining leverage if it is capable of providing the Chinese transferee firm with: an export channel; hard currency earning potential; l a technology not locally available; l a joint venture as opposed to a licensing arrangement; l a reasonably priced technology; l a long-term arrangement that can feed technological enhancements; l a prestigious brand name; and 0 prior experience in ITT.

l l

The Chinese transferee firm is not without its share of leverage points. A Chinese firm has a strong bargaining position when: it has strong technological absorption capability; it has a strong domestic marketing capability and reputation; it is a big user of the product produced by the supplier firm; it has a convenient geographic location (access); it has a direct contact in a governmental agency;

Technovation

Volume 13 No 6

Managing

it is profitable;

it has a strong position in the procurement of local raw material; it is not a direct competitor of the supplier firm; it can provide a transferor firm with complementary technology; and it has strong ties to a financial institution. Furthermore, evidence of our study strongly suggests that firms involved in ITT would do well to study win-win strategy in.the negotiations. ITT negotiation is the start of a long-term interfirm relationship in which both firms should benefit. The objective of ITT negotiation, therefore, is to achieve agreement, not unilateral total victory. In each of the cases we studied, both parties perceived themselves to have gained something and have similar reward/cost ratios when they achieved the agreements. Negotiation has often been compared to a game in which there is always a winner and a loser (341. Our study suggests that ITT negotiation is a behavioral process, not a game. Both cases of this study ended up with an agreement in which both parties won something. From the social exchange perspective, crucial to negotiating with the other party for an ITT agreement is knowing how to develop a climate for a successful conclusion that makes everyone a winner. This requires one firm not only to take care of its own needs but also to be perceptive about, and take care of, the needs of the other firm.

international

technology

transfer negotiation

happening, and why, in ITT negotiations, and facilitate the management of the ITT negotiation process.

Acknowledgements The authors wish to thank the anonymous reviewers for their comments on the earlier draft of this article, and Robert Culpepper for his editorial assistance.

References 1 B.L. Bhagat and R.S. Bhagat, Cultural constraints

on transfer of technology across nations: Implications for research in international and comparative manAcademy (1988) 559-571.

agement.

of Management

Review,

13(4)

2 H. Brooks, National science policy and technology transfer. Proceedings of a Conference on Technology Transfer and Innovation. National Science Foundation, Publication No. NSF 67-S, Washington, DC, 1966. 3 S.I. Doctors, The Role of Federal Agencies in Technology Transfer. MIT Press, Cambridge, MA, 1969. 4 S.N. Bar-Zakay, Technology transfer model. Industrial Research and Development News, 6 (1972) l-11. M.A. Von Glinow and M.B. Teagarden, The transfer of human resource management technology in Sino-US cooperation ventures: Problems and solutions. Human Resource Management Journal, 27(2) (1988) 201-229.

6.

6 N.M. Reddy and L. Zhao, International technology transfer: A review. Research Policy, 19 (1990)

Summary

285-307.

Prior studies on ITT management are dominated by economic framework. This study argues that in addition to economic factors, social and cultural factors exert influence on the eventual outcome of ITT negotiation. This paper suggests that social exchange is a meaningful approach to study the ITT negotiation process. This approach should enable students of ITI to get a better understanding of what is

Technovation

Volume

13 No 6

7 L. Zhao and A. Reisman, Toward meta research on technology transfer. IEEE Transactions on Engineering Management,

39(l)

(1992) 13-21.

8 J. Thibaut and H.H. Kelley, The Social Psychofogy of Groups. Wiley, New York, 1959. 9 G.C. Homans, Social behavior as exchange. American Journal of Sociology (May 1958). 10 H. Hakansson, International Marketing and Purchasing of Industrial Goods: An Interaction Approach.

John Wiley, New York, 1982.

391

L. Zhao and N. M. Reddy

Hakansson and C. Ostberg, Industrial 11 H. marketing - An organizational problem. Industrial Marketing Management, 4 (1975) 113-123. 12 S. Jin and A.L. Porter, Technological innovation and development: Prospects for China. IEEE Transactions on Engineering 258-264.

~un~gement,

35(4)

(January 1986) 68-76.

18 S. Zou, How to do business with China. The China Business Review (January-February 1985) 12-13. 19 M.B. Warrington and J.B. McCall, Negotiating a foot into the Chinese door. Management Decision, 21(2) (1983) 3-13.

20 R. Hardin,

Exchange

theory

Social Science Information,

21 H. Kelly and J. Thibaut,

on strategic

bases.

21(2) (1982) 251-272. interpersonal Relations: A

Theory of Interdependence. John Wiley, New York, 1978. 22 H.B. Braiker and H.H. Kelley. Conflict in the development of close relationships. In: R.L. Burgress and T.L. Huston (eds.). Social Exchange in Developing Re~atio~hips. Academic Press. New York, 1979, p. 135. 23 K. Lee and T.M. Lo, American business people’s perception of marketing and negotiating in the People’s Republic of China. International Marketing Review, S(2) (1988) 41-51.

24 T. Thompson.

How not to do business with China. 1985)

The China Business Review (January-February

10-12. Doing business in China: Why 25 B. Warrington, Britons may have the advantage. Management Decisions, 21(6) (1983) 25-30.

Negotiating a technology license. The China Business Review (May-June 1987) 50-52. 27 J. DePauw, US-Chinese Trade Negotiations. Praeger 26 3. Yuann,

Publishers, New York. 1981. 28 L. Pye, Chinese Commercial Negotiating Style. Oelgeschlager, Gunn & Ham. Cambridge, MA. 1982. 29 L. Pye, The China trade: Making the deal. Harvard Business Review (July-August 1986) 74-80.

392

0. Shenkar and S. Ronen, The cultural context of negotiations: The implications of Chinese interpersonal norms. Journnl of Applied Behavioral Science,

23(2) (1987) 262275. 31 P.E. Shroeder, The Ohio-Hubei

(1988)

13 R.J. Lewicki and J.A. Litterer, Negotiation. Richard D. Irwin Inc., Homewood, IL, 1985. 14 G.C. Homans, Social Behavior: Its Elementary Forms. Harcourt, Brace & Jovanovich, New York, 1974 (first published in 1961). 1.5 J.J. Dowd, Distributive justice and pyschological reactance. Pacific Sociological Review, 18 (1975). 16 P.M. Blau, Exchange and Power in Social Life. John Wiley, New York, 1964. 17 K. Bertrand, Learning a different ball game. Business Marketing

30

to Chinese negotiating

practices.

agreement:

Clues

The Ch~nu Quar-

terly, 91 (1982) 486-491. 32 0. Yau, Chinese cultural

values: Their dimensions and marketing implications. European Journal of Marketing, 22(5) (1988) 44-57.

33

D.E. Simon and D. Rehn, Innovation in China’s semiconductor components industry: The case of Shanghai. Research Policy 16 (1987) 259-277.

34 G.I. Nierenberg,

The Complete Negotiator. Nieren-

berg & Zeif Publishers,

APPENDIX. Al .l.

New York, 1986.

Case 1: Parker-HAIC

Transferor

firm

Headquartered in Cleveland, Ohio, Parker Hannifin Corporation (Parker) produces a complete line of components and replacement parts for hydraulic and pneumatic power systems for the industrial, automotive, aviation, space, and marine industries. In 1987 Parker’s annual sales were about US $14 billion. Parker’s Seal Group is the US market leader, both in terms of market share and technology. This group has successfully transferred its O-ring’ technology to many countries. In late 1979, Parker learned that there was a great interest on the part of Hubei Automobile Industrial Corporation (HAIC) in acquiring access to Parker’s O-ring technology. In April 1980, the two parties began to explore the options of licensing technology or establishing a joint venture. The top management of Parker considered it of strategic value to enter into China for the following reasons. (a) China represented the largest potential market in Asia for Parker’s products. O-ring sales would bring Parker into contact with many potential local customers of Parker’s other products. (b) O-ring production was highly labor and overhead intensive. China could prove to be the low-cost supply base for the Asian market. (c) Parker had no presence in Asia. (d) The O-ring

Technovation

Volume

13 No 6

Managing

technology sales would offset Parker’s R&D cost. As the goal was to establish a long-term relationship, it was felt a joint venture would be the most suitable form of technology transfer. A1.2.

Transferee

firm

HAIC reported to the provincial Machinery Bureau which was the largest industrial bureau in Hubei Province. The company manufactured trucks and truck components and had a work force of between 70000 and 80000 workers. Among HAIC’s many divisions and plants was the Huangshi Seal Plant which manufactured O-rings. There were 13 O-ring plants in Hubei under various bureaus. The O-rings produced in China were inferior to those produced by Parker prior to the Second World War. The Chinese had experienced problems with the quality of their O-ring production, which was hampering their efforts to speed up the development of priority industries such as machinery, transportation and energy. HAIC wanted to acquire Parker’s O-ring technology to improve its competitive position in China. The company also had other motivations to form a joint venture with Parker. The joint venture regulations in China permit a joint venture greater autonomy in business decision making. The employees of such a joint venture also enjoy higher economic and social standing than those employed in domestic firms. Al .3.

Negotiation

process

In July 1980, a team from Parker went to Hubei, starting the first round of negotiation on terms of technology transfer. Both parties agreed to form a technology transfer joint venture (TTJV) with Parker acting as the marketing agent. The disagreements were around the following key issues: A. Workforcelplant location. HAIC wanted Parker to re-equip its existing seal plant, which would have committed the TTJV to use the existing work force of over 200. Parker suggested a greenfield site with a maximum work force of 50 to be more

Technovation

Volume

13 No 6

international

technology

transfer

negotiation

cost effective. The Chinese executives felt they had the social reponsibility to all the employees and did not want to think of getting rid of some of the ‘members in the big family’. They also argued that there would be tensions between the employees that went to work for the TTJV and the ones that did not. They were frustrated that the Parker representatives could not understand them. B. Estimation of Parker’s technology value. Parker asked $350000 for its technology. The Chinese considered Parker’s pricing of its technology to be all wrong. They kept questioning how Parker put a value on the technology. The Parker team’s response was: “How do you put a value on your wife? Technology is worth what you think it’s worth.” C. Domestic/export safes ratio. The Parker team was surprised when HAIC insisted that at least 80% of the plant’s output be exported. Parker management, on the other hand, had expected to export no more than 20% of the plant’s output on a trial basis. The Parker team returned home. A couple of months later they drafted another proposal for establishing the TI’JV. Parker’s proposal addressed the following issues: A. Work force/plant location. The TTJV would be on a greenfield site with a work force of 50. B. Parker’s technology value. Parker still wanted to have $350000 for its technology. C. Domestic/export

sales ratio. Parker proposed

a

60% exportation. The next phase of negotiation, which was held in Cleveland in November 1980, resulted in a deadlock. The Chinese still insisted that 80% of production be exported and argued that Parker’s estimate of the value of their technology was too high. On the latter point, Parker proposed a number of alternatives, including up-front equity contribution, a lump-sum technology payment, or running royalties for the initial technology

393

L. Zhao and N. M. Reddy

contribution and future updates. ‘However, the Chinese were unwilling to commit to any of these alternatives. Moreover, the HAIC team suddenly expressed a desire to expand the scope of the technology transfer to include planar, noncircular, and other special seal shapes technologies. The impasse in negotiations had not been unanticipated by-the Parker-team. Although the Chinese refused to budge, they still seemed very enthusiastic and apparently had high expectations for the ‘ITJV project. Parker and HAIC spent the next twelve months resolving the disagreements. The lengthy negotiations had proceeded at a painfully slow pace, which almost exhausted Parker’s patience. The Chinese continually claimed that they needed more time to think about and review everything. Privately they told the author: “You can’t be too cautious in dealing with those Westerners.” The final agreement was reached at the end of 1981. This agreement’s salient differences from Parker’s initial formal proposal were the following: A. In addition to O-ring technology, Parker would transfer technology for the manufacture of molded seal shapes. Parker agreed to include molded seal shapes because assemblies using O-rings often required one or two special seals of the same material. B. The TTJV would pay a fee of $350000 to Parker for the initial technology transfer. C. The TTJV would sell 65% of its output internationally, with Parker serving as the exclusive marketing agent. Both Parker and HAIC saw this split as a compromise. HAIC also asked Parker to agree to allow the final agreement to state that Parker would provide the TTJV with “Parker’s most advanced O-ring technology”. Parker management had some concerns about the level of commitment implied by these words. HAIC insisted that this language was necessary to ensure speedy approval by the Chinese government agencies.

394

Al .4.

Results

Both Parker and HAIC were pleased with the final agreement. The Chinese mastered the technology for the manufacture of O-ring seals, after a training program, and ran the daily operations independently.

Case 2: SIFCCLSHDFP A2.1.

Transferor

firm

Headquartered in Cleveland, Ohio, SIFCO manufactures specialized and commercial forging for virtually all major industrial markets, in addition to large diameter bearings and electroplating solutions and equipment. SIFCO also provides contract precision machining and turbine components and a bearing remanufacturing service. SIFCO is a medium-sized firm with annual sales of US $60 million. The Forge Group is the largest group in the company. The group serves automotive, energy, machinery and aircraft industries. It enjoys a good reputation for its forging technology and international experience. In 1986 SIFCO was contacted by Shanghai Heavy Die Forging Plant (SHDFP) that was seeking advanced forging technology and an export channel in the form of a joint venture with a foreign partner. SIFCO was willing to discuss a TTJV arrangement for the following reasons. (1) A TTJV would give SIFCO a foothold to enter China’s huge market. (2) SIFCO had been forced to focus on aircraft and other hi-tech forgings in the US market because of foreign competitors with lower costs. A TTJV manufacturing commercial forgings in China would presumably help SIFCO to counter-attack in low-tech forging markets. (3) Technology sales would bring revenue to SIFCO. A2.2.

Transferee

firm

Situated in China’s largest city, Shanghai, SHDFP is a key commercial forging manufacturer in China and is supervised by Shanghai Mechanical

Technovation

Volume

13 No 6

Managing

& Electrical Industrial Investment Corporation directly. With more than 1000 employees, including about 100 engineers and technicians, the plant has annual sales of 22 million yuan (about US $6 million). Although forging dates back 2000 years in China, China’s forging technology lags behind Western technology by about 10 years. High quality forgings, especially closed die press forgings, have to be imported from developed nations. Industries prioritized for development in China, including agriculture, transportation and energy, were all big users of commercial forgings. The open-door policy exposed Chinese firms to foreign technology and the world market. SHDFP saw this as an opportunity to improve its competitive position. SHDFP had been actively looking for a TTJV partner for quite some time before it formally contacted SIFCO. According to SHDFP, the foreign partner should be able to provide technology, capital and an export marketing channel to this TTJV. Once, in a private discussion, a deputy director of SHDFP said: “We wanted to form a joint venture to acquire the technology. We knew we would have greater decision-making autonomy, handsome salary and wage increases for all employees, better fringe benefits, improvement of our social status, additional company cars2 . . . You just name it!” A2.3 Negotiation

process

In December 1986, SIFCO’s Chief Executive Officer visited SHDFP and initiated a discussion on the joint venture. This visit ended with a memorandum of understanding. In this memo both parties expressed their intent to form a TTJV on the basis of SHDFP and agreed to explore further the economic viability of the TI’JV project. A series of discussions followed in early 1987. These meetings further confirmed the technical and economic viability of the TTJV. SIFCO agreed in principle to transfer commercial forging technology to SHDFP and to take the responsibility to sell TTJV forgings to the US market. The

Technovation

Volume

13 No 6

international

technology

transfer negotiation

Chinese side agreed to provide land, building, labor and cash to the TIJV. In May 1987 the SHDFP team visited SIFCO to continue negotiating. SIFCO proposed to sell ‘ITJV-produced forgings in the international market to a total of US $20 million in eight years, starting from the third year after the TTJV was established. The disagreements that surfaced were around the following issues: A. Value of technology. estimation of the value $2.06 million for technical assistance. The Chinese price and insisted on the total.

The focus was on the of SIFCO’s technology: know-how and technical considered it an unfair breakdown of the grand

B. SHDFP’s financial data in the negotiation. SIFCO provided SHDFP with all its financial data. However, SHDFP could not provide any data to show its profitability for the past five years. The only information the Chinese team put forth were statements that were akin to: “Believe us, we’ve been making money for the past ten years.” SIFCO’s team insisted on hard numbers to estimate its financial return. The Chinese team finally told SIFCO that they could not release the information without the Shanghai municipal government’s permission. They promised to talk to the government and provide the financial data later. SIFCO heard nothing from SHDFP for about two and a half months after the Chinese left. Then a fax was sent to.SHDFP: “If you are not interested in this project, let us part friends.” The Chinese faxed back immediately, saying that they were “wholeheartedly” for this project and needed time to review it. It turned out that it took SHDFP more than three months to review the project and discuss it with the municipal government. SHDFP then sent SIFCO its financial data, its five-year projection of sales, cost of goods sold, earnings before taxes, and exports. SIFCO was surprised to find out that production materials were projected about 86% of the cost of goods sold in this laborintensive business. SHDFP also included a request for introduction of press equipment and technology in the first year.

395

L. Zhao and N. M. Reddy

In November 1987, the SIFCO team visited Shanghai again to further discuss the issues concerning the TTJV and the terms of technology transfer. Heated discussions were centered on profitability of the TTJV, value of SIFCO’s technology and work force of the TTJV. A. Profitability of TTJV. When SHDFP was asked why the material cost was so high and earnings before taxes so low in their TTJV projection, the SHDFP team said that the highest market price of materials was used so that the projection would be on a prudent and reliable basis and that both sides would be happier if the actual profitability exceeded the ‘conservative profitability projection’. SIFCO’s team could not understand this practice and thought it was a lack of cooperation. But SHDFP managers maintained that it was their way of planning. They wanted to show their sincerity and commitment to this project by such a conservative approach. B. Value of SZFCO’s technology. SIFCO wished to receive $86OCKMas up-front payment for the disclosure of its technical know-how, and $1.2 million for its on-site technical assistance. The Chinese still questioned the worth of SIFCO’s technology. SIFCO calculated the real benefits of $20 million export sales to the TTJV and countered that no other forging technology transferor in the world would guarantee this amount of export sales. The calculation and challenge influenced SHDFP’s perception. They finally accepted the price. C. Work force.

SIFCO suggested a ‘ITJV with a maximum work force of 450. SHDFP wanted the TTJV to use the existing work force of 1050. The director of SHDFP insisted that all employees be included in the TTJV. He made a number of arguments: (a) serious tension would be created among the existing employees if only part of the work force was involved in the ‘ITJV, because of the difference in wages and benefits; (b) SHDFP had the social responsibility to keep its employees; (c) though the productivity might be low in SHDFP, the projected cost of forging parts in the TTJV was only 60% of SIFCO’s equivalent because

396

of the low wages in China. SIFCO argued that ‘full employment’ might result in a poor global competitive position due to lower productivity. SIFCO also argued that it should not pay the social costs in China. In early 1988, both parties met again. The negotiation finally resulted in the following agreement: A. The TTJV would buy SIFCO’s technology for $860000 up-front. SIFCO would provide technical assistance and know-how, as well as training of engineers and managers, and be paid $1200000 for these. As a result, SIFCO had to make only an insignificant cash investment to the TTJV. B. SIFCO agreed to act as a marketing agent and be responsible for the international sales of TTJV forgings, up to $20 million in eight years. SIFCO would recieve an advance commission of $lOOOOO/ year for four years, starting with the first year of TTJV. C. The venture would hire 850 of SHDFP’s 1050 employees. At the end of the first year of operation, both parties would further discuss the work force on Qe basis of the business’s development and actual needs. Both parties agreed on other issues as well. In August 1988, a Thai investment company joined in as the third partner to provide the TTJV with cash. The three parties met in late 1988. With all terms and conditions agreed to, the ‘ITJV and the technology transfer agreements were signed in early 1989.

A2.4.

Result

All the parties were satisfied with the TTJV arrangement. The TTJV has been growing smoothly since its inception. The technology transfer program has been on schedule. The new venture exported its first batch of forgings two years ahead of the schedule.

Technovation

Volume

13 No 6

Managing

international

technology

transfer negotiation

1 An O-ring is a precision seal for fluid systems (air, water, oil or chemical) molded from specially formulated natural or synthetic elastomeric (rubber) material in a circular configuration with a circular cross-section.

* The Shanghai government discourages companies from owning company cars because of the traffic bottlenecks in the city. Each Chinese company in Shanghai has a quota for the number of cars it can own. However, a foreign-Chinese joint venture can enjoy the privilege of owning more cars.

Liming Zhao is Assistant Pro-

N. Mohan Reddy is Associate

fessor of Management at the College of Commerce and Business Administration, University of Alabama (Tuscaloosa). Dr Zhao’s research interests are in strategic management, international technology management and international joint ventures. His work has been published in various US and international journals including Research Policy, IEEE

Professor of Marketing at the Weatherhead School of Management, Case Western Reserve University, Cleveland. Dr Reddy’s research interests are in the marketing and management of technology. His work has been published in various US and European journals including

Notes

IEEE Transactions on Engineering Management, R&D Management, Research Policy and Technological Forecasting and Social Change.

Transactions on Engineering Management, Journal of Technology Transfer and ASIC

Technovation

Volume

13 No 6

397