Technology Transfers to Central and Eastern Europe:
Developing an Adequate Due Diligence Format
by
Michael Harvey
Dean and Hearin Chair of Global Business
University of Mississippi
Laszlo Tihanyi
Assistant Professor of Management
University of Oklahoma
Milorad M. Novicevic
Assistant Professor of Management
University of Wisconsin-La Crosse
Marina Dabic
Assistant Professor
Faculty of Mechanical Engineering in Slavonski Brod
405-325-3376 (P)
405-325-7688 (F)
Technology Transfers to Central and Eastern Europe:
Developing an Adequate Due Diligence Format
(Abstract)
The economic advancement of many of the Central/Eastern European (CEE) transition economies is going to be influenced to a large degree by two interrelated events: the development of an entrepreneurial conceptualization of business and the transfer of technology from western countries. The transformation of the business orientation toward innovations (i.e., entrepreneurship) will take a considerably long to evolve, and to a degree, is contingent on developing a successful means of accomplishing technology transfers to transition economies. The purpose of this paper is to explain the role of companies from developed countries in meeting the technology demands of CEE countries through technology transfers. This paper explores the drivers of the techonology transfers and develops a due dilligence process for technology transfer into EEC economies.
Key Words:technology transfers, transtion economies,Central/Eastern Europe, techonlogy agents
Technology Transfers to Central and Eastern Europe:
Developing an Adequate Due Diligence Format
“What is needed most in Central/Eastern European post-privatized economies is western technology transfers and the development of an entrepreneurial orientation to business.”
(Ramamurti 2000)
Introduction
Many economists and policy experts have contended that reducing government ownership of companies tends to provide a stimulus to a country’s economy and that increased privatizing of State Owned Enterprises (SOEs) improves the aggregate performance of the local firms (Donahue 1989; Frydman, Hessel, & Rapaszynski, 1998; Miller 2000). A number of empirical studies have reinforced the efficiency hypothesis of this market-based governance (Boardman & Vining, 1989; Galal, Jones, Tandon, & Vogelsan, 1992; Megginson, Nash, van Randenborgh, 1994; Pohl, Anderson, Claessens, & Djankov, 1997; Boubari & Cosset, 1998; Megginson & Netter, 2001). The deliberate shift away from government ownership toward free-market mechanisms has, however, produced mixed results and some specific negative externalities in the transition economies of Central/Eastern Europe (CEE), which have been visible since the inception of the privatization movement in the early 1990s (Fryman, Gray, & Rapaczynski, 1996; Shleifer & Vishny, 1994: Zapalska, 1997: D’Souza & Megginson, 1999; Vavouras, 2002; Kassayie, 2002).
One negative externality, that cannot be overlooked in the rush to free-market economies, is the perceived social bankruptcy and/or disenfranchisement of some of the stakeholder groups among the CEE country constituents. The sudden “fall” of state socialism created institutional vacuum, and therefore, the successful building of each nation’s efficient corporate governance system is needed to provide the foundation of an entrepreneurial private enterprise to gain a foothold in these CEE transition economies (Child & Czegledy, 1996; Kassayie, 2002). The larger the segment of affected &/or disenfranchised portion of the stakeholders, the more uneven is the push toward free-markets, and as importantly, the less frequent are wealth-creating entrepreneurial ventures in these countries. Access to western technologies that can be effectively transferred to CEE country recipients can be an important stimulus to the wealth-creating process in the CEE economies. However, due to different extent and paths of privatization, the progress toward free-market systems through transfer of western technologies has been unevenly distributed across the economies of CEE (Centeno & Rands, 1996: The Road, 2000; Vavouras, 2002).
The purpose of the paper is to examine the influential factors and describe the stages of a due diligence process for technology transfer from developed countries to responsible parties in the CEE countries. The objectives of the paper are threefold. The first section of the paper examines the rationale justifying the heightened need for technology exchange between the developed economies and CEE transition economies in the post-privatization environment, as well as the barriers to the free flow of technology. Second, the factors driving the need for standards setting in the transfer of technology to CEE transition economies are described. Third, a due diligence process to assess the appropriateness of the technology from the perspective of the transition economy partner (i.e., transferee) is articulated as a means of meeting this need. Each of these issues is captured in the model shown in Exhibit 1, and will be discussed in the following sections of the paper. While this paper’s focus is the transfer of technology from Western to CEE countries/companies it should not be construed that there are not CEE transfers to Western countries/companies. Many Asian organizations are taking advantage of the this outflow of high technology products and processes.
Drivers of Technology Transfers to CEE Economies
The intensification of privatization in CEE economies (i.e., Albania, Bulgaria, the Baltic States, the Czech Republic, Hungary, Poland, Romania, Slovenia, Slovakia, and countries of the former Yugoslavia) has attracted significant investment inflows from developed economies in Exhibit 1.Of the inward foreign direct investments (i.e., FDI) stock in CEE, 72.4 per cent have been invested by firms from the European Union and 8.7 per cent by United States based multinational enterprises. In spite of the significant differences in the role of FDI in their economic development, these countries share some common characteristics, including small-to-medium size, geographic proximity to western markets, and interest in becoming members of the European Union.
------
Insert Exhibit 1 Here
------
For interest in European Union membership to come true for CEE countries, learning from not only FDI but also from privatization experiences is imperative (Orlowski, 1998). The privatization experiences of CEE countries arise from the state intervention in the process to: 1) stabilize the macroeconomic foundations of their countries (The Road, 2000; 2) redefine of the role of the state in the post privatization period (i.e., both as the controller as well as the enforcer) (Spicer, Mc Dermott & Kogut 2000); 3) stimulate the liberalization of the economy while tailoring different barriers for western and indigenous firms (Cuervo & Villalonga, 2000; Verny, 2000); 4) provide the incentives for restructuring ownership and joint ventures between western and transition economy firms (Rosenberger, 1992); and 5) develop a means to curb the corruption and “mafia” influence on the local private enterprises (Mauro 1995, 1998; Gupta, Davoodi & Alonso-Terme, 1998) These institutional modifications in the economic foundations of CEE countries are intended to stimulate economic progress and to stabilize the fledgling free-market system, as well as to encourage the wealth-creating rather than asset-stripping entrepreneurial processes that are germinating in many of the transition CEE economies (Stark, 1992; North, 1993; Myant, 1993; Henderson, Whiltley, Czaban & Lengyel, 1995; Lado & Vozikis, 1997; Whitley & Czaban, 1998; Miller, 2000).
Once the institutional foundation is designed and established for free-market systems in CEE countries, a number of other difficulties/barriers to developing independent and entrepreneurial privately owned businesses would also have to be addressed. These future impediments include: 1) undertaking the rehabilitation and reconstruction of firms, industries, infrastructures and workforces to be competitive in the 21st Century (Ingram & Kessides, 1994; Harvey & Myers, 1999); 2) establishing access to internal and external sources of private/public capital to be used in entrepreneurial ventures in CEE transition economies (Muzka, de Koeing & Churchill, 1995; Meyer, 1998; George & Prabhu, 2000);
3) addressing issues associated with structural and transitional unemployment (i.e., retraining, relocation, motivating workers) (Goldberg, 1992); 4) developing a cadre of competent managers/owners who have an entrepreneurial perspective on the development of new business ventures (i.e., as opposed to the bureaucratic management mandate practiced in the centrally planned system) and are willing to “invest” in the future of the free enterprise (Stuart & Abetti, 1990; Nelson & Taylor, 1995: Child & Czegledy, 1996); and 5) stimulating the transfer of modern western technology and methods to CEE transition economies to increase opportunity, and at the same time, encourage the global competitiveness of privatized state-owned firms and new entrepreneurial ventures (Lado & Vozikis, 1997; Pohl, Anderson, Claessens & Djankov, 1997; Swain & Hardy, 1998: Witt, 1998; Weikl & Grotz, 1998).
This paper examines the one of these impediments to the transformation of transition economies that being, developing a due diligence process for transferring western technology to transition economies in CEE. This is not to negate or ignore the flow of technology from the CEE to developed countries in both the west and Asia. This paper develops the means of effectively managing inflowing technology to CEE countries.
The more successful transition economies of CEE have passed the first stage of the evolution, although, in many cases, the transformation took the form of short-term exploitation of asset-stripping rather than wealth-creating opportunities (Goldberg, 1992; Miller 2000). The institutional imperfections, supporting the privatization processes in the CEE countries, allowed many of the former party officials (i.e., insiders) to take advantage of the radical transfer in ownership of state held assets (Aslund, 1996). The espoused strategic orientation of these same CEE countries entering the second stage of the movement toward free-markets is to restructure their economies for regional growth, and hopefully, in the shortest time possible, for global competitiveness (Witt, 1998). Many experts on the transition processes of CEE economies to free-markets feel that technology transfers from outside these economies will play a major role in speeding up the transformation process (Salvatore, 1993; Cheney & Kozlowski, 1994; Peng & Heath, 1996; Witt 1998; Weikl & Grotz, 1999). As explained in the remaining sections of this paper, for the need for technology transfers to be met in CEE transition economies commensurate efficient governance and effective management of technology transfers from the western developed economies are critical.
Need for Technology Transfers to CEE Transition Economies
Technology transfer across national borders has been defined as “the transmission of know-how to suit local conditions, with effective absorption and diffusion both within and from one country to another”(Kaynak, 1985:pp.155-156). A broad conceptualization of technology encompasses: 1) the basic knowledge (i.e., “software”) subsystem (i.e., the scientific component that includes the existing and future stock of theoretical/applied knowledge related to the technology); 2) the technical support (i.e., “wetware”) subsystem/component; and 3) the capital-embodied technology (i.e., “hardware”) subsystem/component. It is imperative to include each of these subsystems/components in the system analysis of technology transfer to CEE transition economies (Affriyie, 1988; Lado & Vozikis, 1997) because only the system perspective on technology transfer reflects the importance of the outcome value for the transferee. Unfortunately, the transfer of technology analysis frequently focuses only on the tangible “hardware” component that is obviously needed by a company in the transition country attempting to source the technology to be transferred to them (Weikl & Grotz, 1999). However, without the software and wetware components embodied, the “hardware” has less inherent innovating value, and can quickly become obsolete.
There are several reasons why the economic success of the companies in the CEE economies is closely tied to the successful transfer of appropriate modern western technology, which include: 1) lower levels of endogenous expenditures on research and development (R&D) during the period of transition to market based economies (Begg & Portes, 1992); 2) limited local ability to transform basic technology into market-oriented products (i.e., in the past, R&D was frequently determined and financed by the defense authorities, and the conversion of this technology to yield marketable products was limited) (Estrin, 1991); 3) lower levels of foreign direct investment (FDI) for R&D into transition economies due to the high level of perceived and actual risk in many of these economies (Estrin et al., 1994); 4) the need to renew the existing production machinery/facilities to become competitive in the global marketplace (i.e., since 1989, the globalization processes have accelerated during the transformation from SOEs to private ownership, often constraining the availability of capital for modernization of the stranded production assets); 5) heightened competition in home markets due to increased deregulation and trade liberalization; 6) increased consumer demand for quality products requiring updated technology; and 7) recognition of the need for environmental protection during production and with the use of the products by consumers. The recognition of these reasons has spurred many CEE countries to develop progressive, proactive policies that are supportive of western technology transfers into CEE companies (see Exhibit 2 from The Road, 2000).
------
Insert Exhibit 2 Here
------
While CEE countries are attempting to facilitate the inflow of western technologies for general public policy reasons, CEE companies are concerned with specific strategic reasons. These concerns of CEE companies underline the need for new technologies that are competitive and enable them to become viable participants in today’s global marketplace (Witt, 1998; The Road, 2000; Miller, 2000). Also, western technology is needed to accelerate the growth of CEE companies and help many of them to technologically “leap frog” their traditional competitors in other transition economies (Scase, 1998). Technology is also important for CEE companies because of the anticipated membership of their home countries in the European Union (Orlowski, 1998). While the membership of their home countries will provide important benefits to these firms, advanced technology will be a key to their survival in the new open competitive marketplace. Therefore, the question is not whether western technology is needed in transition economies, but rather which technology contributes to these nations’ and companies’ competitiveness, and which value and the transfer format are appropriate for technology sourcing from the transferring organizations. Prior to examining a means to successfully transfer technology from developed to transition economies; it is necessary to examine some of the potential barriers to the transfer of technology to the CEE economies.
Potential Barriers in the Transfer of Technology to CEE Countries
The barriers to technology transfers can be categorized into three groups: 1) limitations associated with the transferring country/organization, 2) limitations associated with the technology itself, and 3) limitations associated with the recipient country/organization. Although a full discussion of the various limitations to the transfer of technology to transition economies is beyond the scope of this paper, salient limiting aspects of each category will be presented to illustrate the specific nature of barriers in each category.
Limitations Associated with the Transferring Country/Organization: The political tension between countries can be a major deterrent to the free transfer of technology. While they are not widespread, political tensions have had a significant impact on the economies of the former Yugoslavia. Given the past and present political tensions, there may be a number of explicit and implicit restrictions on what type of technology can be transferred. From transferring companies’ perspective, some CEE transition economies represent a relatively high level of risk, both from economic and political viewpoints, and therefore, many transferors are reluctant to turn over an asset that is generally paid for over an extended time period (i.e., the risk of royalty payments based on volume of sales of products utilizing the technology that was transferred). One particular area that presents a potential concern relative to technology transfers is the transferor’s limited ability to control the technology once it has been transferred to the CEE recipient organization. Given the slow evolution of the new legal systems to regulate business transactions in most CEE countries, the control issues in the technology transfer are viewed as problematic by many western organizations (Miller, 2000).
Another area of concern by the countries and organizations transferring technology to transition economies focuses on the feasibility and equity of receiving “value-for-value” during the transfer process. The ability of the recipient organization to pay the initial up-front cost of the technology and the on-going payment of royalties is viewed as a latent problem. Both the lack of hard currency in some CEE countries and the inability to forecast the potential sale of products made with the new technology restrict the “adequate payment” that reflects the value impact of the technology being transferred (Potts, 1999). In addition, the rate of inflation and the scope of gray market in some CEE transition economies have been erratic, often escalating to a point that the unreliable inputs for the determination of a “stable/equitable” payment for the technology being transferred are viewed as a potential barrier to even attempting a transfer in the first place.
The implementation or final use of the technology is frequently scrutinized by the government in the country of the technology’s origin. As technologies have a number of related as well as unrelated uses, determining the end use of a technology impedes the free flow of technology between countries when export licensing is required (Harvey & Rothe, 1982; Harvey 1984a, 1984b; Mejias, Palmer & Harvey, 1999). This barrier is of particular concern when the political tensions between two countries are high or have been in question in the recent past. In general, the flow of technology is dependent on a level of inter-governmental macro trust, the evolution of which is difficult to assess and/or monitor by the transferring country/organization.
Other concerns of transferring organizations about the potential misuse of the technology focus on the likelihood of counterfeiting of products, as these products could directly compete with the originator organization’s genuine products in the global marketplace. Product counterfeiting and gray market development have become central issues when attempting to control technology transfers to countries in which the absence of the enforceable protection of product infringements, copyright, and intellectual property rights is not actively pursued by the local government (Harvey & Ronkainen, 1985; Harvey, 1988; Harvey & Lucas, 1998; Wolf & Gurgen, 2000).
Limitations Associated with the Technology: There are a myriad of barriers to the successful transfer of technology that are associated with the technology itself. As technology that is to be transferred is commonly a modern technology, the complexity of the process/products and the related design of the technology itself often retard transfer. The utility of a technology transfer may be contingent on a number of factors, such as: 1) the relative advantage of the focal technology over existing comparable technologies available in the global marketplace; 2) the compatibility of the focal technology with the local environment (i.e., social, economic, and physical) into which it is being transferred; 3) the level of modularity of the technology and how difficult it is to implement the technology in the transition economy; 4) the constraints to the opportunity for trial of the technology or for observation of the technology in use prior to transfer, which influence the recipient’s capacity to actually use the technology; 5) the “image” &/or reputation of the technological capabilities of the particular western country may influence local perceptions whether the technology is attractive or unattractive for companies in CEE countries (i.e., the potential for varying levels of future support for the technology is based on the level of the country-of-origin effect on the technology); 6) the degree of resource endowment and sophistication of the recipient organization (i.e., transferee), as well as its suppliers and customers; and 7) the relative price of the technology viewed by the transferee in terms of initial resource commitment and on-going capability development required for the technology and its management.