Technology Transfer

In addition to the widely discussions of a firm’s strategic instrument about managerial delegation system, the topic of technology transfer strategy is also a popular issue in recently.

Except for the R&D and technology innovation activities, in order to reduce production costs and increase profits, firms may choose to buy the production technology patent from the patent-holder. The patent licensing literatures can be classified to two forms: Inside &

Outside. The outside technology transfer case is the one that the patentee is outside the market of operation, i.e. the patentee is not a competitor in the product market, like an outside independent research lab. The reward of the outside patent- holder may be realized through licensing its innovation to the producing firms, so the outside patent- holder is only interested

is inside the market of operation and is a competitor in the product market. For an inside patent-holding firm, it may keep its innovation for its own use and gains an advantage in competing with its competitors, or it may also license its innovation to the other competitors to gain the licensing revenue.

Several important reasons have been advanced in the literature as to why a firm may want to license an innovation to its competitors, covering both the profit motive and the strategic incentive. For example, Gallini (1984) points out the incentive for an incumbent to license to a potential entrant so as to reduce the likelihood of the latter developing a better technology; Katz and Shapiro (1985) regard the incentive to license as an integral part of a firm’s R&D decision in evaluating the profitability of a R&D project; Eswaran (1994) explores the possibility that licensees can serve as a barrier to entry; Lin (1996) shows that licensing in the form of a fixed fee may serve as a facilitating device for collusion among competitors.

When licensing a patented cost-reducing process innovation, a patentee may consider several different policies, and the most popular cases are like (1) the auction: auctioning off a limited number of licenses through a sealed bid auction; (2) the fixed fee: offering a lump-sum licensing fee; and (3) the royalty: offering a royalty payment per unit of production.

In a complete information framework, if the patentee is an outsider, then fixed-fee licensing dominates royalty licensing (Kamien and Tauman, 1986; Katz and Shapiro 1986; Kamien, 1992), whereas in a leadership structure the optimal contract depends on the innovation size (Kabiraj, 2005). Muto (1993), Wang (1998, 2002), Kamien and Tauman (2002), and Wang and Yang (2004) analyze the case where the patentee is an insider and competition in the output market is Cournot. They show that royalty licensing dominates fixed fees. Saracho (2002) found a similar result when the oligopolistic industry is manager-managed.

During the past time, the patent- licensing literature has still followed traditional theory

when economists began to consider seriously the fact that the modern corporation is characterized by a separation of ownership and management, and the analysis of the firm’s objective function began to focus on managerial objectives and the owner–manager relationship, this potentially important features should be taken consideration into the patent-licensing literature. Saracho (2002) extended the framework of Kaimen and Taumen (1986) with delegation and found that the patent-owner will still prefer royalty than fixed fee.

Wang and Hsu (2004) used the inside technology transfer mode with managerial delegation to construct model and found that licensing is less likely to occur under strategic delegation compared to no delegation. But except for the articles in the above, there are still very few studies which are focusing on the relationship between the managerial delegation and technology transfer. So in our studies, we will extend the traditional technology transfer literatures, combining the managerial delegation system with the technology transfer model to discuss some interesting issues.

Our studies will mainly focus on the inside technology transfer model and combine with managerial delegation. We will discuss this issue under different market competition structures. For the Cournot competition, Wang (1998) and Wang and Hsu (2004) have discussed traditional inside technology transfer model and extended it with managerial delegation. For the Cournot Stackelberg competition, Kabiraj (2005) has discussed the traditional Stackelberg model, and Wang and Yang (2004) extended it with pre-innovation model to talk about the inside technology transfer, but they haven’t applied the managerial delegation within the models, so we will extend their basic model with managerial delegation in our studies. Besides, for the Bertrand competition, Wang and Yang (1999) just discussed the traditional basic inside Bertrand technology transfer model without managerial delegation, so we will also extend their models with managerial delegation to see if their results of models will change or not.

Table 1. Inside Technology Transfer Model Comparison

Model Market

Structure

Basic Model Extension Model with Managerial Delegation

Cournot Wang (1998) Wang and Hsu (2004)

Cournot Stackelberg Kabiraj (2005)

Wang and Yang (2004) Our Studies

Bertrand Wang and Yang (1999) Our Studies

The rest of this study is organized as follows: Chapter 1 in the above is the introduction, which includes the research background, literature reviews and the position of our studies among the relative literatures. In Chapter 2, 3 and 4 we will consider basic technology licensing model under Cournot, Stackelberg and Bertrand duopoly market structures which are with and without the managerial delegation system designation. And we will make the conclusion in Chapter 5.