ࡱ> !5@1bjbj22-XXt).......BJ:J:J:8:T:BU2;;";;;;;;Ԁրրրրրր$Rل.];;]]..;;mmm] .;.;Ԁm]Ԁm6mn@}..|~;; PϧC|J:f}(%0U}k,|~BB.....|~; GjmPV;;;BB3&:$km@BB&: 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) mharvey@bus.olemiss.edu 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 countrys 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: DSouza & 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 nations 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 papers 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 todays 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 transferors 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 technologys 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 organizations 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 recipients 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. There are some additional process- and product-related concerns associated with the technology itself that could interfere with the acceptance of the technology and create a barrier to the transfer of technology to CEE countries. In particular, the knowledge-intensive technologies: 1) are frequently more costly to purchase outright and royalty payments are difficult to justify by the recipient in terms of payback period; 2) have very specific and limited uses and need to be adapted to local market demand/conditions, thereby, increasing the cost of the transfer; 3) are usually capital intensive, and therefore, frequently require high levels of upfront resource commitments that have to be financed (i.e., increasing the cost of the technology due to the higher cost of capital in relatively high risk economic environments); 4) require sophisticated support systems that must be installed and maintained to allow optimum utilization of the technology transferred (i.e., the additional cost of maintaining the technology on an on-going basis increases indirectly the cost of the technology transfer itself); 5) require continuing support of the technology transferor, thereby creating an external dependence of the recipient organization and reducing the attractiveness of the technology for transfer; 6) are difficult for valuation (i.e., to price) given the unknown nature of the new market, the likelihood of successful and appropriate application of the technology, as well as the transferors ability to control/monitor of the use of the technology by the transferee; and 7) are often characterized by relatively high bargaining power of the transferor, due to the uniqueness of the technology. The transferring companies have various goals/motivations to transfer their knowledge-intensive technologies to entities in CEE economies. The technology may be transferred to mitigate the significant cost/risk in its development. Therefore, its transfer to companies in CEE transition economies is a commercial exercise of this option (Teece, 1977, 1987). At the same time, a technology may be a by-product of another technological development in the organization; therefore, such a technology is not critical for the future strategic orientation of the firm. If this non-critical technology is withheld from the marketplace, another supplier may sell it to CEE transition organizations, and the initial western technology holder may become a late entrant into the CEE marketplace (Teitel, 1978; Tuma, 1987). Therefore, some owners of technology feel that they are virtually forced into selling their non-critical technology to participate in the evolving technology/product markets of CEE economies. To utilize the potential of the technology transfer, the technology owner must identify a capable participant (i.e., a CEE recipient organization) to produce quality products using the transferred technology in the CEE country(ies). The technology itself dictates not only the need for transfer but also the nature of the transfer implementation once it is undertaken by the transferring organization (Wallender, 1979; Dahlman & Westphal, 1982; Zander & Kogut, 1995). This matching process of aligning technology to market and to recipient organization necessitates the development of an adequate due diligence process for technology transfer. This formal procedure of designing the technology transfer process requires that a myriad of information be collected related to the local economy, competition, government regulations and potential recipient organizations. Limitations Associated with the Recipient Organization/Country: The potential recipients of modern technology transfers in CEE countries may themselves become a specific barrier. Frequently, many of these newly privatized or newly founded organizations are under financed and often do not have available lines of credit to make attractive targets for technology transfers. Due to the history of inefficiencies in the areas of production, marketing, and finance in many CEE industries/firms, the technology transfer cannot compensate for the residual operating inefficiencies of the organization (for a more detailed discussion of this issue, see, The State, 2000). In addition, the limited institutional capacity of the CEE institutions constrains the absorptive capacity of the recipient enterprise, given the major changes that have been taking place in these organizations (Baranson & Harrington, 1977; Kedia & Bhagat, 1988;Cohen & Levinthal, 1990). The absorptive capacity is the ability of the CEE organization to recognize the value of the new technology, assimilate it, and apply it to commercial ends (Cohen & Levinthal, 1990; Lado & Vozikis, 1997). Another dimension of absorptive capacity refers to the production capabilities (i.e., adequate technical cadre, planning, scheduling, control systems, and capacity utilization) to utilize/employ the technology efficiently once it is transferred (Balasubramanyam, 1973; Spender, 1992). A concomitant issue is related to the level of the existing marketing capabilities of the transferee. Without the ability to market effectively the product under the limitations in infrastructure, difficulties in market penetration &/or awareness (i.e., lack of promotion and selling capabilities), and an unstructured knowledge base of taste and needs of the indigenous consumers and potential consumers in the global marketplace, the local organization cannot effectively utilize the technology upon transfer (Westney, 1988; Kumar, 1995). Also, the CEE governments may impose implicit barriers to the transfer of western technology. Many of these restrictions revolve around a very stringent cost/benefit analysis of the technology to the recipient organization as well as to the benefits to the economic development of the country as a whole. The use of hard currency in the short-run may overshadow the potential revenue stream in the future of many of the technologies. Additional barrier is complex and time- consuming red tape. Sometimes, the transfer-related parties are required to navigate an ambiguous registration processes that are ever-present residual bureaucratic holdovers from the past political regimes view of economic progress (Witt, 1995, 1996, 1998). However, it must be emphasized that decisive reform efforts, aimed at stimulating the transfer of western technologies, have been undertaken in many CEE countries. Recognizing that these barriers to technology transfer reduce the flow and value of the transferred technology, many CEE governments are following guidelines established by the World Trade Organization to create an environment that is conducive to attracting foreign technology and the concomitant investment of capital to embed the technology into the competitive fabric of these countries (Lado & Vozikis, 1997). Some of these incentives include establishing a functioning strategic factor markets, an adequate property-rights-based legal framework, a stable pro-business political structure, a coherent tax system and reduced red tape restrictions (Brunner, 1993; Peng & Heath, 1996; Lado & Vozikis, 1997; Witt, 1998. Developing a Proactive Technology Transfer Due Diligence Process Western firms interested in transferring technology to CEE companies have to consider three crucial aspects/stages of the transfer when designing the due diligence process. First, the transferor must analyze its own markets and the stage of evolution of the technology life-cycle to assess the potential impact of the transfer on its market opportunities (i.e., to assess in risk/return terms the potential for reverse technology competition from the foreign transferee). Second, the transferor must analyze the existing competition in the form of global and local competitors in the particular recipient country, as well as within in the other CEE countries. Third, the transferring company must determine whether the particular CEE country being considered has both the economic and political characteristics that are conducive for a favorable transfer of the technology from the companys perspective. The following discussion examines these three stages of the due diligence process of technology transfer in depth (see Exhibit 3). ------------------------------ Insert Exhibit 3 Here ------------------------------ Stage 1: Internal Analysis: The first stage of the technology transfer due diligence process should focus on the internal concerns of the organization that is transferring the technology to the CEE recipient. In this initial stage of assessment, the following issues should be examined: 1) assessment of the technology life-cycle stage; 2) the terms of transfer; 3) impact of the technology transfer on the transferring organization; and 4) the level of the required involvement of the transferring company with the recipient organization after the transfer is completed. Each of these concerns will be briefly discussed to highlight the development of the due diligence process. For more detailed set of due diligence questions, see Section I of Appendix A. Assessment of Technology Life-Cycle Stage: To gain insight into the relative maturity of the technology being transferred to the CEE organization, it is necessary to determine the stage of development that the technology is in relative to the home market of the transferor, as well as to the global market of competitors possessing comparable technology available for transfer at different stages throughout the world). The life-cycle of a technology targeted for transfer can be divided into six distinct stages: 1) initial technology development stage- the discovery of a new technology or a new development in the existing technology that has economic value; 2) technology application stage- frequently referred to as the demonstration stage in the technology development where working models, simulations, and/or prototypes are developed, based on which the technology is test marketed; 3) application launch stage- the initial commercialization of the technology has taken place and the technology is being sold in the domestic market to the end users or to the complementing developers of the technology; 4) application growth stage- the technology is experiencing a level of success in the marketplace and additional applications/markets for the technology are sought (i.e., frequently, the owner of the technology may make initial attempts to sell it in the international marketplace); 5) maturity stage- this stage of the technology life-cycle is characterized by a leveling off of sales volume, a declining profit per unit curve, and the emergence of competitive technologies that can be substituted for the existing technology; and 6) decline/degradation stage-the technology in this stage is considered to be outdated/obsolete as substitute technologies outperform the existing technology; therefore, the technology is no more competitive in the marketplace. There may be a motivation to sell technology internationally at any of the six stages of the technology life-cycle but the risk and pricing of the technology vary across the stages of the technology life-cycle. Both the potential transferor and transferee should be aware of which stage of the technology life-cycle is when prior to the transfer and how the technology will impact the catching up phenomena in the CEE company (Radosevic, 1999). Examination of the Terms of the Technology Transfer: This phase of the technology transfer-related due diligence process encompasses what the transferor wants to receive in the form of compensation for the technology, how the technology will be managed (i.e., controlled after the transfer) and the role of any third parties in the transfer process. First, the value of the technology has to be determined by the transferor taking into consideration the stage of the life-cycle, the development costs, future applications of the technology, the existing market penetration and the competitive alternatives to the technology. The payment method (i.e., initial charge, royalties, and other contingency payments for performance) will need to be determined, which will be to a degree influenced by the stage of the life-cycle and the competitive substitutes in the marketplace. Second, the restrictions on the technology being transferred must be determined prior to the sale in terms of the geographic region, the length of time for the transfer, what will constitute breach of the transfer, and how to exit the transfer once the agreement is terminated or breached. Third, the role of interacting (i.e., home and host governments) and non-interacting thied parties (i.e., World Trade Organization, World Bank, International Monetary Fund, European Bank for Reconstruction and Development, European Union) also has to be taken into consideration. The surveillance of technology transfer agreements by third parties to the agreement has become a common step in the technology transfer process (Ofer & Polterovich, 2000). This is particularly true when western technology is transferred to transition economies due to past improprieties and when third parties financed large projects requiring government-targeted technologies. Impact of the Transfer on the Transferring Organizations: There are both positive and negative consequences of transferring technology abroad in general and to CEE countries/companies in particular. There are two primary negative consequences of such transfers. The first issue centers on developing an appropriate pricing scheme for the technology being transferred relative to its true economic/market value. All too frequently, the price schedule (particularly for CEE transition economies) is set below the market value with hopes that revenues can be generated in the long-run to make up for the low initial transfer price. This under-pricing typically is tied to the shortage of hard currency held by potential transferee organizations in some CEE economies. In other cases, however, over-pricing can result from to the use of contract management, accounting, and negotiating techniques. The second major issue to be addressed in this stage of the due diligence process is the likelihood of creating a future global competitor due to the transfer. Specifically, as the transferee might develop disaster scenarios, the transferor must assess the strategic option of the CEE transferee becoming a global competitor by improving the transferred technology. The terms of transfer become that much more important in the success scenario due to the potential competitive fallout created by a successful CEE transferee. There are positive consequences beyond the direct financial outcomes of the technology transfer that should also be taken into consideration, such as: 1) potential for captive sourcing by the transferring organization of the products produced with the technology in the CEE transition economy to become more competitive in the global marketplace and eventual inclusion in the European Union (Orlowski, 1998); 2) potential for extension of the technology application into new products developed by the CEE organization; 3) the development of new technology from the transfer that can be reverse-transferred to the original transferor; 4) extension of the technology life-cycle by exploiting the specific fit between the technology and competitive arenas in the transition economy (i.e., taking mature technology and getting additional returns from a technology which is no longer competitive in the transferors leading markets); and 5) provide a source of tax-deferred income from the transfer that can be utilized to fund other global operations (i.e., taxes not being levied until repatriation of funds to the transferors home market). In addition, if the CEE transferee is successful it will likely become a loyal customer for future technology transfers. Level of Involvement of the Transferring Organization After The Transfer: The involvement of the transferor generally revolves around two key issues, those being monitoring and service. The monitoring of the transfer pertains to insuring that the terms of the transfer are followed and if there is a violation of the transfer agreement that the transferor gains redress. A formal auditing process has to be developed that can be used to assess the operating as well as the strategic dimensions of the transfer. In addition, as frequently CEE governments must be assuaged from taking a negative attitude toward the transfer, the transferring organization must be prepared to address technical issues with the local government (Foldes, 1998). Several of the CEE governments have aimed legislation and enforcement agencies at protecting their fragile balance-of-payments positions by restricting the inflow of products/technology, as well as by phasing out the outflow of profits or revenues from the technology transfer. Some CEE governments also examine what portion of the indigenous population will be served by the technology (i.e., the impact of the transferred technology on the standard-of-living &/or the substitution of existing products being manufactured outside the CEE economy), thereby substituting for imports. The value of the technology to the local economy may also be assessed on the basis whether it will provide a core competency to allow the local organization to compete in the global marketplace (i.e., increasing exports). The transferor may have to play a part in supporting the basic contentions relative to the value-added of the technology to the CEE organization and country. Another set of issues, which may require the attention and on-going support of the transferor when planning on-going business in the CEE transition economy, encompasses the need of 1) defending the transfer relative to reducing the cost of future transfers, 2) increasing application of the transfer to local and export markets, 3) providing on-going data to the local government to demonstrate the impact/value of the transfer, and 4) providing services to accelerate the rate of diffusion of the technology thereby improving the success of the transfer and other local requirements of government agencies. Therefore, the transfer should not be viewed as a sale and walk away strategy but rather as an on-going commitment to aiding the transferee to improve the probability of its success. Just how much is expected of the western transferor is the question, not whether it is expected or not. Stage II: Competitive Analysis: The competitive analysis, when considering a transfer of technology to an transition economy, is similar to doing a comprehensive analysis when launching a new product in a domestic market (i.e., basic industry analysis, primary/secondary and domestic/global competitor analysis, general environmental analysis, supplier and customer analysis, organizational and strategic maturity analysis and competitive position analysis). For a more detailed set of due diligence questions that pertain to the competitive analysis of CEE transition economies see Section II in Appendix A. There are some concerns beyond this type of general competitive analysis that are of particular concern in CEE economies. Specifically, what are the political ties that competitors have in a specific CEE country? Due to the recent privatization efforts of most CEE countries, many of the top management members in competitor firms have developed personal networks that are intertwined in the past and present governments. These contacts can provide competitors with significant competitive advantages that are difficult to replicate. The ownership and other ties of competitors should also be ascertained to determine the potential impact of their powerful partners in the local context. A potential issue from a competitive standpoint is the projected impact of the technology being transferred on local as well as global competitors competing in the transition economy. How disruptive to the competitive equilibrium is the intended technology transfer going to be? If the projected impact is a major one, disenfranchisement of local competitors could precipitate an unforeseen or harsher government reaction to the transfer, thereby increasing the cost of the transfer. The protection of local competitors is a very common practice in CEE economies either through official or unofficial venues. Often, the government agencies want to maintain or increase employment and the tax base of the country by not permitting a technology that makes other producers products/technology obsolete. If a new technology erases the traditional competitiveness of domestic producers, there may emerge a reluctance to approve the transfer by imposing penalties that are associated with the transfer. Therefore, the new transition governments have a tendency to become involved in forecasting the outcomes of technology transfers, as well as in overseeing the permitting and initiation phases of the transfer process. There are a number of positive/negative competitive reactions to a technology transfer in the home market of the transferor. The transfer may send mixed competitive signals to primary domestic competitors, such as: 1) the company is unable to compete effectively in the core product markets; 2) the company is having difficult financial times and has to sell off its newly developed technology; 3) the company is expanding into the global marketplace for additional revenues &/or profits that might be used to be more competitive domestically; 4) the additional revenue might be used to fund additional R&D; and 5) the company is reducing its emphasis on technological leadership and will become less of a competitive factor in the domestic marketplace. As a result, the technology transfer can provoke a variety of competitive responses; the only response that will not take place is the competitors ignoring the firms foray in the CEE transition economies. Stage III: Recipient Country Analysis: In an effort to better understand the congruence between the technology targeted for transfer and the recipient countrys environment, the organization must take into consideration a number of issues that may be related to the transfer, as well as the significant variation in incentives/barriers to the transfer of technology found in the CEE countries (Zloch-Christy, 1998). Frequently, the concerns of governing bodies in the CEE transition economies are more of a macro nature and not specifically related to the technology transfer arrangement. For a more detailed set of due diligence process-specific questions that pertain to the recipient country analysis, see Section III in Appendix A. There are, however, some specific tenets of the deal that often come under governmental scrutiny in most CEE countries, those being: 1) the form of payment and the long-term financial obligations of the transferee to their western partner; 2) the additional non-financial commitments that are required in the transfer agreements (i.e., service contracts, tying agreements on reverse technology transfer); 3) the taxation on the payments related to the transfer agreement, both upfront and long-term payments; 4) the disposition of revenues/profits after being paid by the transferee (i.e., repatriation intent of the transferor to transfer abroad revenues/profits); 5) the cash flow from the transfer and the currency selected for the transaction; and 6) the intent of the transferor to relocate additional technology, jobs, training, research and development, as well as a myriad of related issues to the initial technology transfer. As these factors vary across CEE countries, the technology transfer should not be viewed as an independent dyadic transaction between the transferor and the transferee, in that a number of mediating government agencies will need to be approached for ratification. Frequently, certain non-interacting third party agencies (i.e., World Bank, IMF, European Bank for Reconstruction and Development, and the United Nations) could have stakes in the private transfer, particularly if western financing is associated with the technology transfer transaction. The macro issues that are of concern to CEE governments primarily pertain to the impact of the technology being transferred on the economic, social, and political conditions in the recipient country. A representative set of issues/questions, which may be raised relative to the technology transfer, would be as follows: Which segments of the countrys population will be most affected by the technology? How will the technology impact the present competitiveness of local, indigenous firms? Will the technology provide the foundation for exports to improve trade balance? What are the current trade relations with the transferring country? What influence will the technology have on the redistribution of income in the country? What is the impact of the technology on employment in the transferee organization as well as the industry? Will the technology address existing pollution issues in the country (i.e., during production as well as after production when the resulting product is in use)? What are the requirements for the raw materials needed to produce the new product (i.e., the need to use less of existing stock of raw materials, new local raw materials, imported raw materials)? What is the national security implications associated with the dependence on the technology transferred? Will the transfer stimulate/impede the development of allied technologies in the transition economy (i.e., the long-run impact of buying technology from western outsiders)? This sample of questions highlights the policy-related concerns of governments in CEE transition economies but should not be considered exhaustive. As was stated earlier, the CEE countrys government could be directly involved in the transfer of any western technology to a local partner. The due diligence process should focus a great deal of attention on the environmental context of any anticipated technology transfer in that the representatives of the government can make or break just about any technology transfer to any CEE transition economy. Therefore, the intent to transfer technology to CEE country requires that a specific type of agent middleman be recognized to facilitate the transfer process. This new entrepreneurial agent organization will be a facilitator between the CEE and Western parties. The role of this entrepreneurial agent is discussed in the following section of this paper. The Role for a Technology Transfer Agent Between CEE and Western Parties In order to effectively transfer technology from the West to the CEE countries, one needs to view the CEE economies along the three separate but interrelated aspects: 1) The macro economy and the privatization of formerly state owned organizations; 2) The intermediate sector of new business ventures and entrepreneurial activity; and 3) The external markets and suppliers to CEE countries (see Exhibit 4).Each of these aspects will be discussed to illustrate their importance/role in the transfer of technology form the West to CEE countries. ------------------------------ Insert Exhibit 4 Here ------------------------------- I. Aspect One: Macro Economy and Privatization: The growth of living standard in CEE economies depends on the improvements in the local firms productivity and profitability (Sheleifer & Vishny, 1994). In turn, these improvements require the macro-level industrial restructuring of SOEs and financial restructuring of banks, which are encouraged by appropriate policies (Carlin, Van Reenen & Wolfe, 1995). The industrial restructuring involves labor reduction, wage stabilization, spinning off unproductive assets, exports to western markets, and the development of new quality products (Djankov & Heokman, 1997). The economic policies that support and encourage industrial restructuring include: 1) rapid privatization; 2) external control of organizations; 3) wage increase control upon restructuring; 4) financial discipline; and 5) debt servicing (Djankov & Pohl, 1997). The influence of privatization on industrial restructuring is very significant. Although the extent of privatization is somewhat similar across CEE countries, the speed of privatization varies across the CEE economies. Pohl, Anderson, Claessens & Djankov, (1997) found that privatization accounts for 70-90 percent of the labor productivity growth in the CEE countries with large privatization programs. However, in countries like Bulgaria, with disperse ownership by small investors a large program of fast privatization would damage the quality of privatization. Therefore, there are differences in the privatization process and its effect on restructuring among the CEE countries. Some countries are relying on case-by-case privatization (i.e., Hungary), while some other countries engage in limited mass privatization (i.e., Poland). A very important set of factors, influencing the variation among CEE countries in firm privatization and industrial restructuring, encompasses the country-specific policies for the privatization, financial restructuring, and re-capitalization of the former state-owned banks. In particular, the success in the firm privatization and industrial restructuring may be hampered if banks may not be able to pay their liabilities because of bad loans. The bad loan ratio is significant impediment to industrial restructuring in Bulgaria, but not in The Czech Republic. This indicates that the CEE countries vary in how they combine their policies for bank re-capitalization with those for privatization (i.e., unlike Bulgaria, the Czech Republic pursued bank re-capitalization only after the banks were privatized). In general, the relationship between the macroeconomic indicators (i.e., those reflecting the effects of industrial and financial restructuring) and privatization is complex and, to a large degree, country-specific. A local specialized, often tacit knowledge is necessary to possess or acquire in order to be able to determine the reliable analytical inputs for critical processes such as the design of a due diligence process for technology transfer into the CEE countries. II. Aspect Two: Intermediate Entrepreneurial: Most of the CEE economies are experiencing an increase in new business start-ups and the revitalization of entrepreneurship in their countries. While the State-run organizations are now less than successful, in some cases the new ventures appear to be taking a foothold in the transition economies. These privately owned and for the most privately financed companies, are focused to fill the void in the consumer markets where the demand for products/services has outstripped the ability of local companies to meet the demand. The concept the average citizen in the CEE transition economies is yielding the right of way to the concepts of a consumer and an entrepreneur. This change is, however, evolutionary and uneven. On the one hand, there is a significant segment of the population in some CEE countries that find life in the post-Communist market-driven economies difficult (i.e., the retired or semi-skilled worker who has been downsized during privatization of the large SOE). On the second hand, there appears to be an emerging middle-class of consumers who have pent-up demand for products/services to meet their individual needs. As the success of new ventures continues, there will be a ripple effect on the accelerating growth of a middle-class stratum in CEE countries. The distribution of these middle-class members (i.e. the prime consumers) will not be evenly distributed throughout the CEE countries or for that matter within each country, but the growing middle class sector of each CEE economy must be considered the consumers of the future. Finally, the segments of society that will have difficulty recuperating from the change in market orientation are the retired or near-retirement, semi-skilled or military personnel (McHale, 1998). The transition to market driven economy has removed the social safety net for this segment of society and their ability to function productively in the new economy is questionable. The resulting effect of the evolutionary and uneven transition in CEE economies relative to the transfer of technology process is the emerging need for entrepreneurial intermediaries to help navigate the transfer transaction within the complexities of the transition process. The unique role of the entrepreneurial agent middleman in the transfer of technology from the West to the CEE countries is to represent both the transferee and the transfer. The local CEE agent will have tacit knowledge of the official as well as the unofficial institutional requirements on technology that might be transferred into the CEE country. In addition, this new minted entrepreneurs will have social and professional contacts that can be used to identify potential transfer recipients. The local agent should also know how to facilitate the payment for technology being transferred. Whereas, the Western technology transferor will have knowledge of technology that is available for transfer as well as intimate knowledge of how to effectively bring about a successful technology transfer their knowledge of the local market needs would be limited. The agent middlemen could also help to insure that the technology transfer is efficient and effective for both parties to the transfer agreement. The value-added service of the agent middlemen in these transactions is to match the need for technology with the supply of technology and, as importantly, to demonstrate the expertise and objectivity to help insure the equitable transfer is negotiated and consummated. The unique and valuable knowledge and experience of these entrepreneurs should accelerate and secure the flow of technology as well as the satisfaction of both the transferor and the transferee. III. Aspect Three: External Markets and Suppliers: The entrepreneurial agent organization that provides the expertise to facilitate the technology transfer has another set of functions that it can perform in CEE transition economies. That being, to negotiate the supply of raw materials, goods-in-process and other required inputs to key privatized companies in the transition economy. This could be accomplished through the contacts and relationships built with the technology transferee. Frequently, many local firms lack a knowledge and network to successfully obtain supplies for Western companies. Due to the nature of the previous economic system, frequently little attention was given to suppliers or customers (i.e., external constituents); therefore, in order to accelerate the privatization process, the agent middlemen can provide a valuable service to the companies attempting to privatize. The entrepreneurial agent can also function as a marketing arm for local firms that are recently privatized. Again, in the past the attention to marketing and selling activities was minimal and therefore, the need for such expertise could be high, particularly in the early stages of the transition to private ownership. Through the Western principal, the agent middleman can help to find markets and in some cases sell the end-product to the company that was involved in the technology transfer in the first place. These middlemen can also develop the expertise to negotiate barter/switch-trades for products produced in the CEE countries for machinery and other key supplies. This service would provide the CEE entrepreneurial organization with valuable commodities that then can be sold to the privatized local firms in various markets. This reciprocal supplying/selling relationship can go a long way into developing the trust/commitment to relationship between organizations. The expertise and to some extent the credibility of the relational contract is fostered by the knowledge/expertise and trustworthiness of the entrepreneurial agent middleman. To perform this role in the face of moral hazards engendered by the institutional evolution in CEE countries, the entrepreneurial agent middleman should be meaningfully bound by the professional code of conduct. Summary/ Conclusion The economic success of the transition in Central and Eastern Europe depends on the continuing transfer of modern technology from developed countries. Transferring western technology to the emerging markets of CEE is, however, a complex task. Interested parties have to overcome a number of barriers related to the transferring country, the technology itself, and the recipient country. In this paper, a model of a due diligence process is developed to assess the context of technology transfer. From a transferors perspective, the due diligence process should include multiple stages, such as internal analysis, competitive analysis, and recipient country appraisal. By outlining the different tasks involved during these stages, comprehensive guidelines are provided that will help to improve the success rate of technology transfer to transition economies of Central and Eastern Europe. The due diligence process for technology transfer, developed in this paper, has a number of implications for the parties involved. For instance, the western-transferring firms may improve their success by carefully analyzing the institutional impediments of technology transfer to CEE. By understanding the current state of socioeconomic transition, these firms might be able to assess more accurately the demand for specific technologies in CEE. While our model is outlined from the transferor perspective, it provides helpful information for transferees as well. With their limited resources, the survival of local firms in CEE will largely depend on their technological development. Successful transfer of western technology will have implications for the outcome of transition in general in CEE. For example, as aspirants for membership in the European Union, countries of CEE must start to develop a business environment that is similar to the market institutions in other current EU-member countries. Thus, the ability of CEE governments to create a friendly institutional environment for a rapid and efficient transfer of modern western technology to local firms may provide long-term benefits for the region. The remaining issue is developing a technology due diligence transfer team (see Exhibit 5) that is the focus of future research of the authors and should help to insure the success of western technology transfers to CEE countries/companies. ------------------------------- Insert Exhibit Five Here -------------------------------- References Afriyie, K. (1988). A Technology-transfer Methodology for Developing Joint Production Strategies in Varying Systems. In F. J. Contractor and P. Lorange (Eds.), Cooperative Strategies in International Business, 81-95. Aslund, A. (1996). 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Exhibit 1 FDI Inflows to the Top 10 Recipient Countries in Central and Eastern Europe in 1998-1999 (Millions of U.S. Dollars) Country19981999CEE, Total $21,149$22,923Poland 6 365 7 500Czech Republic 2 720 5 108Russian Federation 2 761 2 861Hungary 2 036 1 944Croatia 893 1 382Romania 2 031 961Bulgaria 537  770Ukraine 926 486Latvia 357 366 Source: UNCTAD World Investment Report, 2000 PAGE  PAGE 36 bjs  G t v ~ *=>@AGH|XdeVaqҕ~hphikmh`Z h]X\ h]XCJ h]X5; h]X56h.=56CJ\]h]X56CJ\] h]XCJh]X5CJ\h]X56] h]X5\ h]X;\ h]X5hAyheh]X h]XCJhH;>h]XCJ17cdefghijvwxyz{|  @ ^@ `gde$a$$a$t11   2 T v w      G s t $a$ p^p` >?@ABCDEFGH|X8^8$a$$dha$dhgd' $dha$gd'$dha$ $d`a$$a$X !!&)$]a$ $]`a$$ Hd]`a$gdikm$d]`a$ $d]a$$da$$a$$8^8a$qr>`~89yijp !!m"u"v"####<$=$$$b%%6&7&C&D&P&Q&}&~&&&&&&&c(e( h]XH*hdOhZh]X6h( h]X5\hikmhZhH;>hMh]X6hph4hMh]Xh`ZJe(((((Q)R)^)_)u)v)~)) * *N+O+e+f+}+~+++,#,3,S,,,,,,,,,,,,,a---.//<0=00001111122222222444477+7,788::;;d<e<???????h`Zh`Z6h`ZhChph(hZh3zhdOh]XU),.34H9???@EEH"MPSmV6]c $d]a$ $]`a$$d]`a$gd4d]d]$d]`a$$d]a$gd3z???@8@xAyAAAAAAcBdBBBH[HMMMMOOOOIRJR}R~RWSXSSS*V+V8V9VNVOVcVdVmVVVVVV7e8epeqeffgggihiiiii/kokmmmnnnnnnoopppprrrruuu hC6h5 h]X6hph]X6hCh3zh(h]XUcg/kmruvHyy}}}}}5$ !d]a$ $ !]a$$ !d]a$$ !d]`a$gdcU$ !d]`a$$d]`a$ $d]a$uu x x y yyy1y4y5yFyHyyr}}}}}}}}}~~ +Ӌ؎P=ܛfuޥT{fQR3@BK h]X6] hcU5\ h`Z5\ h]X5\ht#hikmhJh5hM h]X6 h55 hcU5 h]X5hcUhCh]Xh`ZD;ЪT5R|$ !]`a$ $ !]a$$ !d]`a$gdcU$ !d]a$$ !d]`a$}+ mPdd&dP]gdN d]`$d]^`a$ ]`$ !d]a$$ !d]`a$$ !]`a$Kk|}Ba78 m Gt-Ws by/H/O_$h3zh]X]h3zh]X6h]XmH sH ht# h]X6h]X5CJ\hNh3z5hNh3zhcUhikm h]X6]hJh]XhAfnC)*$0]^`0a$ 0]^`0dh] $dh]a$$d]`a$gd3z01./^_  $0]^`0a$$=6BT]7i=uJj}/:u.^Lu  " 3   N t     4 T u     B~Q$@be$6Thp h]X6]h3z hM6hihi6hi h]XH*ht#h]X h]X6h]XmH sH NAB67<=|}tu-.    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