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International Technology Transfer in Services

Author(s): Robert Grosse


Source: Journal of International Business Studies, Vol. 27, No. 4 (4th Qtr., 1996), pp. 781-800
Published by: Palgrave Macmillan Journals
Stable URL: http://www.jstor.org/stable/155512
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INTERNATIONALTECHNOLOGYTRANSFERIN SERVICES
RobertGrosse*
American GraduateSchool of International Management

Abstract.This studyexaminesthe natureof technologyand the process


of its transferin fiveserviceindustriesfromparentcompaniesto foreign
affiliates.Threeprincipalresearchquestionsare posed:What is the key
technologyin eachindustry?Whatare the mainmethodsfor transferring
this technology?How andwhydo technologyandtransfermethodsdiffer
acrossfirms,industriesandcountries?The empiricalanalysisshowsthat
key technologiesweregenerallyknowledgeof/experiencein the industry
and methodologyfor producingthe service.Transferof the technology
was mainly done throughthe training and transfer of experts: and
organizationalforms werewhollyownedsubsidiariesand international
partnerships.More technologytransferoccurredwhenfirmsweremore
international,whenaffiliatesweremorerecently-established,
and when
parentownershipwas lowerin the affiliate. Some evidenceexists that
morefirm-specific,
jointlyproducedtechnologyleadsto higherownership
percentageandgreatertransferto affiliates.
INTRODUCTION
Technologyis a fundamentalcompetitiveadvantageof firmsin businesstoday.
From creation of new products to knowledge of markets or industrial
processes,technologyplays a majorrole in the success of both domestic and
transnationalfirms.Likewise,technologyis an importantbase for economic
growth and development, so governments need to pursue policies that
optimize its creationand use. This study examinesthe key technologiesthat
drive competitionin severalservicesectors, namely:advertising,commercial
banking,computersoftware,hotels,and managementconsulting.The purpose
of the study is to explain the key technologies involved in each sector; to
describeprocessesby which transnationalfirms transfertechnology to their

*RobertGrosse is Director of Researchat Thunderbird,the AmericanGraduateSchool of


InternationalManagement. He writes about the theory of the multinationalfirm, internationalbankingand internationalbusinessin Latin America.
I would like to thank a number of MBA and Ph.D. students who carried out interviews in Argentina (several
students from the Universidad del Salvador); Brazil (Ana Lidia Gresenberg of the Fundacao Getulio
Vargas); Colombia (Martha Osorio of Universidad de los Andes); Ecuador (Valerie Merino of the
Universidad Catolica del Ecuador); Peru (Fernando Diez Canseco and Rene Cornejo of ESAN); and
Venezuela (Maria Jimena Rodriguez of IESA); and who did data analysis at the University of Miami
(Nancy Yeldezian, Kumar Venkataramany and James Siegal). This project was undertaken for the United
Nations Program on Transnational Corporations (then carried out by UNCTC, now part of UNCTAD),
and funded by the Government of Germany.
Received: December 1993; Revised: June 1995, January & June 1996; Accepted: July 1996.
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JOURNAL OF INTERNATIONAL BUSINESS STUDIES, FOURTH QUARTER 1996

foreign affiliates;and to analyzethe company,industryand countrycharacteristicsof this technologytransfer.


Since services now constitute the vast majority of economic activity in
industrial countries, and more than half of GDP in many less developed
countriesas well, analysisof their structureand functioningis a precondition
for defining appropriategovernmentpolicies and corporate strategies.The
technologythat drivesservicesectorcompetitivenessoften is not the same as
that which drives manufacturingor extractivesector competitiveness.While
product-producingsectors often demonstratecompetitiveadvantagesbased
on proprietaryproducts, service sectors show advantagesbased on 'soft'
technology,that whichis managerialor information-based.Othercontrastsin
technology managementand technology transferdemonstratethat services
differimportantlyfrom manufacturing,and thus the implicationsneed to be
explored.These issues are examinedin some detail in the analysisbelow.
TECHNOLOGY AND ITS TRANSFER

The businessliteraturegenerallyrefersto at least three types of technology:


product,processand management.IProducttechnologyis the knowledgeused
to produce any product- the information that specifies the product's
characteristics and uses. Process technology is the knowledge used in
productionto organizethe inputsand operatethe machinery- it relatesto the
processby which a givenproductor serviceis produced.Managementtechnology is the knowledgeused in operatinga business- the managerialskillsthat
enablea firmto competeby using its resourceseffectively.Each of these types
of technologycan createa competitiveadvantagefor the firmthat possessesit.
That is, although all firms possess each type of technology, an advantage
accruesto firmsthat are able to obtain and deploysuperiortechnology.2
Internationaltechnologytransferis the diffusionof technologyfrom the place
of its introductionto othermarketsaroundthe world.This diffusionmay take
place throughmarkettransactions,with one firmsellinga product,process,or
skill to another.Alternatively,it may be carriedout within a firm throughits
network of affiliates. Also, technology transfer may take place through
strategicalliancesbetweenfirmswhich agreeto mutuallyuse that technology,
as in a joint ventureor a cross-licensingagreement.3
Technologytransfermay be categorizedas verticalor horizontal,depending
on whetherthe processmoves from basic to appliedresearchor to development (vertical transfer), or from use of a technology in one place to its
applicationin anotherplace (horizontaltransfer).4In the presentcontext, the
transferis primarilyhorizontal,with a giventechnologytakenfrom the home
office of a TNC servicefirmto an overseasaffiliate.Even so, when adaptation
of the technologyto local needs is carriedout, the processmay be viewed as
partlyverticalas well.

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CHARACTERISTICSOF SERVICESECTORS
Service industriescan be categorized as producerservices,where users are
primarilyother firms- for example,accountingand managementconsulting,
advertising, and engineering, and consumerservices - such as hospitals, hotels

and retail stores. Some of these industries are quite high-tech- such as
computersoftwareand telecommunications,while others are decidedlylowtech - such as insuranceand publicutility provision(though even these often
have high-tech segments). And some of the industriescross the boundary
betweenconsumerand producerservices- such as commercialbanking and
hotels.
Even this fairlyneat distinctionbetweenconsumerand producerservicesfails
to capturethe essentialcomplexityof definingserviceindustries.5Much of the
service provided by these industries includes physical products as well as
'service'. It is easy to see that airline flights provide a service to the user,
namely, transportation from one place to another. It is much more
complicatedto draw the line in computer software.The software itself is a
product,typicallyrecordedon an electronicmediumsuch as a disk or a tape;
however,the adaptation of that software to a client's particularneeds is a
servicethat involvesinteractionbetweenthe sellerand the buyer,and may be
intangible(i.e., trainingin the use of a computerprogram).6
Giventhe difficultyin separatingservicefromproductin manyinstances,let us
defineservicesin a simplemannerfor use as a basictermof reference.A service
is an intangible item that depends to some extent on interaction between the
buyer and the seller for its provision. A product or good, on the other hand, is

a tangibleitem that may or may not dependon interactionbetweenbuyerand


seller.
Thus, an airplane ride is intangible because the buyer does not retain any
product from the seller after the trip and because the buyer must sit in the
seller'sairplaneto receivethe service.An airplaneitself may be sold as a good
(product),and it obviouslyis quite tangible;the degreeof interactionbetween
buyerand sellerdependson whetheror not the buyerwants modificationsto
the standardairplanethat the seller offers. For a second example,computer
programssuch as MicrosoftWordor Lotus 1-2-3 areproductswhen sold by
retail stores to typical buyers.However,computerprogramsthat are sold in
modifiedform (e.g., a speciallytailoredversionof Lotus 1-2-3)involveservice
to the buyer;and trainingin the use of any programis a serviceas well. Thus,
sale of computer software always includes a product, and when special
adaptationor trainingis involved,it also includesa service.7
The technologyused in each servicesectormust be defined,and the processof
using that technology understood, before the analysis can move to the
evaluationof technologytransfer.For example,to understandthe importance
of technology in an industry such as managementconsulting, it must be

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understoodthat the key technologyis generallynot a high-poweredcomputer,


but rathera systemof informationanalysisand informationtransfer.
There have been few studies of the internationaltransferof technology in
serviceindustries,outsideof those sponsoredby the United Nations Centeron
TransnationalCorporations(e.g., UNCTC [1989a, 1989b, 1989c];UNCTAD
[1994]). Other studies that have focused on internationalcompetition in
services [U.S. Congress OTA 1987; UNCTAD 1991] have considered
technologytransferin some sectorsas a secondaryissue.Studiesthat examine
service industriesin economic development[Shelp, Stephenson,Truitt and
Wasow 1984; UNCTAD 1984]likewise offer some insights into technology
transfer, but without a focus on this issue. The UNCTC has sponsored
researchinto technology transferin some sectors (e.g., commercialbanking
and constructionengineering),and it has looked in detail at the structureof
servicesectorswhereTNCs commonlyoperate(such as financialservicesand
hotels).The presentpaperextendsthe UNCTC workon technologytransferin
services by presentinga detailed analysis of service-sectorTNCs operating
throughaffiliatesin LatinAmerica
The analysisis structuredas follows.First,the principalresearchquestionsare
posed. Next, the data sourcesand analyticalmethod are described.Third,the
empiricalresultsare presentedand analyzed.And finally,the implicationsof
these resultsfor companymanagersand otherdecisionmakersare considered.
PRINCIPALRESEARCHQUESTIONS
Three basic areas are examinedas researchquestions in this analysis.Since
technology and its transferin serviceindustryTNCs has not been explored
adequatelyin the literature,the firstquestionestablishesthe termsof reference:
ResearchQuestion1: What is the key technology in each of these
serviceindustries?
This questionis askedfirstat the level of the aggregategroupof industriesand
firms, and then divided into parts to examine differentstages of the valueadded chain and to permitcomparisonwith manufacturingindustries.Interindustrycomparisonsare made laterin the paper.
The second questionlooks at the transferprocess:
ResearchQuestion2: What are the main mechanismsand organizational formsused to transferthis technology?
Since it is found that most of the key technologyis 'soft'- personalskills and
knowledge- the transfermechanismsfor moving the skills and knowledgeto
foreignaffiliatesare elaboratedin some detail. Likewise,the transferprocess
for each stage of the value-addedchain is examined.
With the terms of referenceestablished,the third question pursues more
specificanalyticalgoals:

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ResearchQuestion3: How and why do technology and its transfer


differacrossfirms,industriesand countries?
This question is obviously complex, so in the discussion below, a series of
hypothesesare stated,and theirtests are presentedas the detailedresponse.
METHODOLOGY AND DATA

Primarydata compiledfor this papercome largelyfrom a seriesof interviews


at home offices and Latin American affiliates (i.e., subsidiaries,branches,
partnerships,and otherkindsof affiliates)of transnationalcorporationsin five
service industries: advertising, commercial banking, computer software,
hotels, and managementconsulting.Initial interviewswere carriedout at the
Latin American headquartersof several banks, computer software firms,
hotels, and managementconsultingfirms.Additionalinterviewsweredone by
telephonewith the LatinAmericanexecutivesof threeadvertisingagencies.All
of this input was used to refine the questionnairethat was subsequently
employedin interviewsin the region. The interviewsat TNC affiliateswere
conducted with the general manager or designatedalternative,following a
structuredformatand generallylastingfor approximatelyone hour.8
During the springand summerof 1991, approximatelyeighty interviewswere
carried out at TNC affiliates in seven countries (Argentina, Brazil, Chile,
Colombia,Ecuador,Peru, and Venezuela).In each countrythe objectivewas
to obtain three interviewsin each industry,including at least one firm not
basedin the United States.Firmswereidentifiedfromlists of the largestTNCs
in each industry (see UNCTC [1990]). Because of the relatively limited
presence of TNCs in these service sectors in three of the seven countries,
almost all of the TNC local officeswerecontactedto try to obtain the desired
fifteen interviewsper country. Due to unwillingnessof a few affiliates to
participatein the study, and inadequateavailabilityof local offices of TNC
firms in some industries,the actual numberof interviewswas approximately
twelvein each country.
The empirical data are used to examine the phenomenon of technology
transferthroughthe productionprocess (value-addedchain) in each service
sector. Interviewswere used to establishthe key elementsof technology and
the contractualform of transferat relevantstages of the productionprocess.
This method of structuringthe analysisseeks to cover all importantkinds of
technologyand transferthat may appearin each industry.
BROAD COMPANY CHARACTERISTICS

An overviewof the companycharacteristicsis presentedin Table1. Hotels are


by far the largestemployersin the group, with more than 600 employeeson
averageworkingin each hotel. Advertisingagenciesare the most 'top-heavy'
industryin staffing,with almost one manageror officerper staff memberin
their offices.

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JOURNAL OF INTERNATIONALBUSINESS STUDIES, FOURTH QUARTER 1996

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TABLE1
Characteristics of Firms in the Five Industries
Measure
Number of firms
Average number of

employees
Officers/staff ratio
Percent of global
business done
in Latin America
Median ownership
Average year of
establishment
Key technology

Advertising

Commercial
Banking

Computer
Software

Hotels

Management
Consulting

14

16

16

10

17

142

172

138

658

245

1/1.1

1/2

1/5

1/17

1/4

10%
100%

11%
100%

14%
100%

16%
100%

17%
100%

1970
1954
Experience
Experience
Mgmt skills
Creativity
Methodology Fin skills

1968
Experience
Mgmt skills
Comp skill

1972
1956
Experience Experience
Methodology
Service
Tech Info

Note: Almost halfof the consultingfirmsare operated as partnerships.


Source: Interviewsat seventy-two TNCservice firmaffiliatesin LatinAmerica,1991

All of the industriesconductapproximately100/o-20%


of theirglobal business
in Latin America.These firmshave been operatingin Latin Americafor an
average of more than two decades; the consulting firms and advertising
agencieshavelongerexperiencethan the softwarefirms,banks and hotels.
All of the industry sectors show a preferencefor 100% parent-company
ownership in their affiliates,though some differencesare noteworthy.The
consulting firms frequently prefer a partnershipstructure or association
agreement;a significantnumberof hotels arelocallyownedfranchisesof TNC
chains;and almost half of ad agenciesarejoint venturesor other contractual
forms.These ownershipformsare very similarto the samefirms'structuresin
other countries.
EMPIRICAL RESULTS

Each of the researchquestionsis pursuedherethroughhypothesistests and/or


descriptivestatisticsproducedfromthe empiricaldata.
ResearchQuestion1: What is the key technology in each of these
serviceindustries?
Accordingto the interviewresponses,the key technologyin everyone of the
service sectors under study was some kind of personal knowledgeheld by
employees.The top five items that werecited include,in descendingorder:
1. Knowledgeof/experiencein the business(33%)
2. Methodologyfor producingthe service(10%)
3. Managementskill (9%)
4. Technical/specialized
information(7%)
5. Financialskills (7%)

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In addition, some of the executives interviewed stated that creativity,


marketingskills and client relationshipswerea key technologyfor theirfirms.
Less than 5%of those interviewedstated that computersystemsor the firm's
internationalnetworkof affiliateswerethe key technology;thesewerethe only
referencesto company or machinerycharacteristics,ratherthan to personal
knowledgeor skills.
These responsesidentifythe key technologyin the five servicesectorsas 'soft'
skills,embodiedin people ratherthan in machinesor other physicalproducts.
Interestingly,if specific services provided to clients were considered as
'products',then the technologiesexaminedherecan be categorizedin the same
manneras for industrialfirms:namelyproducts/servicesthemselves;processes
for producingthe services;and managementof the servicebusiness.The skills
noted above then can be divided into producttechnology (knowledge and
experience);processtechnology(methodologyand technicalinformation),and
managementtechnology (managementand financialskills). By far the most
frequentlycited was producttechnology- knowledgeof and experiencein the
particularservice.Thus, in concept, the services have a similar technology
emphasisas do physicalproductindustries,though the servicesthemselvesare
quite differentfromproductsin numerousways.
Since technologydiffersalong the value-addedchain,9a similarquestionwas
posed for each major stage of the chain:purchasing,production,selling, and
after-saleservice.As may be expected, the upstreampart of the chain was
more dominatedby technical knowledge and skills, while the downstream,
customer-relatedpart emphasizedmore the relationshipswith clients.Table2
comparesthe resultsthroughthe value-addedchain.

TABLE2
Key Technology Ranking through the Value-Added Chain
Stage Purchasing

Production

1.

Knowledge/
experience
(28%)
Training(17%)

Knowledge/
experience
(29%)
Methodology
(11%)

3.

Computer
systems (11%)

4.

Technical
information
(9%)
Financial/
forecasting
skills (6%)

Technical
information
(9%)
Financial
skills (9%)

2.

5.

Creativity(8%)

Selling

After-Sale
Service

Market
knowledge,
research (24%)
Contacts/
relationships
(20%)
Company image
(9%)

Contacts/
relationships
(18%)
Market
knowledge/
research (18%)
After-sale
research (9%)

Selling skills
(9%)

Knowledgeof
clients (9%)

Knowledgeof
clients (7%)

Technical
information
(7%)

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JOURNAL OF INTERNATIONALBUSINESS STUDIES, FOURTH QUARTER 1996

Employees'knowledgeof the particularserviceand experiencein the industry


dominatedall stagesof the value-addedchain.The methodologyfor operating
an affiliate'sanalyticalworkrankedveryhigh in the productionstage,but did
not appearin the rankingfor the other stages. Existing client relationships
rivaled knowledgeand experienceas the leading technology at both of the
downstreamstagesof the chain.
Among the five serviceindustriesstudied,the key technologyvariedto some
extent accordingto the degree of firm-specific,jointly providedknowledge.
That is, in cases where the firm operatedon a highly integratedbasis, with
sharedknowledgeand skills from differentaffiliatesfrequentlyused in service
provision by the local affiliates, the key technology often reflected this
integration.The technologywasjointly providedby severalpeople in the firm,
and thus was specificto the context of that firm. This type of technologyis
difficult to copy by outside firms, since it is not embodied in one person,
product or manual. Badaracco [1991] has termed this technology to be
"embedded"in the firm, or residentin complex social relationshipsamong
people within the firm.'0
For example,in the sectorsthat reliedmore on joint provisionof the service
betweenthe Latin Americanaffiliateand the home office(or other affiliates),
the importanceof methodologywas greater.Advertisingagencies,management
consultingfirms and computersoftwarefirms demonstratedgreaterlinkages
betweenthe home officeand affiliatein the developmentand provisionof the
service(and greateremphasison trainingof their officers)than did banks or
hotels. Two of these three- advertisingagenciesand managementconsulting
firms- ratedmethodologyas one of the top two technologiesin theirbusiness,
while none of the otherthreegroupsof firmsdid. This resulttends to support
the notion that these firmshave emphasizeddifferenttechnologydue to their
abilityto benefitfromfirm-specific,jointly providedtechnology.
It is difficultto comparethese findingswith what has been found in studiesof
manufacturingand extractiveindustries.One noteworthydifferenceis that the
technologyviewedas key in servicesis almost alwaysnot protectedby patents
or copyrights,but ratherby secrecy.This contrastswith the key technologyin
many manufacturingapplications,where patents are obtained for products
and/orprocessesused to makeproducts.The key technologiesin servicestend
to be skillsthat are not capableof beingprotectedby legal means,so the firms
resortto keepingthem internalized.II
In manufacturing,technologiesrelateto the productionof a physicalproduct,
as well as to management of the business. The literatureon non-service
industriesdivides the managerialtechnology from the product and process
technologies almost exclusively.Some exceptions, such as Behrman and
Wallender[1976]and Robinson[1988],discussthe full range of technologies
that may be transferredin manufacturingindustries.Behrmanand Wallender

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found that 'soft' technologywas the key in manufacturingindustries,and that


it was highly firm-specific,just as the present study finds for services.They
found that the knowledgeof how to producea productor how to deal with
problemsin the productionprocess was more importantthan possession of
machineryor other physicalgoods that embody technology.Marton's[1986]
discussionof the transferof industrialtechnology by transnationalfirms to
LDCs likewiseemphasizesthe 'soft' natureof the technology,viz., knowledge,
skills, techniques,experience.These similaritieslead to the conclusion that
manufacturingand servicesmay not differ so much as to the nature of key
technology, but rather as to the applicationof that technology to physical
goods or to intangibleservices.
At anotherlevel, it could be arguedthat the same emphasison the transferof
product and process technology, rather than managerial technology,
dominatesservicesas well as manufacturing.That is, while managerialissues
may be non-trivial in the success of any business, the key technology
transferredin all of the industries seems to be that for producing the
product/serviceand creatingproducts/servicesthat can be sold successfully.
ResearchQuestion2: What are the main mechanismsand organizational formsused to transferthis technology?
This question must be pursued by dividing the issues into the means of
transfer, and the vehicles or arrangementsfor transfer, each of which is
analyzedbelow.
The Means

The product,process,or managerialknowledgethat is createdor obtainedby


a firm can be used entirelyinternallyto producea productor service.In this
case, technology would be transferredout of the firm through sales of its
product/serviceto customers.Also, as people who work in the firm leave and
take jobs elsewhere,some of the knowledgewill be transferredwith them.
Similarly,a firmthat undertakesto sell in an overseasmarketvia its local sales
subsidiarybecomes a vehicle for internationaltechnology transfer to that
country.Once again,the knowledgethat is transferredmay be movedthrough
the simplesale of the product/servicein which the knowledgeis embodiedor
throughthe movementof employeesto other firms,or throughother means
(such as copying by competitors).And finally,the firm may choose to sell its
technology as an input to another firm(s), thus transferringit externallyto
additional markets. This paper looks only at the ways through which
technologycan be transferredfrom the home countryof an internationalfirm
to its affiliatein a foreigncountry.
Following Brooke's[1985, p. 62] view of the 'technologypackage'in service
industries,a seriesof transfertypes can be identified,as shown below.

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JOURNAL OF INTERNATIONALBUSINESS STUDIES, FOURTH QUARTER 1996

Means of Technology
*
*
.
.
*
*
*

Transfer

Hardware (machinery)
Software
People transfer
People training
Documentation
Communication
Agreements (permissions)

These means are not mutually exclusive,of course. They may be used in
varying combinationsin differentindustriesand at different stages of the
value-addedchain. In the empiricalsurvey,the mechanismsused to transfer
technology from the home office and other affiliatesto the Latin American
affiliatesweretypicallymultiple,includingin descendingorderof importance:
trainingprograms,manuals,visits by experts,and employmentof expatriates.
Physical machinerywas seldom noted as being important in the transfer
process,nor were formalagreementsbetweenhome officeand affiliate.There
wereno significantdifferencesin rankingsof servicetransfermeansamongthe
industries studied, nor were there differencesat different stages along the
value-addedchain.12
A noteworthyaspect of all of these servicesectorsis that the full servicewas
largelyproducedlocally in each affiliate.That is, the productionprocesswas
not segmentedto put only final processingor assemblyin the local affiliate.
This is largelydue, of course, to the reality that servicesgenerallymust be
provided at the point of sale, rather than 'imported' from elsewhere.
Nevertheless,this means that technologytransferis largelyhorizontalin these
services,passing from one location of full-serviceactivity to another. This
contrastswith manymanufacturingsituations,wherethe value-addedchain is
more dividedacrossaffiliatesof the firm.13
Vehicles or Arrangements14 for Technology

Transfer

The arrangementsfor carrying out the transfer range very broadly from
externalizedforms to those that require some degree of parent-company
equitypresencein the host country.The main vehiclesare listed below:
Vehicles for Technology
.
*
*
*
*
*

Foreign direct investment


Licensing
Technical assistance contract
Training contract
Turnkey contract
Representation contract

Transfer
.
*
*
*
.
.

Exporting
Franchising
Management contract
R&Dcontract
Co-production agreement
Subcontracting

In principle,every one of the transfer arrangementscan be used between


affiliates of a TNC, and all except foreign direct investmentcan be used
betweena TNC affiliateand an unrelatedcompany.In fact, only a few of these

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TABLE3
Organizational Forms Used by TNC Service Firms in Latin America
*
*
*
*
*
*
*
*

Wholly owned subsidiary


Partnership
Joint venture
Management contract
Association agreement
Licensing agreement
Representative office
Other

(47%)
(13%)
(10%)
(8%)
(7%)
(6%)
(4%)
(5%)

Source: Interviewsat seventy-two TNCaffiliatesin LatinAmerica,1991

arrangementsappearedamong the samplefirms.Table3 presentsthe survey


resultson organizationalform.
Wholly owned subsidiarieswere the most common organizational form,
appearingin 47%of the cases.Partnershipsin whichglobal partnerssharedin
the ownershipof the affiliatewerethe secondmost common form (13%of the
cases). Partnershipsgenerallyincludedone or more of the local executivesin
the global firm'spartnergroup,so that ownershipcould arguablybe viewedas
joint between partnersoverseas and locally."5Association agreementswere
similarto licensingor managementcontractingagreements,in whichthe local
firmhad a contractual,fee-basedtie to the transnationalparent,but existedas
an independentlegal organization.
These arrangementsdemonstratethe firms'use of ownershipas a means of
controllingtheir technology and in general controlling the performanceof
affiliatesin Latin America. This finding is consistent with other studies of
TNC manufacturingfirms in developing countries [Kobrin 1987; Grosse
1992],wherethe dominantorganizationalformis the whollyownedsubsidiary.
It may be hypothesizedthat the firmsthat reliedmore on firm-specific,jointly
provided services would have greaterneed to maintain full ownership and
control over their foreign affiliates.Dividing the seventyfirms in the sample
into those using more firm-specifictechnology (advertising, management
consulting, software) versus the others, a simple regression model of
percentage ownership by the parent showed a highly significant, positive
coefficient(p = .0000) for the independentvariable(firm-specifictechnology)
and an R2 = .42 (F = 45.99, p = .0000). Measuring the degree of jointness of

service production or firm specificity as officers/staff- since more officerintensivefirmswerethose that claimedgreateruse of multiple-personteamsin
producingtheirservices- a similarmodel showeda highlysignificant,positive
coefficient (p = .0006) for the independentvariable (officers/staff)and an
R2 = .18 (F= 13.13, p = .001). With both measures,greaterdegree of firm
specificitywas correlatedwith greaterownershippercentagein the affiliate.
ResearchQuestion3: How and why do technology and its transfer
differacrossfirms,industriesand countries?

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792

It was expected that both technology and transfer methods would differ
betweenfirms with differentcharacteristicsand possibly also betweencountries with differenteconomic and legal characteristics.The primaryemphasis
was placedon examininginter-firmdifferences.
The key technologyitselfwas expectedto differfor firmsin differentindustries.
This turnedout to be true only to the extentthat all sectorsrated'experience'
as the most importanttechnology,whileadvertisingand consultingfirmsrated
'methodology'as the next most importanttechnology,and the others rated
varioustechnologiesin theirorderings.No statisticalinferencesweredrawnon
this point.

Next, the amount of technologytransferwas explored,using severalmeasures


of the transfer.In principle,what is sought is a measureof the value of the
technologytransferred.This presentsa complexvaluationproblem,since the
value of the transferdependson how the technologyis used by the affiliate.16
Alternatively,it could be argued that since the technology is principally
people-embodiedskills,then the greatesttransferwill occurwhen the greatest
skill level is achieved,for example,throughtrainingor transferof experts.
In the empirical analysis, several simple measures of the quantity of
technology transferredwere used: the numberof trainingdays per year for
officers and staff, the number of expatriatesemployed, and the numberof
visits by home-officeexpertsperyear.17In eachcase,the argumentis thatmore
technology is transferredwhen more of the factor is observed (e.g., more
trainingdays or visits per year).
The amount of technologytransferredwas hypothesizedto be a functionof a
series of contributing factors, based on company, industry and country
characteristics.In simplest terms, technology transfer was expected to be
greaterwhen the cost of carryingout the transferwas lower,whenthe barriers
to transferwere lower,and when the benefitsof the transferwere higher.For
example,when a firm has greaterabilityto control the technologybecauseof
its joint provision (embeddedness),or because of greater ownership and
control of the affiliate,it would be more likely to transferthat technology.
Likewise,when the host market is larger,the firm may anticipate greater
benefits from carrying out the transfer. Also, when the firm has many
internationalaffiliates,it may have greaterease of transferringtechnologyto
affiliatesand thus lowercost, so more transferwould be expected.
Factorsexpectedto influencethe amountof technologytransferinclude:
Ownership.Greaterownershipof the affiliate,and thus greaterabilityto
control it, is expected to result in greater technology transfer (e.g.,
Behrmanand Wallender[1976]).Measuredas a percentageof the affiliate
owned by a parentfirm.

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793

Experience.The longerthe affiliatehas been in place,the lesser/greaterthe


amount of technologytransferexpected.In supportof the first interpretation, it was anticipated that greater experiencein the affiliate would
permitgreaterindependencefrom the home officeand thus less likelihood
of direct,measurabletechnologytransfer.But second, it was anticipated
that greater experiencein the affiliate would lead to a greater level of
cooperationbetweenaffiliatesand thus greatertransferof technology.The
directionof influencewas left as an empiricalquestion. Measuredas the
year of establishmentof an affiliate.
The more globally extendedthe firm, and thus the more
Internationality.
previous opportunitiesit has faced to transfer technology to affiliates
worldwide,the greateramount of technologyit is likelyto transferto the
affiliate (e.g., Telesio [1979]). Measured as the number of countries in
whichthe firmhas affiliates.
Joint. The more firm-specificand jointly providedthe technology in an
industry,the easier for the firm to protect that technology,and thus the
greateramount of technologytransferexpected.(e.g., Kogut and Zander
[1990]).Measuredalternativelyas officers/staff,or as a dummyvariable=
1 if advertising,consulting,or software,and = 0 if bankingor hotels.
Country.It was expectedthat largercountrieswouldencouragetechnology
transfer because of desirable markets; and it was also expected that
governmentsin suchcountrieswouldbe morelikelyto demandtechnology
transferin their dealings with foreign firms. For both reasons, a larger
country was expected to be associatedwith greatertechnology transfer.
(e.g., Stobaugh[1988]).Measuredas the 1990GDP of the host country.
These factors were used in a model to explain the amount of technology
transfer.The model may be describedas:
TECHNOLOGY TRANSFER = a + bi(OWNERSHIP) + b2 (EXPERIENCE)
+ b3 (INTERNATIONALITY)
+

b4 (JOINT) + b5 (COUNTRY),

wherethe directionof the expectedrelationshipis positivein all instances


In simple,bivariateregressionmodels,all but one of the hypothesizedfactors
demonstrateda positive,significant(P < .01) correlationwith the technology
transfermeasures.18
Age of the affiliatewas consistentlynegativelycorrelated
with the amount of technology transferred.The full model then combined
these factors. Table 4 presents the results of the full model using multiple
regressionanalysis.

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TABLE4
Model Results, Determinants of Technology Transfer in Services
\

~~Dependent
\Variable
Indepeindent \Training
\Officers
Variables
Age of affiliate
Internationality of the firm
Percent ownership by TNC
Country of affiliate
Firm specificity
Adj. R2
F-value (prob.)
Number of obs.

-0.563***
(-3.00)
0.430***
(2.75)
-0.381*
(-1.92)
0.195
(1.47)
0.028
(0.22)
0.55
12.87
(0.000)
51

Training
Staff

Visits by
ExpertSa

-0.628***
(-3.25)
0.308*
(1.84)
-0.108
(-0.50)
0.072
(0.50)
-0.213
(-1.57)
0.50
10.45
(0.000)
49

-0.248
(-1.09)
0.186
(1.08)
0.171
(0.76)
0.124
(0.86)
0.048
(0.33)
0.41
7.97
(0.000)
52

aThe model of technology transfer based on 'visits by experts' has produced very weak results. While
the model has a significant F-statistic, the individual factors have insignificant coefficients. This is not
due to multicollinearity since the highest correlation between independent variables is 0.38. The result
is probably due to the fact that 'visits by experts' is a weak measure of technology transfer, and thus
does not model well.
*significant at .10 level; **significant at .05 level; ***significantat .01 level
Coefficients are presented as standardized estimates.

The tablepresentsthreesets of results.Column 1 showsthe modelusingofficer


trainingdays per year as the dependentvariable.Columns2 and 3 show the
full model using staff trainingdays per year and visits by expertsper year as
the dependentvariable,respectively.
The basic model using officer training days per year as the measure of
technologytransferproducedsignificantcoefficientsfor most of the variables,
althoughcountrysize was not quite significant,and firm specificitywas also
insignificantbut was signedas expected.The degreeof internationalityof the
firmwas stronglyand consistentlypositivelycorrelatedwith technologytransfer. The age of the affiliatewas stronglyand consistentlynegativelycorrelated
with technologytransfer,supportingthe hypothesisthatneweraffiliatesneeded
greatersupport from the home office than did more-establishedones. The
percentageof the affiliate owned by the parent company was consistently
negatively correlatedwith technology transfer.Apparentlyin these service
industries,the firmswith less ownershipstaketransferredmore technologyvia
officertraining.The size of the host countryas measuredby GDP waspositively
but insignificantlycorrelatedwith technology transfer.The degree of firm
specificityof the technology,as measuredby the ratio of officersto staff, was
also positivelybut insignificantlycorrelatedwith technologytransfer.
The model using staff trainingdays per year producedsimilar though less
significantresultsthan the firstmodel, as shown in column 2 of the table.The

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INTERNATIONAL TECHNOLOGYTRANSFER IN SERVICES

795

model using the numberof visits by expertsfrom other affiliatesof the firm
showed reasonable explanatory power, but none of the coefficients were
significant.19

Overall,these resultsprovidesome supportfor three of the five hypothesized


relationships.Greatertechnologytransferdoes indeed occur when the firm is
more international,and when the host country is larger.Also, more recently
establishedaffiliatesreceive more technology transfer than do longer-lived
ones. Although jointly provided, firm-specifictechnology was positively
correlatedwith technologytransferin two of threemodels,the coefficientwas
neversignificant.
Only the percentageownershipof the affiliateby the home office showed a
relationship to technology transfer that was opposite to that which was
hypothesized- one could possibly conclude that ownership forms such as
franchisesand managementcontracts requiredmore input from the home
office to ensure successfultechnology transferthan more closely controlled
formssuch as whollyownedsubsidiaries.This in itself is an interestingfinding,
since studies of manufacturingindustrieshave shown the opposite relationship, due apparentlyto firms'unwillingnessto shareas much technologywith
partnersin joint venturesor contractualagreementsas they sharewith wholly
ownedsubsidiaries.20
It was expectedthat greatertechnology transfer(or at least more successful
transfer)wouldbe associatedwith betterperformanceof the affiliate.This idea
was examinedonly tangentially,by comparingthe affiliate'smarketsharefor
its main product/servicewith measures of technology transfer. Simple
regressionmodels of marketshare based on the four measuresof technology
transferproduced all significantpositive coefficientsand significantregressions, all at the .001 significance level (except for number of expatriates
assignedto the affiliate,whichwas significantonly at the p = .02 level). Using
this measure of performance, greater technology transfer was indeed
associatedwith betterperformance.
CONCLUSIONS
The key technologyin the five serviceindustriesunder study was in all cases
'soft' technology:knowledgeof or experiencein a business;a methodologyfor
producinga service;or special skills of the firm'semployees.This technology
tended to be first product-specific, second process-specific, and third
In the value-addedchain, key technologiesin upstream
management-specific.
activities such as purchasing and production were technical skills and
knowledge,while key technologiesin downstreamactivitiessuch as sales and
after-saleservicewereclient relationshipsand marketknowledge.
The technology that these firms employ, beyond the non-proprietary
equipmentsuch as personalcomputersand telecommunicationsgear that are
availableto any firm in these industries,tends to be firm-specific
and jointly

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JOURNAL OF INTERNATIONALBUSINESS STUDIES, FOURTH QUARTER 1996

provided(embeddedin teams of people within the firm). That is, each firm
developsits own global information-processing
systemand methodologiesfor
carryingout its work that link affiliatesworldwideand that tie users to that
firm'ssystem.Advertisementdesignand developmentare not identicalamong
ad agencies, and informationabout each firm'sprocess is possessed by its
professionalsand guarded internally.The methodology for carryingout a
particularmanagementconsultinganalysisis tied to the computersoftwareof
the TNC firm and to expertsin variouslocationsof the firmwho can provide
advicein usingthe givenmethodology.Eventhe methodologyfor clientservice
in an ad agencyis tied to the agency,throughproceduresthat requirein-house
expertisefor computerizeddesignsand even for conductingrelationswith the
mediawhereads areplaced.Acrossthe fiveindustrysectors,the importanceof
methodology for producingand/or deliveringa service was greaterfor the
sectors that rely more on joint provision of the service between the local
affiliateand the home office(or otheraffiliates).
The meansfor transferringkey technologieswerevaried,emphasizingpeopletransfers,that is, trainingprograms,visits by expertsand the employmentof
expatriates.The vehicles or arrangementsfor transferringtechnologyprincipally involvedthe use of wholly owned affiliates,though other arrangements
such as joint venturesand managementcontractswerealso found.The sectors
characterizedby morejoint provisionof their servicesweremore disposedto
use wholly ownedaffiliates.
In the attempt to identify factors that contribute to a greater degree of
technologytransfer,it was found that a more internationalfirm, a largerhost
country, and a more recentlyestablishedaffiliatewere positively correlated
with the transfer of technology. Surprisingly,the lower the percentageof
parent-companyownership,the greaterthe transferof technology.This last
point contrastsnotablywith the experienceof manufacturingindustries,and it
may be due to the need for servicefirmsto bettercontrolor indoctrinatecontractuallylinked(not wholly owned)affiliatesin the global firm'stechnology.
These service-sector results contrast in a number of ways with the
characteristicsof manufacturingand extractiveindustries.Technologyin the
case of servicesis much more often soft, ratherthan embodied in physical
goods. The technologyis most often transferredhorizontallyin servicesectors,
sincemost affiliatesproducemost of the servicelocallyratherthan segmenting
the production process across affiliates as occurs with some frequencyin
manufacturing.Greatertechnologytransfertakesplacebetweenaffiliateswith
lower parent-companyownershipin services,while the opposite is found in
manufacturingstudies.Similaritiesdo exist:for example,the key technologies
in both kinds of industriestend to be divisibleinto product(service),process
and managerialcategories,and people-embodiedtechnologiesseemto be most
importantin both cases.

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Additionalstudy is needed to extend these resultsto more countries,though


the evidence taken from other studies does support the findings here. The
presentauthor'sdiscussionswith managersin industrial-countryaffiliatesof
these servicefirmssuggestthat the processof technologytransferis similarin
those countries.Bettermeasuresof technologytransferalso are needed;the
challengeis to capturethe cost of the transferand the benefitto the firm of
realizing that transfer. The relationship between technology transfer and
corporateperformanceis similarlya key issue that is largelybeyondthe scope
of the presentstudy.Giventhe importanceof both technologyas a competitive
advantageand service industriesas employersand income-generators,these
issuesclearlycall for additionalanalysis.
NOTES
1. See, for example,Chudson [1971];also see, Baranson[1978, p.13];Marton [1986b,p. 4];
Robock [1980].The UNCTC [1988]follows a similardefinitionin Figure 1, p. 178.
2. Eventhis statementis too strong,sincepossessionof superiortechnologydoes not implyan
advantageif the firm has to pay so much for superioritythat its benefit is canceled by the
additionalcost.
3. For a discussion of interfirmvs. intrafirmtechnology transfer,see Contractor [1989];
Davidsonand McFetridge[1984];and United Nations CTC [1987,pp. 12-16].
4. Mansfield[1975]drawsthis distinction,whichis quiteuseful in serviceindustriesas well as
for manufacturing.When the technology is primarilymanagement skill, it still may be
transferredhorizontally from parent firm to affiliate,and/or it may be developed further
abroadwhen appliedthereand thus constitutea verticaltransfer.
5. Several other distinctions among service industries are made in the literature.See, for
example,Quinn [1987, pp. 119-20];also see Miles and Wyattin UNCTAD [1991, para. 48,
70-86]; and Boddewynet al. [1986].
6. To complicatethe discussioneven further,one could distinguishbetweenservicesin which
productionand consumptioncan be decoupledand those wherethey cannot. For example,
managementconsultingfirms and computersoftwarefirms could conceivablyproducetheir
services in the home country and deliver them to clients in the host country. Hotels and
restaurants,on the other hand, need to produceand deliverthe servicein the same location,
generallyspeaking. See Erramilliand Rao [1990].In the currentcontext, all of the service
providersare largelyproducingand deliveringthe service in the host country,although in
most cases there is some degree of jointness of productionof the service betweenthe local
affiliateand the home office of the firm.
7. This paper'sexaminationof the computersoftwareindustry focuses on software that is
adaptedto clients' needs, and to other servicesprovidedto clients by the softwarevendors
interviewswerecarriedout using a structuredquestionnairewith ninety-sixquestions,mostly
closed-ended. (e.g., How many expatriates work in your affiliate?)

8. The head of the local TNC affiliatewas contactedby phone to arrangethe interview,and
eitherthat person or a designeeansweredthe questions.All questionnaireswere writtenand
answered in Spanish, except those translated into Portuguese and used in Brazil. The
questionnaireis availablefrom the authorupon request.
9. Any firm'sbusinessactivitycan be dividedinto the componentsthat comprisethe process
betweenthe purchaseof necessaryinputs to the provisionof the final product or service.A
commercial bank, for instance, buys office equipment, rents or buys office space, hires
personnel,and obtains a variety of other inputs to its business.A bank producesfinancial
services such as depository instrumentsand loans, plus a range of other services such as

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JOURNAL OF INTERNATIONAL BUSINESS STUDIES, FOURTH QUARTER 1996

investmentadvice,creditanalysis,and guarantees.After the sale of one of these servicesto a


client, the bank may provide after-saleserviceuntil the loan, deposit, or other instrument
maturesand is redeemedor canceled.The value-addedchain is discussedin detail in Porter
[1985,Chs. 2, 5] and appliedto internationalbusinessin Grosseand Kujawa[1992,Ch. 2].
10. He discusses embedded knowledge that arises from teamworkwithin the firm, from
craftmanshipthat is developedby membersof the firm, from inter-firmrelationshipssuch as
keiretsu and federations of firms in the same business, as well as from geographical
concentrationsof firms such as in Silicon Valley.Our focus is on the teamworkform of
embeddedness.
l1. This point is illustratedtangentially by UNCTAD [1986], in which it is found that
Portugueseaffiliatesof TNCs use technologycontractswith parentfirms principallyin the
form of licensesfor manufacturingfirmsand in the form of servicecontractsfor servicefirms.
12. Virtuallyall of the firmsrespondedthat they transferredkey technologythrough'various
means', includingtrainingprogramsand manualsand often other ways. It was not possible
to separateout one or two of the mechanismsas being more importantthan the others.
13. This point is illustratedby a UN study that shows that service-sectorTNC affiliatesin
developing countries have employee compensation levels similar to those in parent
companies, whereas manufacturing affiliates have much lower compensation levels.
[UNCTAD 1994, pp. 58-59]. Similar findings in the U.S. Department of Commerce
BenchmarkSurvey on FDI abroad show that service-sectoraffiliates have much closer
compensationlevelsto those in the parentfirmthan manufacturingaffiliates[USDOC 1989].
These resultsimplythat similaractivitiesand skill levels are used in the servicesaffiliatesand
parents, while manufacturingfirms have delegated lower-tech and lower compensation
activitiesto affiliates.
14. The UNCTC defines "arrangements"for commercialtechnology transfersin UNCTC
[1987, pp. 2-6], using a classification system very similar to that presented here. The
contractualvehiclesfor transferringtechnologyare also comparedand analyzedin Bonin in
Safarianand Bertin[1987,pp. 73-84]. Robinson[1989]discussesthese transferarrangements
('mechanisms'in his terms), along with legal forms (such as subsidiary,branch,partnership,
and joint venture)used by TNCs to effect the transfers.Erramilliand Rao [1990]examine
foreignmarketentrymodes used by servicefirms,thus examiningthe vehiclesthroughwhich
technologyand othercompanyassetsaretransferredto host countries.Finally,Davidsonand
McFetridge [1984] examined internalized (FDI) vs. externalized (licensing) modes for
technologytransferby TNCs, comparingempiricalstrategiesof thirty-twoU.S.-basedTNCs
in a wide rangeof host countriesover time.
15. In fact, the local affiliatesin partnershipswere usuallyviewed as wholly owned parts of
the global firm.The fact that one or more local people werepartnersdid not detractfromthe
logic that the firm'sglobal earningsaccruedto the global partners,though of course local
work for clients would produce local earnings as well (e.g., billable hours of the people
involved).
16. This problemhas been studied,for exampleby Galbraith[1990].
17. Anothermeasureof technologytransferthat could be used in this contextis royaltiespaid
by the affiliateto the home office.This measureis meaningfulin manufacturingindustries,
wheretechnologyoften is embodiedin machinesor patentedprocesses,but much less so in
services.Veryfew of the firmsin this samplepaid royaltiesat all, so statisticaltests were not
performedusing this variable.
18. All of the bivariate regressionsproduced significant coefficients for the independent
variableand a significantF-valuefor the regression.Twoof the modelsusingvisits by experts'
as the dependentvariableprovedsignificantonly at the .05 level.
19. The model using numberof expatriatesperfirm as the dependentvariableproducedno
significantcoefficientsand poor explanatorypower. It is not clear why this result was so
weak;in fact very few expatriateswere employedby these firmsexceptfor hotels and banks.

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20. Alternatively,one could hypothesizethat greatertechnologytransfermay be carriedout


through expatriateassignmentsin wholly owned affiliates,while in more contractuallytied
affiliatesformal training and contractuallystipulatedvisits by experts may be used more
often.

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