[LICENSING TO BRIC COUNTRIES] Master Thesis 2012

2012

Master Thesis

D.O. Freriks

S1684531

D.freriks@student.rug.nl

Supervisor: Florian Noseleit

Co-reader: Thijs Broekhuizen

[

LICENSING TO BRIC

COUNTRIES

]

Abstract

This study focuses on the institutional environment of the BRIC country cluster and it’s influence on licensing technology to these countries. By using a fixed effect regression analysis based on a panel dataset, the effect of the institutional factors Intellectual Property Rights protection, economic freedom and country risk is investigated. A sample of 203 licensing agreements, including 72 technology license agreements, was used to prove the effects of 8 variables over a time frame of 15 years. The results of this research show that several variables underlying the institutional factors have a significant relationship to the amount of technology licensing compared to general licensing agreements. Lower corporate taxes and open trade regimes cause technology transfer to become more important and thus underline the importance of economic freedom. Interesting and unexpected findings include the significant influence of transparency of government policy. Although expected differently, the results suggest that more transparency leads to less technology licensing. The implications for this research can be of use for consulting purposes as well as for government policy making. Clear is that when the institutional framework of a company is interesting for high-tech companies, licensing of technology only is less favorable. More involvement in the form of cross licensing takes place and (complementary) knowledge transfer becomes more beneficial for the company as well as the country itself. Although a lot has already been written in the field of entry modes, the focus has often been on FDI versus Licensing. These two ends of the continuum are interesting but the literature lacks in depth analysis of determinants of specific means of expansion. This thesis tried to fill that gap in countries that have become, and will become increasingly important to the world economy.

Preface

This thesis was written as the final part of my master education; Business Administration specialized in Strategy and Innovation. Although I was still a student at the University of Groningen, I conducted this study in the vibrant and international city of London, Great Britain.

Working on my thesis while enjoying the buzzing (business) environment of London has been an experience I would never have wanted to miss. However, this was only possible due to the flexibility of the University of Groningen and in particular my supervisors. Therefore, I would like to take this opportunity to thank Florian Noseleit for his support and insights during the process. Moreover, thanks to Thijs Broekhuizen for his final supervision.

In addition to my supervisors I would like to thank everyone who helped me reviewing and provided me with proper feedback over the last few months, from the first research proposal to this final copy. Daan Olivier Freriks

Table of contents

1. Introduction 5

2. Theoretical Framework 8

2.1 Intellectual property rights protection 9

2.2 Economic freedom 11 2.3 Country risk 13 2.4 Conceptual model 16 3. Research Design 18 3.1 Data sources 17 3.2 Sample 17 3.3 Variables 18

3.3.1. Licensing agreements involving technology transfer 18 3.3.2 Intellectual property rights protection 18

3.3.3 Economic freedom 19

3.3.4 Country risk 19

3.4 Reliability and Validity 19

3.5 Descriptive statistics 20 4. Results 20 5. Discussion 22 6. Conclusion 24 6.1 Theoretical implications 25 6.2 Managerial implications 25

6.3 Limitations and further research 25

7. Reference List 27

8. Appendix 32

8.1 Overview GDP ($ BIL) BRIC countries 32

8.2 PESTLE Analysis – BRIC countries 33

8.3 Mixed model analysis 35

List of tables and figures

Table 1

Table 2

Table 3

Figure 1

1.

Introduction

“Innovation distinguishes between a leader and a follower.”

Steve Jobs

In the past decades innovation has become an important factor for companies to create value and gain a competitive advantage. However, staying competitive in fast changing industries requires a sustainable competitive advantage (Barney, 1991). Following Barney’s (1991) resource based view, gaining a sustainable advantage requires resources which exploit opportunities in a firm’s environment. However, most important is that these resources should be imperfectly imitable and no substitute should be available.

Patents or other forms of intellectual property protection safeguard the innovation from imitation by competitors and facilitate this. However, due to greater importance of technological know-how, globalization, accelerated rates of technological change and increases in outsourcing and collaboration (Kim and Clark, 2013), markets for technology have risen and licensing has become a popular way of transferring technology and exploiting these patents.

Technology licensing is an arm’s length technology transfer where the seller and the buyer are distinct entities. Under a licensing agreement, a firm purchases the rights to another organization’s technology or patents for an initial lump sum payment and future royalties, with the exact terms depending on the agreement (Kim and Clark, 2013).

Although increasing revenue (Katz and Shapiro, 1985), may seem the most logical reason for companies to license and exploit a patent they have, companies can have different incentives for licensing. Strategic competition (Shepard, 1987) could be an incentive to block other competitors from the market. Moreover, (co) development of products (Wind and Mahajan, 1988) can be achieved through licensing. However, in the context of this paper, the rapid creation of a dominant design by increasing demand (Gallini, 1984) is an important element in the decision to license technology.

To gain these economies of scale and to pursue cost reductions to stay innovative and competitive, companies license their technologies to low-cost countries. These so called “north-south licensing agreements” (Viswasrao, 1994) are especially involved in high technology industries and currently in developing countries as China and India.

Diffusion can be defined as the process by which an innovation is communicated through certain channels over time and among the members of a social system. (Rogers, 1995). To overcome the concept of time in this definition, licensing is used to ensure global coverage of a product in a fast pace manner. Especially countries with a large potential as well as installed user base are therefore attractive markets and are interesting for high technology companies.

The type of licensing which is indicated in academic literature concerned with these concepts is so called “ex-post” licensing (Gallini and Winter, 1985). Ex-post licensing is licensing to collect rents from the replacement of relatively inefficient means of production. This type of licensing is specifically involved with the exploitation of an innovation and has nothing to do with the development of a product. This refers to the benefits from acquiring the lowest cost position in the market. Moreover, it refers to the rents which are received in the form of royalties due to turnover received in the market in which the licensee is active (Gallini and Winter, 1985).

One could say that due to fierce competition a premium has been put on licensing innovation. The emergence of a trade off between low cost production and product diffusion on the one hand and defending intellectual property from unlicensed imitators (Grindly and Teece, 1997) on the other. Moreover the rise of for example China and India as formidable competitors on the global stage means that companies across the world increasingly find themselves embroiled in complex webs of collaborative and contractual relationships (Pisano, 2006).

Already in 2001, Jim O’Neill (2001) indicated a change in economic power from developed countries in the western world, to developing countries as Brazil, Russia, India and China. O’Neill’s claim is based on his research for Goldman Sachs and summarized in figure 1 and appendix 9.1. Anno 2012, the so called BRIC countries have also been acknowledged by scholars (Gupta, 2011; Mahalingham, 2009) as well as the World Trade Organization. The countries of this cluster are characterized by fast growing economies and a large number of inhabitants. Although their economic power is rising and have an enormous potential, legal issues (Park and Lippoldt, 2008) and lack of economic freedom still remain cumbersome.

Transparency International's Corruption Perceptions Index for 2011, Brazil is ranked 73rd out of 183 countries. Corruption is a significant problem in Brazil and businesses are expected to encounter corruption while bidding for government contract. The situation is the same in India, where in 2010 corruption issues came to the fore due to irregularities concerning the Commonwealth Games and the 2G spectrum awards. In Russia, there were demands for the elections to be held again from the public and opposition, for Russia especially political instability will remain a challenge in the near term (Datamonitor 2012, PESTLE analysis).

Figure 1 – Growth BRIC countries Source: O’Neill, J. 2001, Building better BRIC’s

Do these situations influence the decision to license technology to these countries? And are there other country specific determinants playing a role? Kim and Clark (2013) have focused on a broad spectrum of inter firm alliances in the high technology industry within and between European countries based on country-specific determinants. However, developments in the shift of economic power of BRIC countries have made it interesting to look to technology transfer through licensing agreements to these countries specifically. Park and Lippoldt (2008) already included the BRIC countries in their research on the strength of intellectual property rights protection and the implication to the transfer of technology. Focusing on intellectual property rights only, their research identifies an important factor but lacks other possible significant factors.

an integrated insight on the influence of these factors involved on agreements in what are perceived to be the economic “super” powers of the future.

Therefore, by combining determinants indicated earlier in this chapter, this research will contribute to the current academic literature by giving an exhaustive overview of the country specific drivers influencing western companies in transferring technology through licensing agreements to BRIC countries. In order to do so and to fill the gap in the current field of research on licensing, this paper will answer the following research question: What are the country-specific determinants that influence companies in licensing technology to BRIC countries? To answer this question and draw solid conclusions from the research, the research question is divided into 3 sub questions. Firstly, how does intellectual property right protection influence the licensing decision of companies? Secondly, in what way does the economic freedom in countries influence licensing decisions? Finally, which country specific issues regarding regulations influence companies in licensing agreements?

Based on these questions the research paper is divided in 6 chapters. After this first chapter in which an introduction to the subject and its relevance was given, chapter 2 will provide the theoretical framework. This framework is divided in 4 sub chapters providing theoretical background on the concepts used and their corresponding hypotheses that are eventually summarized in the conceptual model. The research design is highlighted in chapter 3 including the data collection, sample, variables and methodology. The results from this research will be presented in chapter 4 and discussed in chapter 5. Eventually the answer to the research question as well as the managerial and theoretical implications are given in chapter 6. Finally this chapter concludes with the limitations of the research and the options for further research.

2.

Theoretical framework

“Emerging markets are more complex than ever. Indeed, there are an increasing number of metrics to consider as the manufacturing industry’s complexity grows”

Pete Read, Head of Strategic Analysis & Advisory of the Global Intelligence Alliance

2.1

Intellectual property right protection

“Brazil is a leader of the so-called G-77 countries’ effort to reduce the already minimum standards for patent protection in the Paris Convention. As a newly industrialized nation, it is time for Brazil, the eighth largest economy in the west, to start playing by the rules of the international trading system.”

Gerald J. Mossinghoff, former President of the Pharmaceutical Manufacturers Association

In 1995, after the Uruguay Round of multilateral trade negotiations, the Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPS agreement) was implemented in the framework of the World trade Organization. This agreement was thought of to be a necessary evil in order to counter imitation of products or services on a global level.

Imitation of a product was and is popular due to low barriers of entry in competing with the original innovation. This can by explained by the fact that Imitators frequently can spend less time and money on research than the innovator. The product's existence and characteristics provide the imitator with a great deal of information that the innovator had to obtain through its own research. Protection by (domestic) legislation of intellectual property rights partly overcomes this problem (Mansfield, 1981).

Intellectual property can take different forms such as patents, copyrights and trade secrets (Teece, 1986). Different scholars advocate the protection of intellectual property to support broader and more diffuse networks of innovation to enhance economic development (Pisano, 2006). Especially in the case of product innovations, in contrast to process innovations, protection is important (Levin et al, 1987).

In the context of licensing, intellectual property right protection is seen to be important to solve the appropriability problem. This problem first introduced by Arrow in 1962, is based on the transaction cost theory and focuses on the rent divided by different actors in an agreement. Teece (1986) further elaborated on this problem and indicated that in licensing agreements, different factors play a role in allocating these rents to the licensor.

Another insight of the transaction cost theory in intellectual property rights protection is given by Williamson (1996). He states that under an institutional setting in which the protection of property rights is weaker, the cost of contracting and the cost of using a hybrid such as licensing increases. This is due to the increased risk of leakage or unwanted dissemination of proprietary, technological and marketing assets to rivals, suppliers, and buyers.

In addition to this Javorcik (2004) uses the OLI paradigm (Dunning, 1993) based on the transaction cost theory to explain the relationship between licensing and the strength of intellectual property right protection. The OLI paradigm is concerned with 3 factors which are ownership, localization and internalization advantages. While ownership advantages relate to trademarks and other assets of the firm itself, localization advantages refer to specifics which enhance the ability to enter the host country market. Finally, internalization explains the incentives to retain control over production instead of licensing (Dunning, 1993). Following this, weak IPR protection increases the probability of imitation, which erodes a firm's ownership advantages and decreases localization advantages of a host country. At the same time, a weak IPR system increases the benefits of internalization, since it is associated with a greater risk of the licensee's breaching the contract and acting in direct competition with the seller (Javorcik, 2004).

Not only for the licensee but also for the licensor the protection of intellectual property rights plays an important role, as exclusiveness is an important factor in a licensing contract. Exclusiveness is referred to as the geographical restrictions included in the licensing agreement (Anand and Khanna, 2000) and determine the value of such a licensing agreement.

Pure logic tells us that an agreement on a big geographical market will be worth more than one concerning a fairly small market. However, when IPR protection of a country which technology is contracted to is weak, the value of such a contract will be lower (Anand and Khanna, 2000). Since no effectively restricted access exists and unlicensed parties will be able to invent around the licensed technology, licensor are less willing to engage in a licensing agreement.

Due to the different insights of the transaction cost theory regarding intellectual property right protection and the case study on the BRIC countries performed by Park and Lippoldt (2008) the following hypothesis can be stated.

H1: If intellectual property rights protection is perceived stronger, more technology licensing agreements will be closed

2.2

Economic Freedom

"BRIC cooperation now faces both valuable opportunities and severe challenges. We should set clear objectives for cooperation among the four countries and advance the BRIC cooperation process from a strategic height." Hu Jintao, President of the People Republic of China

According to Hoekman et al. (2005) not only the legal regime is an important aspect for a country when it comes to stimulating technology transfer through licensing. Multinational corporations are often keen to transfer technology to local suppliers (Moran, 1998) but are restricted in the ways they do this (Mansfield & Romeo, 1980). Specifically in countries that are relatively poor, have weak institutions and have limited R&D capacity the priority should be to improve the business environment with liberal policies to encourage imports of technology through licensing (Hoekman et al., 2005). At the moment however, according to Davis (2005) countries are insisting that corporations engage in international technology transfer rather than facilitating this process with adequate policies to attract them.

In their research Kim and Clark (2013) capture these policies in the concept “Economic Freedom”. This concept consists of the trade regime a country has, the corporate tax policy it pursues and its use of subsidies. In the latter of this chapter these concepts will be elaborated on in order to eventually construct a solid hypothesis to test.

The term trade regime refers to the openness of a country regarding trade. In the past decades it has been debated how trade policies contribute to economic growth and the increase of productivity and efficiency of a country. The most commonly adverted regulations on trade, as can be seen by (most) World Trade Organization members, are concerned with reducing or removing import as well as export tariffs on products and services. A so called open “trade regime” is claimed to improve resource allocation, which could lead to investments in areas in which economies have competitive advantages (Kokko et al, 2001).

agreements (Kim and Clark, 2013). In addition to Kim and Clark (2013), Parry (1985) advocates the connection between trade barriers and licensing based on the Internalization theory (Dunning, 1993).

In addition to trade regime, corporate taxation is also believed to be one of the factors by which countries could facilitate inflow of technology and create economic wealth by enhancing local learning and increase the absorptive capacity of local companies (Hoekman et al., 2005). To make this possible, Hoekman et al. (2005) advocate the option to offer the same fiscal benefits to foreign firms transferring their technologies as the benefits that are available to their domestic counterparts.

Following the transaction cost theory and pure logic one could assume that with higher corporate taxes higher costs are involved. Based on that fact, companies would be reluctant to invest in such a country. This assumption is supported by the case study of Becker et al. (2006) on tax reform in Germany. Moreover, they state that tax considerations seem to be more relevant in branches in which investment is likely to be cost-driven, like manufacturing.

Strong evidence for the relevance of the tax system for investment is also provided by Gresik (2001) who focusses his research on tax strategies of multinationals. Hines (1999) is even able to stick a number to the relationship between FDI with respect to tax rates and finds convincing evidence of large response elasticity.

In the specific case of licensing, Kim and Clark (2013) show that taxes are an example of costs that should be eliminated in order to enable technology transfer. Lowering taxes will make it more attractive for technology holders to transfer their technology to developing countries.

When it comes licensing intellectual property subsidies are a more controversial subject. Advocates of economic freedom policies have made clear that countries should rely on markets rather than political processes to allocate goods and resources. However, subsidies per-unit as well as fixed amount subsidies are claimed to have a positive effect for the host country and the licensor. Or in the words of Tyson (1993); “Subsidies should be treated not as a threat but as a gift – one that not only lowers prices but also new information, free of charge.”

Different scholars have indicated the importance of subsidy policies like this. One of these scholars is Amsden (1989) who argues that subsidies are important in the acquisition of knowledge. Especially in manufacturing, in which licensing occurs often, subsidies play an important role since they offer knowledge spillover for the host countries and a financial incentive for licensors.

In the case of offering a per unit subsidy together with the innovation, the innovator makes a licensee more efficient and increases the willingness to pay for the license (Chun-Hsiung and Sen, 2005). This effect is based on the principal – agent theory and is indicated by Fershtman and Judd (1987) as similar to the effect caused by a principal who manipulates the marginal payoff of an agent to make him more aggressive.

Concluding, economic freedom can eliminate some of the costs associated with transferring technology through licensing. Following the transaction cost theory, (Williamson, 1979) this implies that higher economic freedom will lead to a larger amount of licensing agreements. Hence, the following hypothesis and underlying sub-hypothesizes.

H2: When the economic freedom is higher, more technology licensing agreements are closed

 H2a: A more open trade regime will increase the number of licensing agreements

 H2b: Higher corporate taxes will result in less licensing agreements

 H2c: Subsidies are an incentive for a higher number of licensing agreements

2.3

Country Risk

“In some ways Brazil is the steadiest of the BRICs. Unlike China and Russia it is a full-blooded democracy; unlike India it has no serious disputes with its neighbors. It is the only BRIC without a nuclear bomb”

The Economist

All business transactions involve some degree of risk. When business transactions occur across international borders, they carry additional risks not present in domestic transactions. These additional risks, called country risks, typically include risks arising from a variety of national differences in economic structures, policies, socio-political institutions, geography, and currencies (Meldrum, 2000).

Kim and Clark (2013) capture the country risk concept as the risk associated the stability of the environment. This stability or instability is mainly caused by political situation, lack of transparency, the presence of corruption and abundance of bureaucracy (Kim and Clarke, 2013). The latter of this chapter will further review the extensive literature on these concepts and their interrelatedness.

One of the aspects, political risk concerns risk of a change in political institutions stemming from a change in government control, social fabric, or other noneconomic factor. This risk covers the potential for internal and external conflicts and expropriation risk. Generally the political stability in a country is influenced by numerous factors such as the decision-making process in the government and the history of the country (Meldrum, 2000).

rights (Schneider and Frey, 1985). Moreover, uncertain political situations make investors and public officials short-term oriented and pursuing personal gains while sacrificing the legality, e.g. drive corruption (Wei, 2000).

Transparency is also involved with country risk and refers to the clarity and effectiveness of activities with impact on public policy. On the other hand non-transparency refers to a set of government policies that increase the risk and uncertainty faced by foreign investors. Moreover, economic policies are likely to be treated as non-transparent if they are subject to unpredictable policy reversals (Drabek and Payne, 2002).

Transparent economic policies are vital for foreign investors. Most important and in line with the transactions cost theory is that non-transparency imposes additional costs on businesses. These additional costs arise as firms have to tackle the lack of information that should have been provided by the appropriate government department in the implementation of its policies and in the activities of government institutions (Drabek and Payne, 2002).

Moreover, policy performance and transparency is monitored by outside agencies that have a crucial impact on decisions of foreign investors. These agencies include the International Monetary Fund and various private credit rating agencies such as S&P, Fitch and Moody’s. However, the implications of these agencies are different. While the IMF oversees economic policies and rates them, credit rating agencies evaluated direct investment opportunities within the specific country (Drabek and Payne 2002).

In addition to transparency a often cited aspect of country risk is corruption. Corruption is defined as the abuse (or misuse) of public power for private benefit (Bhardan, 1997). Corruption includes bribing and the unlawful use of public funding. Due to globalization and the growth in emerging economies multinational enterprises now frequently are confronted with challenges associated with corrupt governments (Uhlenbruck et al, 2006). Moreover, in line with earlier parts of this thesis, corruption is widespread in countries where the government and underlying legislative bodies enjoys excessive and discretionary power, and where laws and processes are barely transparent (Tanzi, 1998).

Finally bureaucracy is also indicated by (Kim and Clark, 2013) to measure the extend of country risk. The concept bureaucracy refers to the extent to which the national bureaucracy enjoys autonomy from political pressure in a stable manner, and whether or not it has an effective mechanism for recruiting and training, the ease of regulations concerning licensing requirements and labor, environmental, consumer safety, and worker health. (Campos and Konishita, 2003). In short this is called the burden of regulation.

Bureaucratic rules or government intervention in this sense are indicated by Poynter (1982) as important factors which influence the investment of companies. Expropriation, coerced sales, and unilateral contract renegotiations are phenomena which occur especially in developing countries. Poynter (1982) points out in his research based on different multinational corporations and different “less developed countries” that multinationals have always chosen for low intervention-risk nations to invest in.

Moreover, Campos and Konishita (2003) present further evidence that poor public sector institutions or poor quality of bureaucracy deter to economic growth, as they reduce FDI. In addition to this, less bureaucracy implies lower direct cost for foreign investors. This is simply because a government that can be trusted, with modest regulations is less likely to ask for bribery and additional payments (Wei, 2002).

An increase in the risk caused by the indicated factors causes the costs of the licensing transaction to go up (Kim and Clark, 2013). The transaction cost theory (Williamson, 1979) implies that when the risk attributed to a country goes up, the number of licensing agreements will go down. Hence, the hypothesis regarding country risk is the following.

H3: More country risk will lead to less technology licensing agreements

 H3a Political instability causes country risk and leads to less licensing agreements

 H3b Transparency of economic policy drives the amount of licensing agreements

 H3c Corruption and bribing causes the amount of licensing agreements to be less

2.4

Conceptual model

In this part of the theoretical framework the previous stated hypothesizes are summarized in the conceptual model of this thesis. Figure 1 shows the relationships between the several variables that are present in the research, as well as their underlying concepts. These key relationships are depicted in the figure as either a plus or a minus, presenting a positive or negative relationship respectively.

3.

Research design

In order to test the previously mentioned hypotheses and to answer the overall research question of this paper, a data analysis has been conducted based on the concepts indicated in the literature review.. Using SPSS, a correlation as well as a regression analysis was performed. Since the data is presented as panel data the research is designed around a fixed effect regression model so that the effect of the investigated variables can be isolated and explained individually. An extensive overview of this model can be found in the appendix. However, the input of this model and the methodology regarding this research will be presented in this chapter.

3.1

Data sources

In this research different sources of secondary data are used to ensure the creditability and the generalizability of the outcomes. Top tier journals as well as websites, newspapers and magazines are used to form a theoretical framework and to give an insight in the latest developments in the field. Acquired through academic search engines as Business Source Premier, EconLit, Picarta and Google Scholar, these articles form the basis of this paper. The quantitative analysis will be based on a data available from the world competitive yearbook (WCY) of the IMD world competitiveness center. Moreover, an overview of the number of countries involved in (technology) licensing agreements will be found in the SDC Database of Thomson Financial.

3.2

Sample

3.3

Variables

The variables used are based on hard data as well as soft or in other words, survey data. To choose the right statistical method it is worthwhile to have a look at the composition and the nature of this data.

As mentioned earlier the dependent variable is constructed from the data available through the SDC Thompson financial database. Due to the amount of data the number of licensing agreements is presented as a ratio and shows the development in the importance of technology transfers in licensing agreements over time.

The independent variables are based on the IMD WCY. This database uses statistical as well as a global executive survey to complement to prior. While hard data is used to measure certain variables over a specific period of time, the survey is used to measure how these variables are perceived. The Executive survey is sent to senior business leaders who represent a cross-section of the business community in each country (IMD, 2012). The questions are targeted to top and middle management who are nationals or expatriates, located in local and foreign enterprises in the country and which, in general, have an international dimension (IMD, 2012). The latest survey of 2012,IMD received 4200 responses from 59 countries worldwide. Moreover, it is important to know how the questionnaire is designed since the type of analysis to be conducted is dependent on how the data can be classified. In this case, The Executive survey questions have a scale of 1-6 of which the respondents choose the most appropriate answer, a higher value depicting the level of consensus. Afterwards this Likert scale was converted in a 0-10 scale. Although there is some discussion in academic research on the classification of Likert scale data, based on the (even) number of answering options this dataset is classified as ordinal data.

3.3.1 Licensing agreements involving technology transfer - Dependent variable

Following the basic literature review provided in the earlier part of this research, the dependent variable consists of the number of license agreements in the different countries of the BRIC cluster. To indicate the relative importance of licensing agreements that involve technology transfer compared to general licensing agreements the dependent variable is presented as a ratio.

3.3.2 Intellectual property right protection - Independent variable

3.3.3 Economic freedom - Independent variable

As indicated in the theory review, the concept economic freedom consists of several aspects. These aspects have been indexed by the IMD World Competiveness Center in their World Competitive Yearbook as Protectionism, Corporate taxes and Subsidies. By investigating the values of each aspects we can answer the sub hypothesizes and eventually H2.

3.3.4 Country risk - Independent variable

Just as the economic freedom dimension, the concept country risk is build up from different theoretical aspects, indicated in the literature review. Risk of political instability, Transparency, Bribing and corruption and Bureaucracy are dimensions from the World Competitive Yearbook which are used. By researching the values of these aspects we can answer the sub hypothesizes and eventually H3.

3.4

Reliability and validity

For a research to be successful and the research methodology to be solid, it is necessary that the variables accurately measure the concept and that this measurement is done consistently over time. In other words, the research should be valid and reliable respectively. Gilbert (1993) indicates this importance in his work and indicates that a variable links a concept to an observable fact. In this research the variables are constructed around the earlier mentioned IMD World competitive yearbook. Since the concepts relate exactly to the questions asked, as can be seen in table 1, the reliability of the research methodology is high. Moreover, the consistency of the data collection can be assumed to be solid. However, working with secondary data, this process is never entirely transparent. Cultural differences as well as misinterpretation could have biased the collection and therefore no concluding comment can be given.

IPR Protection Intellectual property rights are adequately enforced (Updated: MAY 2011, IMD WCY executive survey based on an index from 0 to 10)

Corporate taxes Maximum tax rate, calculated on profit before tax (Updated: JUN 2011)

Trade regime Protectionism does not impair the conduct of your business (Updated: MAY 2011, IMD WCY executive survey based on an index from 0 to 10)

Subsidies Subsidies do not distort fair competition and economic development (Updated: MAY 2011, IMD WCY executive survey based on an index from 0 to 10)

Transparency Transparency of government policy is satisfactory (Updated: MAY 2011, IMD WCY executive survey based on an index from 0 to 10)

Bribing and Corruption

Bribing and corruption do not exist (Updated: MAY 2011, IMD WCY executive survey based on an index from 0 to 10)

Bureaucracy Bureaucracy does not hinder business activity (Updated: MAY 2011, IMD WCY executive survey based on an index from 0 to 10)

Political stability The risk of political instability is very low (Updated: MAY 2011, IMD WCY executive survey based on an index from 0 to 10)

3.5

Descriptive statistics

The variables over a fifteen year timeframe based on the four different BRIC countries provided 56 observations. To ensure proper measurement and a complete dataset of 70 values, lacking data was replaced by averages in the case of Corporate taxes and Bribing and Corruption. However, due to extreme values two entries were excluded automatically by SPSS, leaving the research with 68 in values in total. In table 2 the measurements can be found, which present some interesting results. Based on the table, Bureaucracy and Bribing and Corruption cause serious problems for business in the BRIC cluster. Moreover, although media often questions the stability of the governments of BRIC countries, business leaders perceive it as stable. Interesting to see as well is the standard deviation o the dependent variable. As the standard deviation is high, values vary heavily which influences the regression model. The next chapter will discuss the results regarding this model, and explain the different relationships among the variables.

Parameter N Minimum Maximum Mean Std.

Deviation

L / Ltech transfer Ratio 68 .00 10.00 1.2122 2.14712

IPR Protection 68 1.37 7.87 4.3516 1.23863

Corporate taxes 68 20.00 47.50 30.3878 6.06997

Trade regime 68 3.72 7.17 5.1654 .78358

Subsidies 68 2.99 6.06 4.8781 .56708

Transparency 68 1.46 6.43 4.0604 1.22982

Bribing and Corruption 68 .47 3.79 1.7831 .71589

Bureaucracy 68 .61 3.01 1.9621 .69934

Political stability 68 2.00 8.17 5.9583 1.24618

Valid N (listwise) 68

Table 2 – Descriptive statistics

4.

Results

In this chapter the results of the fixed effect regression will be presented. As can be seen in table 1, the relationship between the amounts of licensing agreements that involve technology transfers and the protection of intellectual property rights is a positive one. In other words, while the IPR protection is perceived as solid, businesses are less likely to license their technology to one of the countries of the BRIC cluster. This is not in line with H1; the relationship is not significant. Therefore on a 95% interval level H1 is rejected.

that when corporate taxes rise less technology will be transferred through licensing agreements. This relationship is significant and therefore we can accept H2a. Moreover, the model shows that when a country has an open trade regime, companies are more eager to license their technology to that country. Since this relationship is significant as well, we can accept H2b on a 95% interval level. Finally, the results suggest that when subsidies rise, licensing technology is not preferred. Although not significant, this is not in line with H2c and therefore this hypothesis is rejected.

Building upon the several sub hypothesizes we are able to accept or reject hypothesis 2 of this thesis. Although not all 3 hypothesizes have a significant influence on technology transfer in licensing agreements, 2 of them do. Therefore, due to these significant relationships and the importance of both variables on the concept of economic freedom H2 is accepted.

Just as Economic Freedom, the concept of country risk is concerned with several factors. Transparency, bribing and corruption, bureaucracy and finally political stability influence the overall risk of a country. The relationship between transparency and the amount of technology transferred in licensing agreements is shown in table 1. The relationship is positive and thus tells us that when government policies are more transparent, less technology transfer takes place. This relationship is significant on a 95% level, however not in line with H3a. Therefore, H3a cannot be accepted. The variable Bribing and Corruption is also present in table 1. Looking closer at this relationship shows that less bribing and less corruption causes less technology transfers to take place in licensing agreements. H3b states differently and is thus rejected. Moreover, the results regarding the bureaucracy that is present in a country are shown in the table. The relationship between the variable and technology transfers is negative, which is in line with H3c. However, since this relationship is not significant we cannot accept the hypothesis. The last variable making up the concept of country risk is political (in) stability. Table 1 shows that the more stable a country is political wise, less companies transfer their technologies through licensing. Following this relationship, H3d is rejected.

a. Dependent Variable: L / Ltech transfer Ratio. b. *. Correlation is significant at the 0.05 level c. ** Correlation is significant at the 0.01 level Table 3 – Results

5.

Discussion

In this part of this paper the results that are presented in the previous chapter will be discussed in more depth. Since some of the hypotheses of this research cannot be accepted, possible explanations for these phenomena are given.

One of the most surprising outcomes of this research is that when Intellectual property rights are perceived to be properly enforced, companies are less likely to use technology transfer licensing agreements. However, when we take a closer look at table 1 we can see that this relationship is a very thin one. In other words, the influence of intellectual property right protection on the decision to licensing technology is almost non-existent. This could suggest that managers already take into account the risks associated with licensing their intellectual property to BRIC countries. Though to make this claim, comparative research is required.

However, academic literature also provides insights in the found (thin) positive relationship. The relationship could be explained by the fact that when IPR protection is solid, companies are willing to transfer not only technology but also more tacit technology as know how through licensing agreements or even cross-licensing agreements. This explanation is backed by Horstman (1987), who states that reputation of a brand is also important in this situation. When IPR protection is good, companies choose for certain forms of commitment (like third-party bonding), the existence of reputations induces the company to choose closer agreements over technology licensing under all circumstances. This very

Parameter H# Count Estimate Std. Error Sig.

Intercept - 68 -4,805905 3,290136 ,149 -

IPR Protection H1 68 ,024630 ,269930 ,928 Reject

Corporate taxes H2a 68 ,180682 ,045410 ,000** Accept

Trade regime H2b 68 -,977172 ,364842 ,010** Accept

Subsidies H2c 68 ,523466 ,458818 ,259 Reject

Transparency H3a 68 ,751395 ,335296 ,029* Reject

Bribing and H3b 68 ,191079 ,515330 ,712 Reject

Bureaucracy H3c 68 -,668696 ,459513 ,151 Reject

strong result depends crucially on the assumption that the licensee and host-country branch plant operate with identical costs (Horstman, 1987).

Although the hypothesis regarding the influence of Economic Freedom on technology licensing was accepted, it is still interesting to discuss the impact of subsidies in this context. While the other variables of the concept Economic Freedom seemed to have a significant effect on technology licensing, subsidies have not. According to the results, this relationship is even on the contrary of what was expected.

As stated in the theoretical framework, subsidies are a controversial topic when it comes to economic freedom. Although several scholars conclude that subsidies encourage companies to transfer their technology abroad, in practical sense this does not seem to work. One of the main influencers of this phenomenon can be the fact that subsidies are often not divided in an equal manner. The differentiation can be between foreign and domestic firms, but even between several foreign firms (Liu and Buck, 2007). This also makes sense when taking a closer look to the correlation table that can be found in the appendix. In this table a clear significant correlation can be seen between subsidies, bribing and corruption as well as transparency. This underlines the research of Liu and Buck (2007) and could explain the outcome of this variable. However, due to this correlation, the results regarding this hypothesis could also be biased by multicollinearity. Multicollinearity can occur when several independent variables in a multiple regression model are closely correlated to one another.

Multicollinearity misleadingly inflates the standard errors and makes some variables statistically insignificant while they should be otherwise significant (Farrar and Glauber, 1967). A multicollinearity check of Variance Inflation Factor (VIF), which can be seen in the appendix, shows high values for both values. This suggests that the results are biased by this effect, and therefore not trustworthy.

Chapter 4 showed that neither of the sub hypothesizes concerned with the influence of country risk could be accepted, e.g. no expected relationship between transparency, bribing and corruption, bureaucracy nor political stability was found. To understand these results, viable explanations for these outcomes will be given on each variable.

A way to increase the “tightness” of a relationship is the use of cross licensing (Grindley and Teece, 1997; Nagaoka and Kwon, 2006). Cross licensing has gained popularity over the years due to the importance of having a patent portfolio (Choi, 2003). Typically used by manufacturing firms to either complement or produce their product, cross licensing is very common in the 2 chosen SIC industries (Nagaoka and Kwon, 2006).

6.

Conclusion and implications

In this part of the thesis an answer to the research question will be given as well as to it’s sub-questions. Moreover, conclusions will be drawn on the research done; it’s results and theories that are used. Finally the implications of the results, its limitations and options for further research are highlighted.

To answer the research question and identify what the country specific determinants that influence companies in licensing technology are it is necessary to create an overview of the determinants.

One of the country specific determinants following the theoretical framework is the protection of intellectual property rights. This determinant is stated in the first sub question of the research question and investigated by using the IMD Competitive yearbook survey. The results of this research show that, although theory suggests otherwise, intellectual property rights protection has no significant influence on licensing technology to BRIC countries. In fact, the results suggest that the relationship between these two concepts is non-existing.

The second sub question posed in the introduction regarded the determinant economic freedom. Economic freedom was measured in the extent of corporate taxes, openness of trade regime and the use of subsidies. As expected economic freedom is of importance when it comes to technology licensing. However, subsides remain a subject of controversy in this aspect, possible due to the diversion of these funds.

The final sub question regarding this research focuses on country risk and investigates the influence of several factors that are indicated by the theoretical framework. Country risk seems not to influence companies in their decision to licensing technology to BRIC countries. However one of the factors, transparency, resulted to be of significant importance.

6.1

Theoretical implications

This paper was build upon previous research of Kim and Clark (2013) and Park and Lippoldt (2008) who have separately focused on country specific determinants on inter firm alliances in high technology industry and IPR protection in BRIC countries respectively. The lack of an integral framework of the theories used by these two and the shift of economic power towards BRIC countries have made it interesting to look at technology transfer through licensing agreements to these countries specifically.

This thesis tried to fill that gap in countries that have become, and will become increasingly important to the world economy. The results of this research suggest that although the extensive body of literature on licensing, a fresh look is needed when it comes to emerging markets. This research has shown that to fully understand corporate behavior in closing licensing agreements, government policy regarding taxation and protectionism is important. Moreover, the results suggest that intellectual property rights protection is less important than previously assumed.

6.2

Managerial implications

The results of this research can be of use for consulting purposes as well as for government policy making. Clear is that when the institutional framework of a country is interesting for high-tech companies, licensing of technology only is less favorable. More involvement in the form of cross licensing takes place and (complementary) knowledge transfer becomes more beneficial for the company as well as the country itself.

On the other hand is it important for countries to refrain from any trading barriers such as import or export tariffs as well as high corporate taxation. Although protectionism is popular in emerging countries, this will cause less technology transfer to take place and consequently less (cross) knowledge exchange.

6.3

Limitations and further research

In this part some limitations of this research regarding the data and method will be presented. Moreover, thoughts for further research are discussed at the final paragraph.

Not only the amount of data on the dependent variable is one of the limitations of this thesis. Several independent variables indicated by scholars to be of importance to investing in emerging countries could not be included due to the fact that they could not be gathered on the BRIC cluster.

One of these variables is the number of possible licensors. Indicated by Arora (2000) the amount of licensors available influences companies in their decision to either use FDI, Licensing or Technology licensing. More licensor give the licensee more options to choose a trustable partner to safeguard the reputation of the licensor, when the low cost of licensing are beneficial to him (Horstman, 1987). In practice however, including data like this is hard. Especially in developing countries the availability of partners is a figure that is subjective. Therefore, although this variable is proven to be important, it was not included in this research.

Mainly based on how integrated licensing agreements are compared to technology licensing only, scholars have indicated cultural distance is to be an important factor in the licensing literature as well (Hofstede, 1991; Johanson and Vahnle, 1977) However, the difference in scope and the lack of data available on this variable caused me to exclude it

Moreover, this research did not incorporate the influence of the experience companies have in licensing their technologies. Arora (2000) indicate this in their research, building further on the U or Uppsala model that is studied in depth by Johanson and Vahlne (1977). This part of the internalization theory states that in the process of sequential steps, firms oriented at globalization learn habits, preferences and market structures of the countries they want to expand to. This knowledge is however tacit in nature, therefore hard to measure and incorporate in research. Moreover, the origin of the used database made it impossible to use the variable in this thesis.

7.

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8.

Appendix

8.1

Overview GDP ($ BIL) BRIC countries

# Country 2050 2045 2040 2035 2030 2025 2020 1 China 70,710 57,310 45,022 34,348 25,610 18,437 12,630 2 US 38,514 33,904 29,823 26,097 22,817 20,087 17,978 3 India 37,668 25,278 16,510 10,514 6,683 4,316 2,848 4 Brazil 11,366 8,740 6,631 4,963 3,720 2,831 2,194 5 Mexico 9,340 7,204 5,471 4,102 3,068 2,303 1,742 6 Russia 8,580 7,420 6,320 5,265 4,265 3,341 2,554 7 Indonesia 7,010 4,846 3,286 2,192 1,479 1,033 752 8 Japan 6,677 6,300 6,042 5,886 5,814 5,570 5,224 9 UK 5,133 4,744 4,344 3,937 3,595 3,333 3,101 10 Germany 5,024 4,714 4,388 4,048 3,761 3,631 3,519 11 Nigeria 4,640 2,870 1,765 1,083 680 445 306 12 France 4,592 4,227 3,892 3,567 3,306 3,055 2,815 13 South Korea 4,083 3,562 3,089 2,644 2,241 1,861 1,508 14 Turkey 3,943 3,033 2,300 1,716 1,279 965 740 15 Vietnam 3,607 2,569 1,768 1,169 745 458 273 16 Canada 3,149 2,849 2,569 2,302 2,061 1,856 1,700 17 Pakistan 3,070 2,085 1,472 1,026 709 497 359 18 Philippines 3,010 2,040 1,353 882 582 400 289 19 Italy 2,950 2,737 2,559 2,444 2,391 2,326 2,224 20 Iran 2,663 2,133 1,673 1,273 953 716 544 21 Egypt 2,602 1,728 1,124 718 467 318 229 22 Bangladesh 1,466 1,001 676 451 304 210 150

8.2

PESTLE Analysis – BRIC countries

Political landscape Economic landscape Social landscape

Brazil The country is challenged by a

high crime rate in the cities and widespread corruption in politics and business, with people in power enjoying alleged impunity. Moreover, congress has reached a political impasse over the passing of important bills.

The government plans to spend $500bn between 2011–14 on airports and seaports, highways, energy, housing and sanitation, public transport, sports infrastructure,

telecommunications, security, professional education, and health.

Congress approved some reforms to the pension fund for federal government workers on April 27, 2012 to reduce strain on government funding. The new scheme will put a cap on government contribution to social security.

Russia Russia ranked in the 41.6

percentile on government effectiveness in 2010. However, it was behind the other BRIC countries, which were in the 50 percentile.

The global economic slowdown gripped the Russian economy, which went into recession with a contraction of 7.8% in 2009. Russia’s economy subsequently recovered, and the country posted growth of 4.2% in 2010 and 4.3% in 2011.

Income inequality in Russia has widened in the post-liberalization period. The difference between the richest 10% and the poorest 10%

among the Moscow

population was over 42 times in 2009 compared to 38.6 times in 2005.

India In 2010, India’s corruption issues

came to the fore due to irregularities concerning the Commonwealth Games and the 2G spectrum awards, which led to high level investigations and arrests. These allegations and scams have tarnished the image of the government, and have led to nationwide protests.

The economy is expected to grow by 7.9% in 2011, against a backdrop of rising inflation and the revival of the global economic slowdown.

Despite the focus on sustained improvement in the quality of life of the population in general (and the poor in particular), India’s progress on the social front remains slow, especially in areas concerning public health and education.

China Since 1986, the state has sought

to pursue an "open door" economic policy. In this time, China has emerged as one of the fastest-growing economies in the world, with the current regime promoting various reform measures in economic, social, foreign, and defense policies, among others.

China’s 12th Five-Year Plan (2011–15) envisages an average annual GDP growth target of 7.0%, down from the 7.5% goal set in the government's 11th Five-Year Plan.

According to The 2010 Report on the Development of China's Floating Population, migration could hit a staggering 350 million by 2050. Due to this kind of shift, there could be challenges in terms of decreasing farm output and increasing strain on the infrastructure of cities.