Component-Based Technology Transfer in the Presence of Potential Imitators

Abstract

Technology transfer to low cost locations offers global firms an opportunity to reduce their variable costs involved in serving emerging markets. However, such moves may also make imitation by local competitors easier. As a consequence, technology transfer may create competition in the local market. We introduce component-based technology-transfer for the global firm as a means to deter or accommodate the imitators' entry, recognizing that components may differ in technological complexity. By choosing a subset of components to transfer, the global firm's decision has an impact not only on the imitators' fixed entry costs, but also on post-entry competition based on variable costs. Our research identifies two different types of deterrence strategies – the barrier-erecting strategy and the market-grabbing strategy. In the former deterrence strategy, the global firm retains enough component technology in the home country to make the potential imitator's fixed entry costs so high, that it is not worthwhile entering. In the latter deterrence strategy, the global firm transfers enough component technology to the emerging market, reducing the global firm's variable cost to make the potential imitator's revenues so low, that it is not worthwhile entering. Which deterrence strategy the global firm should employ depends on the degree to which geographical proximity reduces imitation costs and the degree of differentiation between the local firm's and the global firm's products. Some other interesting and counter-intuitive results arise. For example, it may benefit a global firm to transfer less technology for products with a higher emerging market potential.