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4
International Crosscompany Links
Although consortia offer opportunities for international technological col-
laboration, as will be discussed in more detail in the concluding section, the
major mechanisms for industrial R&D cooperation across national borders so
far have been joint ventures and licensing.
JOINT VENTURES
lathe first U.S.-Japan joint ventures were companies established primarily
to foster sales and production of U.S.-developed products. Eventually, some
of these sales-oriented joint ventures established for purely geographic and
market considerations were expanded to include manufacturing and product
development. A limited number of these manufacturing/product develop-
ment ventures, in turn, moved to take up joint research, the last area to be the
focus of joint venture activity.
U.S. companies began establishing joint ventures in Japan beginning in the
late 1950s and early 1960s, although some U.S. companies had established
strong ties to Japanese firms earlier. At this stage many large firms had set up
sales bases in Europe, and similar ventures were needed in Japan as part of
these companies' global expansion strategies. In most cases the Japanese
parent company supplied the workers and provided the interface with the
Japanese business community. The Japanese government maintained strict
regulations on foreign direct investment during this period and acted as a
gatekeeper to encourage licensing of technology to Japanese firms. Japanese
22
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companies set up joint ventures and subsidiaries in the United States much
later, with the most significant activity occurring in the 1980s.
Participants say the rewards of a successful joint venture can include tech-
nology sharing and product development, but the failure rate is high. For the
venture to be a success, the partners must understand each other's strengths,
organizational styles, and problem-solving approaches. Each partner must
offer complementary assets, and top-level management must be committed to
a long-term perspective in nurturing the relationship. In successful joint ven-
tures both partners agree to a clear definition of purpose. However, as the
project evolves, particularly when new products are developed, partners must
adapt flexibly to changing circumstances, and original licensing and royalty
agreements sometimes must be revised.
Participants discussed examples of joint ventures in Japan and the United
States that have resulted in technology transfer and the creation of comple-
mentary new product lines. One is Yokogawa Hewlett Packard (YHP), creat-
ed in 1963 as a joint venture between Yokogawa Electric and Hewlett
Packard to sell and manufacture Hewlett Packard products in Japan. A major
motivation for creating the joint ventures was that Japanese law required that
no more than 49 percent controlling interest be held by foreign firms in
Japan.38 Yokogawa provided the management, staff support, and liaison with
the Japanese business community to YHP, which operated as a separate com-
pany.
After little discernible activity in the first 5 years, Hewlett Packard
expressed dissatisfaction with the management and staff provided by
Yokogawa, and the venture appeared to be in serious jeopardy unless signifi-
cant change ensued. New and stable management was provided by
Yokogawa in response, and U.S. marketing and sales methods were intro-
duced. Eventually, these actions had very positive effects on YHP's corpo-
rate profits, but marked improvements did not take place for 10 years.
As YHP matured, it began to seek opportunities to establish a charter for
the development and manufacture of unique YHP products. This occurred at
a time of rapid growth and diversification for Hewlett Packard, when there
was intense competition among divisions for new product lines. As a nondo-
mestic joint venture established for purely geographic reasons, YHP was
poorly positioned to negotiate effectively over these issues. Eventually, how-
ever, the problems were resolved, and YHP now has the lead in several major
product areas worldwide.
Hewlett Packard now owns 75 percent of YHP, which manages sales of
products in Japan totaling over $1 billion per year. YHP won the coveted
Demming Quality Award and was able to alert Hewlett Packard's domestic
divisions to rapid improvements in competitors' products and to the need to
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improve performance and reliability. In retrospect, the YHP venture is seen
as a clear success, but it required patience and persistence on the part of both
partners to adjust to changing circumstances.
The experience of Sumitomo Electric Industries, Inc. (SEI), in establishing
joint ventures with U.S. firms also deserves mention.39 In the l980s joint
ventures in the United States were established with a number of North
American companies, including: AT&T (Litespec, Inc.), Alcan (Alcan-
Sumitomo Electric, Inc.), Lucas (Lucas-Sumitomo Brakes, Inc.), and Eaton
(Engineered-Sintered Components, Inc.~. In the last two companies, SKI is a
50 percent partner. It is a 51 percent partner in Alcan-Sumitomo Electric and
a 49 percent partner in Litespec. All of the ventures were formed primarily to
provide marketing and management support for Sumitomo products, although
Alcan-Sumitomo also produces aluminum products.
Sumitomo senior executives say that joint ventures are key elements of
corporate strategy to promote international collaboration and diversification.
In selecting potential partners and sites, Sumitomo views mutual trust as the
most important factor and the promotion of a global outlook as a desired
result. In keeping with this approach, Sumitomo places a great deal of
emphasis on respect for each partner's business and social culture and on the
importance of adapting to foreign environments. These factors, in addition to
the potential for market expansion or creation and for technology develop-
ment and transfer, are seen as essential conditions for a successful joint ven
ture.
The joint venture Sumitomo 3M is a marriage of 50 percent equity from
3M, a U.S. corporation, and from Sumitomo Electric Industries and NEC of
Japan. This joint venture is based on technology developed in the United
States; an exclusive right to manufacture was given to Sumitomo 3M, and the
joint venture also received nonexclusive rights to import, convert, and sell
products. From the perspective of 3M, the joint venture is part of a global
strategy of building technology capability that includes strong links to con-
sumer requirements in particular locations. The joint venture firm Sumitomo
3M now has its own laboratory where technical sales support, project engi-
neering, and modification are carried on. Although the initial impetus for this
joint venture was market access, corporate planners believe that a technology
development phase now has begun. 3M, like the other parent firm Sumitomo
Electric, emphasizes the importance of meshing corporate cultures to the suc
cess of a joint venture.
Although the Sumitomo 3M experience generally is viewed positively by
the partners, leadership from Sumitomo Electric Industries discussed
unfavorable conditions that can limit the success of joint ventures in other
cases. These include competition for market share between the parent compa
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ny and the joint venture; an excess of control from abroad, including the par-
ent company; overemphasis on short-term profits; excessive interest in the
"money game," as opposed to production and manufacturing; ignorance of
local market needs; ignorance of local culture; and hesitation to promote tech-
nology transfer.
~ the case of Fuji Xerox, neither parent at first wanted the firm to conduct
product or technology development. Recognizing the special requirements of
the Japanese market for a small xerographic copier, the joint venture built
independent expertise and established its own corporate R&D facilities. The
joint venture maintains a close relationship to Xerox by sending researchers
to work in the laboratories of the U.S. firm and by other means.
In conclusion, corporations everywhere prefer wholly owned subsidiaries
to joint ventures, because in such instances they face fewer constraints on
technology sharing, decision making, and communication. The initial impe-
tus for joint ventures may be to get into a foreign market, but over time the
successful joint ventures alert parent firms to changes in markets and com-
petitor positions. Some of the best-known joint ventures in Japan provide
evidence that they can contribute to improvements in quality and efficiency
of production and that technology sharing is possible, particularly through
exchange of personnel.
LICENSING
Licensing has been a major mechanism for acquiring technology relatively
quickly and at low cost. Japanese firms made extensive use of licensing in
the 1960s and 1970s to acquire American technology. Although transfers of
technology from the United States to Japan remain the dominant mode,
observers note that cross-licensing and technology transfer from Japan to the
United States appear to be increasing.
The general motivations for licensing are to reduce costs and risks, fill
product gaps, catch up in order to promote growth, and stay competitive.
Considerations differ for licensers and licensees. If a firm seeks to buy tech-
nology through a license, it is usually because the company has identified a
need for a specific type of technology that will reduce the time required for
commercialization or market entry. Licensing can compensate for lack of in-
house knowledge or skills. Some companies also use licensing for long-term
speculative purposes, gambling that a license bought today may be a bargain
5 years down the road. Some observers believe that Japanese companies use
this strategy more than American companies.
There are a number of reasons why companies sell their technology. For
some the sale of technology is an incidental activity for a firm going out of
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business or changing R&D directions. For others it is a deliberate element of
corporate strategy. In such cases licensing often is seen as an alternative to
more expensive options, such as setting up additional manufacturing plants
overseas. Some firms establish separate companies devoted to developing
technology specifically for licensing.
Because both the licensee and licenser must gain something, hard bargain-
ing is necessary to achieve the correct balance. The licenser must be able to
support the technology, and the licensee must have the capability to use it
effectively. If a licenser feels it has sold technology too cheaply, it has no
motivation to help the licensee succeed. If the licensee decides it has paid an
unreasonable price, it may try to abrogate or circumvent the agreement.40
The biggest problems associated with licensing are those relating to intel-
lectual property rights. For example, a company may license technology only
to decide later that it is a crucial element of an internally developed product
or process. Situations such as this make the question of who owns what very
complicated and often result in difficult and protracted litigation. The struc-
ture of royalty payments also is a critical issue. Some Japanese observers cite
examples to support their view that when royalty payments are structured so
that large payments are made in a short period of time, the licensers are more
likely to develop alternative technologies.
Companies develop contrasting licensing strategies, depending on their
market goals. Honda of America was established in 1978 to manufacture
motorcycles and moved into auto production in 1982, beginning production
of the Accord and Civic in 1986.41 The company purchases parts, materials,
and supplies from American vendors at a total annual value of $2 billion.
Through these purchasing activities, Honda works with suppliers to develop
and produce parts that fit Honda's unique requirements, facilitating tech-
nology transfer and information exchange. From the perspective of Honda of
America, these relationships have been the stimulus for expanded licensing of
Japanese technology to the United States.
Honda of America purchases sheet steel, plastics, and other materials in
the United States. Strict quality control and innovative design based on
incremental improvements to basic parts are Honda's hallmark. The compa-
ny has devoted considerable effort in working with American suppliers to
explain Honda requirements and specifications. In some cases the company
has worked jointly with these suppliers to meet these requirements. In the
early l980s it was difficult to obtain sheet steel that met Honda's require-
ments from the only supplier, Inland Steel. Samples of Inland's product were
sent to Japan for testing. After 3 years of joint consultation, Inland was able
to achieve the desired result after engineers from Inland and Nippon Steel
worked on production problems together. In a similar manner, Mitsui was
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brought in to help U.S. companies produce plastics meeting Honda's specifi-
cations. One result of joint development was production of a new,
lightweight bumper beam introduced in 1990 Honda models that has also
been adopted by other automobile manufacturers.
Additional examples of joint development activities include work to
reduce engine size so as to increase passenger room and the redesign of air
cleaners and oil filters to adapt to the smaller engine compartments. When
U.S. companies could not meet Honda standards, Honda transferred its tech-
nology for molding paper cartridges for filters with resins to Fram Canada,
and after 2 years filter production began in the United States.
Honda of America has taken two approaches to technology transfer. One,
as noted above, is to engage U.S. suppliers to develop parts. Another is to
transfer technology directly, such as production technology for the air filter.
Honda worked with 78 suppliers to locally produce 870 parts for its 1990
models. In conjunction with its efforts to expand local purchasing, Honda
believes it has expanded technology transfer to the United States.
The experience of Centocor illustrates the contrasting licensing strategy of
an emerging biotechnology firm.42 Centocor is engaged in biotechnology-
based R&D and production of pharmaceuticals and diagnostics. The compa-
ny has over 200 research staff members who select and screen antibodies to
develop a full line of products in house. Centocor's strategy is to license in
technology and antibodies and license out products.
Centocor has discerned that Japan presents opportunities both as a market
and source for technology and product ideas. While some U.S. pharmaceuti-
cal companies have yet to tap lapan's potential to any depth, Centocor has
devoted considerable effort to cultivating relations with Japanese companies
and has participated both in the Japanese clinical registration process and in
marketing activities there.
In keeping with its strategy to become a worldwide pharmaceutical com-
pany, Centocor has executed agreements for manufacturing and sales with
Ajinomoto, Daiichi, Takeda, and Nippon Pharmaceuticals. The firm also has
developed a relationship with Toray in diagnostics and therapeutic products.
It is hoped that over time, these relationships will form the basis for joint
technology development.
Representative terms from entire chapter:
joint venture
