Component-based Technology Transfer: Balancing Cost Saving and Imitation Risk

Technology transfer offers global firms an opportunity to reduce the costs involved in serving emerging markets as well as to source from low-cost locations for their home markets. However, it also poses a potential risk of imitation by local competitors who may enter the market(s). We introduce a component-based technology transfer instrument for the global firm to either deter or accommodate the imitator's entry, by recognizing that components can differ in two dimensions: cost-saving potential and imitation risk. By choosing the range of components to transfer, the global firm's decision has an impact not only on the imitator's fixed entry costs, but also on the post-entry com- petition based on variable costs. Hence, the proposed instrument leads to two different types of deterrence strategies: "barrier-erecting strategy" and "market-grabbing strategy" by transferring a lower or higher amount, respectively, of component technology than in the case of no imitator. Which deterrence strategy the global firm should employ, depends on the level of imitation risk of transferring the components. Some other interesting and counter-intuitive results arise. For example, transferring less technology when the emerging market potential increases can be optimal. Considering a sourcing opportunity for a home market, a larger home market potential makes the deterrence strategy more attractive when the imitation risk is low, but less attractive when the risk is high.