28 April 2014, Sweetcrude, Port Harcourt – Technology can have a substantial impact on an industry’s performance. Consider the effect of genetic engineering on pharmaceuticals, of transistors on telecommunications and of plastics on metals. Identification of the commercial potential of technological developments has dramatically accelerated world-wide, and the lag between ideas, invention and commercialization has decreased. In the past ten to 12 years, an amazing number of new technologies have brought forth such products as video recorders, compact discs, evermore powerful and ever smaller computers, mobile phones, fax machines, new lightweight materials and highly effective genetically engineered drugs. Technological progress over the next ten years is predicted to be several times that experienced during the past ten years; much of it will be spurred by the need to find solutions to our environmental problems. Major technological innovations can be expected in a variety of fields, especially in electronics/telecommunications.
A modern advocate of the importance of innovation is D’Aveni who argues that due to technological progress and information technology the sources of competitive advantage are being eroded at an increasing rate. The answer is to disrupt existing sources of advantage in the industry and create new ones. In the context of ‘hyper-competition’ the best the firm can do is seek to achieve a sequence of temporary advantages that keep it ahead of the rest of the industry.
If this is true then an awareness of research and innovation is central to companies
success. As it is with the private sector, so it is with nations!
All companies and governments are faced with a dilemma when attempting to decide how much to spend on research. It is well established that the returns on research expenditure are potentially high in many industries. A large scale research project carried out in the US back- tracked innovations, and found that the rate of return on research expenditure was of the order of 30 per cent. However, this rate of return related only to those inventions which reached the marketing stage, and did not take into account failures. The research also demonstrated that the rate of return on successful research is high, but left open the issue of the return on total research expenditure by companies, given that a proportion of research does not lead to marketable products.
There are in fact two stages to the problem of allocating resources to research and development (R & D): how much to spend, and what criteria to use in order to identify potentially profitable products from the possibilities produced by research, since a company may not have sufficient resources to exploit all potential products. It could be argued that since so little is known about the likely success of new products, the most efficient approach is simply to develop products on a ‘first come’ basis, and tailor research expenditure to produce the number of new products a company is capable of dealing with.
To do this it would be necessary to have some idea of the productivity of research expenditure in terms of producing new ideas. It is interesting to note that although many academic economists have spent the past thirty years attempting to identify a relationship between research expenditure and the production of inventions, the findings have been at the aggregate level and consequently this type of research has produced no guidelines on which an individual company can base its research expenditure decisions. This is partly due to the fact that in aggregate there is a reasonably stable output of inventions by the global economy, but for the individual company it is highly unlikely that marketable ideas will occur at a constant rate over time.
However, the task of leadership in research and innovations is not strictly one for the private sector. Government has a significant role, in creating and funding research institutes, in granting research loans to individuals and other related institutes, and to create government agencies to facilitate and fund technological research and research-based learning. In Nigeria, we have several relatively new agencies tasked with some of these functions, e.g. Petroleum Technology Development Fund (PTDF), Tertiary Education Trust Fund (TETFUND), National Content Development and Monitoring Board (NCDMB). It may be premature, at the present, to measure the degree of functionality of these agencies and their output. However, if the top positions in these relevant agencies are constantly filled based on political considerations rather than candidates with the requisite credentials and experience then the result is a foregone conclusion. There are strong indications that the Engr Ernest Nwapa-led National Content Board is progressing according to set goals and objectives of the agency.
Considering the poor state of indigenous technological advancement in Nigeria, then how have we coped so far and how do we move forward in this direction? In the oil sector, we have managed to keep afloat through technology transfers as enshrined in the concession agreements and production- sharing contracts (PSCs). Generally, the purchase or licensing of privately-generated (typically Western) technology is a matter of great importance in the petroleum sector.
A firm’s technology processes and specially developed formulas are one of its most valuable assets and confer a sustainable competitive advantage. One of the most serious issues such a firm encounters when making a direct foreign investment is controlling the use and dissemination of such information-based assets. On the other hand, some developing countries have viewed agreements for technology transfer as presenting issues of foreign legal and economic domination as were raised by the concession system in oil & gas production. Officials of those developing countries may have perceived Western foreign oil companies (FOCs) as using their advanced technology and superior bargaining positions to extract profits from host countries in the form of royalties and licensing fees. They also argue that such licensing agreements impose extensive and durable restraints on the use of the technology, such that the benefits to the host country and its citizens are minimal. Historically, such assessments have usually led to legal prohibitions or limitations on contractual provisions that are perceived as disadvantageous or unfair to the country or its citizen-licensees.
However, one of the hallmarks of the industrial property rights created by patents, designs, trademarks, etc is the right of the owner of the relevant rights to sell them, through assignment of rights. The assignee (purchaser) acquires the rights of the vendor (assignor) to the relevant piece of industrial property, usually conditional on the payment of a lump sum. In the case of the petroleum sector (where there are often joint- venture operations between the host government and FOCs) the principal alternative way in which industrial property rights can be obtained is through the licensing arrangement. In this case, the lump sum payment is replaced by the periodic payment of royalties over the productive life of the relevant technology. The choice of outright purchase over licensing arrangements may depend on the technological experience of the acquiring entity.
The outright purchase of relevant rights allows the acquirer greater freedom in producing modified versions (as the Asian and Japanese companies did in the 1980s), but also freedom in marketing the products produced by the technology. Through the sale of license rights the owner of technology rights will be able to concentrate its commercial efforts in the production of new technology, which may be its field of greatest competence, without having to assume the financial burden and commercial risks involved in marketing the products of that technology. Other commentators view licensing as the most common way of acquiring and exploiting technology. It involves a grant by the proprietor of technology know-how of permission to make use of all or some of those rights and information.
The device of licensing is especially attractive to both the licensor and the licensee. For the licensor, the grant of licenses may be the most profitable way of exploiting its technological assets. That way, the licensor is saved all the efforts and expenses of manufacturing and marketing the goods and services involved in the exploitation of his property rights particularly where the goods or services are to be sold overseas. Also, where a licensor is considering foreign market entry, the grant of licenses for that market may represent a means of exploring its viability. By harnessing the local knowledge and business contacts and expertise of a foreign licensee, the licensor will be free from some of the multifarious problems of producing and marketing products in an alien environment.
In any case, the primary objective of a licensee in acquiring a technology license includes the acquisition of a developed and tested industrial process without having to bear the risks, delay and expense of its development. Regarding licensees in developing countries, the unavailability of facilities for R & D often renders the licensing of foreign technology rights as the only means of obtaining them. As a result, there is a growing perception that in relation to license agreements where enterprises in developing countries are technology know-how recipients the bargaining power is weighted in favor of the licensor. Consequently, the objectives of the technology acquirer are very much subordinated to the commercial wishes of the licensor. However, it will be a question of degree whether a given licensing agreement can be judged as reasonable or restrictive.
Some of the provisions in sample agreements in licenses for the transfer of technology have been identified as threatening significant limitations to access to technology. These include: “no-challenge provisions”, whereby the licensee undertakes not to challenge the validity of a licensed industrial property right; “grant-back provisions”, which obliges the licensee to transfer to the licensor any improvements in the technology represented by the licensed property rights; and “tying”, which obligates the licensee to acquire additional inputs from the licensor, such as plant and equipment, raw materials, intermediate products, and additional technology from the licensor or a source designated by it. In some cases, the imposition of a tie may be justified as necessary for the successful operation of that technology and therefore reasonable. However, the opportunity of using an industrial property monopoly as a basis for the tie-in of other items is a common exploitative abuse of industrial property rights. Other perceived abuses, include the obligation of a licensee to use personnel designated by the licensor; obligation not to manufacture or sell products which compete with those of the licensor; and not to acquire competing technologies.
Based on the issues raised so far, it seems clear that non-producers of technology will always have a weaker bargaining power relative to owners of industrial proprietary rights. This is equally applicable to individual firms and nations. The question then is how a country can encourage the development of these proprietary rights among its citizens through funding R & D processes. The answer seems straight forward, but the doing is not quite that simple particularly in developing countries where sometimes uneconomic and parochial criteria are used in the decision- making and implementation processes.
From the simple to the complex, government can empower specialized research institutions already in existence and charge them to do more; further empower existing and related government agencies in discharging their objectives; encourage more productivity in relevant faculties in Federal and State Universities; empower first class science graduates by making them beneficiaries of the Overseas Post-Graduate Programmes and harnessing their knowledge afterwards; provide special funding for specialized Industrial Institutes and Centre’s of Excellence in Energy & Petroleum as well as adjunct Institutes and Centre’s; and the creation of a National Energy Bank.
*Dr Chijioke Nwaozuzu, a petroleum policy expert wrote from Emerald Energy Institute, University of Port Harcourt. Email: firstname.lastname@example.org