External technology acquisition; Catching-up; Innovation performance; Chinese auto firms



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Technological Catching-up of Latecomer Firms through External Technology Acquisition: Evidence from GEELY Auto Company in China

Abstract

External technology acquisition has been viewed as an important method to realize technological catching-up. However, only a few studies have been on technology acquisition strategy of auto firms. This study develops theories related technological catching-up through external technology acquisition of a Chinese auto firm to reveal that: first, integrating different streams of technological knowledge is crucial to innovation; second, external technology acquisition apparently in terms of technological performance is based on accumulation of internal R&D inputs. These results provide important suggestions for late starting companies to catch up with leaders, formulate technology acquisition strategy and strengthen technological capabilities.

Keywords: External technology acquisition; Catching-up; Innovation performance; Chinese auto firms


  1. Introduction

How the newly industrialized economies (NIEs) take-off since their independence after the Second World War? What is the difference of technology development process between latecomer firms and the firms in technologically advanced countries? These are questions highly debated by literature regarding technological catching-up process of latecomers (Hobday, 1995; Kim, 1997; Lee and Lim, 2001; OECD, 1992; Westphal, et al., 1985). Most technology-oriented views focus on explaining how NIEs have tried to catch up with advanced countries by acquiring matured technology from them and increasing absorptive capacity (Gil and Lee, 2003; Katz, 1984; Kim, 1980; Lall, 1980; Lee et al., 1988, 1994; Stewart, 1979). However, others argue that latecomers can catch up by leapfrogging or direct innovation at the technological frontier (Fan, 2006; Lee and Lim, 2001; Perez, 1985).

Latecomer firms have viewed external technology acquisition as an important technological catching-up method over the last two decades (Duysters and Hagedoorn, 2000; Zahra et al., 2005). This practice can expand a firm’s technological capability to better cope with increasing speed, cost, and complexity of technological development (Cohen and Levinthal, 1989; Hagedoorn and Duysters, 2002; Henderson and Cockburn, 1996; Lambe and Spekman, 1997; Montoya et al., 2007). Most existing literature on external technology sourcing concentrate on influential aspects of acquisition (Hemmert, 2004; Jones et al., 2001; Yoshikawa, 2003; Zahra et al., 2005), choice between internal and external sourcing (Narula, 2001; Veugelers, 1997; Veugelers and Cassiman, 1999), as well as external technology acquisition and performance relationships (Ahuja and Katila, 2001; Jones et al., 2001; Tsai and Wang, 2007, 2008; Vanhaverbeke et al., 2002). The strategies of acquiring technology externally investigated in literature include mergers and acquisitions (M&A), technology purchase through license contracts (inward licensing), technologies embodied in equipment, and some (formal or informal) cooperative modes of R&D (Chiesa et al., 2000; Cho and Yu, 2000; Hung and Tang, 2008; Tsai and Wang, 2009; Venanzi, 1996). Firms should choose appropriate technology strategy for acquiring needed technology (Chesbrough, 2006; Chesbrough and Crowther, 2006).

Comparing with technology condition of advanced countries, NIEs like China are a follower rather than a leader (Tsai and Wang, 2008). Over the past two decades, China’s auto companies have played a key role in the rapid growth of Chinese economy. China central government has been consistently emphasizing the importance of technological innovation in auto sector and viewing it as an engine for catching-up with advanced countries. Increasingly complex technologies prompt more and more auto firms to acquire external technology that matches their internal development activities.

Although many studies explain how firms in NIEs have gone through technological catching-up their own way, which are so-called hi-technology firms (semiconductor or biochemical) mostly, they have yet to suggest specific themes such as microcosmic mechanisms on the absorption of acquired technology and the implementation of proper technology acquisition strategy of auto firms. This study intends to fill this gap in literature by studying technological catching-up process through technology acquisition of a certain late starting company in China, GEELY Auto Company, which is one of the fastest growing and innovative auto companies in China and acquired Volvo Cars in 2010 (see Table 1), investigate how latecomer auto firms manage their technology acquisition activities to help generating innovation and examine the impacts of external technology acquisition on firms’ innovation performance.



Table 1

GEELY milestone events



Year

Events

1984

Founding refrigerator factory

1994

Entering motorcycle industry

1996

Setting up GEELY Group Co., Ltd and beginning large scale development

1997

Entering automotive industry

1998

The first GEELY car “ Pride” off the assembly line

2001

Becoming first qualified private enterprises of car production in China

2002

Renamed GEELY Holding Group Co., Ltd

2003

The first GEELY car exported overseas

2005

On the public market in Hong Kong

2007

Announcing strategic transformation

2010

Acquisition of Volvo Car, with 100% of the shares and related assets (including intellectual property)

The rapid growth of GEELY raises several issues to be studied. First, how does GEELY accumulate technological capability in such a short time span? Second, which technology acquisition strategies does GEELY adopt during different technological catching-up stages? Third, what implications do GEELY offer to other latecomer auto firms? To answer these questions, a quick review of relevant theories, as well as the process of accumulating technological capabilities, the external technology acquisition strategies and the impact of external technology acquisition on technological performance with internal R&D efforts observed in GEELY Auto are detailed in the following sections. Some conclusions and implications from GEELY’s practice in technological catching-up through external technology acquisition are presented in the closing section.

  1. Literature review

2.1. Technological catching-up of latecomer firms

In terms of technological catching-up process, evidence shows that substantial innovation occurs based on minor improvements to existing processes and product designs via the absorption of foreign technology from abroad (Hobday, 2005). Some scholars argue that technology development in Korea seems to follow reverse order of A-U model (Utterback and Abernathy, 1975), a model of acquisition, assimilation and improvement (Kim, 1997; Lee et al., 1988), starting from obtaining mature technology from developed countries. Through cases of electronics in the four dragons: Korea, Singapore, Hong Kong and Taiwan, Hobday (1994, 1995) confirms this general reversal process in firm-level as follows: assembly skills, incremental process changes for quality and speed, full production skills, R&D for products and processes, and competitive R&D capabilities. This process is analyzed in terms of interacting technology and market transition from OEM, to ODM and OBM. By analyzing the case of Samsung Semiconductor, Kim and Seong (2010) point out that catching-up innovation focus on quick imitation and the innovation model is normally reverse engineering.

Lee and Lim (2001) identify three different patterns by analyzing six industries in Korea (see Table 2). In the first pattern, latecomer firms follow the same path taken by the forerunners. The second pattern is stage-skipping catching-up. The third pattern is path-creating catching-up, where latecomer firms explore individual paths of technological development. Among these, stage-skipping catching-up and path-creating catching-up are considered technological leapfrogging, which suggests that latecomers do not simply follow the path of technological development of advanced countries in catching-up process, but skip some stages or even create their own individual paths (Hobday, 1995; Lee and Lim, 2001; Perez, 1988).

Table 2

Three patterns of technological catching-up



Path

Stages

Path of the Forerunner

stage A→stage B→stage C→stage D

Path-following Catch-up

stage A→stage B→stage C→stage D

Stage-skipping Catch-up

stage A→----------→stage C→stage D

Path-creating Catch-up

stage A→stage B→stage C’ →stage D’

Source: Lee, K., and Lim, C. 2001. Technological regimes, catching-up and leapfrogging: findings from the Korean industries. Research Policy, 30(1): 459-483.

Technological catching-up evolves through the accumulation of technological capability. The concept of technological capability has been the focus of research in NIEs for years, and researchers have developed diverse definitions of technological capability (Dutrénit, 2000). During the early 1980s, technological capability was defined as the ability to utilize technological knowledge and classified into production capability, investment capability, and innovation capability (Westphal et al., 1985). Recently, the concept of technological capability has expanded to include the ability to utilize existing knowledge effectively in addition to create new knowledge (Dutrénit, 2000; Kim 1997). In advanced countries, technological capability is accumulated through learning by research, whereas in NIEs, it is done through imitative learning by doing (Kim, 2001). Only a small number of NIEs (i.e., Korea, Taiwan, and Singapore) have succeeded in making a quick shift from learning by doing to learning by research (Hobday, 1995).



2.2. External technology acquisition and performance

Technology acquisition can be defined as a process of planned, selective, focalized importation of advanced technology which enterprise has not master, and new application of imported technology which can bring expectant economic benefits to new users (Lambe and Spekman, 1997; Lowe and Taylor, 1998).

Recent research contributing to external technology acquisition can be categorized into three main domains. The first perspective is discovering different kinds of technological acquisition modes. These modes include M&A, cooperative R&D, importation of equipment and international joint ventures (JV) (Atuahene-Gima, 1993; Chaudhuri, 2004; Cho and Yu, 2000; Hung and Tang, 2008; Park, 2011; Tsai and Wang, 2009; Venanzi, 1996). Table 3 shows some mostly used technology acquisition channels and corresponding literature summarized by Daim and Kocaoglu (2008).

Table 3

Overview of the technology acquisition channels and related literature



Technology acquisition channels

Representative literature

Industry-university consortia

Alp et al. (1997a,b), Chiesa et al. (2000), Dill (1990), Kamala and Swamy (1985), Lichtenthaler and Lichtenthaler (2004), Lopez-Martinez et al. (1994), Nakamura and Odagiri (2005)

External R&D centers

Hemmert (2004), Jones et al. (2001)

Licensing agreements

Chiesa et al. (2000), Granstrand (2004), Hemmert (2004), Killing (1980), Lichtenthaler and Lichtenthaler (2004), Nakamura and Odagiri (2005), Pack (2001), Toshikawa (2003)

Purchasing technology

Akarakiri (1998), Alp et al. (1997a,b), Awny (2005), Granstrand (2004), Hemmert (2004), Jones et al. (2001), Narayanan (1998), Pack (2001), Swan and Allred (2003), Tsai and Wang (2008)

Vendors/suppliers

Gagnon and Sheu (2003), Koc and Ceylan (2007), Rothwell (1992)

Source: Daim, T. U., and Kocaoglu, D. F. 2008. Exploring technology acquisition in Oregon, Turkey and in the U.S. electronics manufacturing companies. The Journal of High Technology Management Research, 19(1): 45-58.

The second domain is factors affecting the decision-making of external technology acquisition. Jones et al. (2001) investigate the impact of three variables (technological change life cycle stage, intellectual protection and internally available resources) on the propensity of multinational firm subsidiaries to acquire technology externally. Vanhaverbeke et al. (2002) find that previous direct and indirect ties between partner firms in the application-specific integrated circuit (ASIC) industry have varying impacts on the choice of M&A. By examining a sampling of electronic industries in Japan, Korea and Taiwan, Hung and Tang (2008) indicate that among the factors analyzed in this study, which is a firm’s technological capability, size, previous experience and relevance of its core technology, technological capability (technological level, technological innovation and R&D activities) is the most significant factor influencing the determination of technology acquisition mode.

The third domain highlights technology acquisition and performance relationship. Jones et al. (2001) investigate 188 subsidiaries of multinational firms, and show that internally available resources enhance the effect of external technology acquisition on product performance. Based on an analytical sample of 341 Taiwanese electronics-manufacturing firms, Tsai and Wang (2008) reveal that the positive impact of external technology acquisition on firm performance increases with the level of internal R&D efforts. Additionally, Vanhaverbeke et al.’s (2004) survey on firms in chemical, automotive and pharmaceutical industries indicate that a company's direct ties, indirect ties with other firms in technology alliance network have different impacts on its learning performance (patent). Through a detailed analysis of German and Japanese pharmaceutical and semiconductor business units, Hemmert (2004) points that technology acquisition performance is influenced by a variety of institutional factors which include access to R&D personnel, access to external sources of knowledge (firms and research institutions), the political, legal and administrative environment and the organization of knowledge transfer.

Although several studies have contributed empirical evidence to factors affecting decision-making of technology acquisition and technology acquisition–performance relationship, there still remain some questions needed to be studied: first, these studies focus on advanced countries mostly, which may be different from NIEs; second, literature on firm-level technological catching-up through external technology acquisition in traditional manufacturing industry is scarcely found, especially for automotive firms; furthermore, most previous research about impact of external technology acquisition on technological performance has not got agreement on those investigated firms or industries, which may cause an unclear cognition on the application of technology acquisition. This study here focuses on technological catching-up process through external technology acquisition of latecomer auto firm in China, which not only combines technological catching-up related theories with technology acquisition perspective, but also expands the research on firm-level technology acquisition strategies and performance in NIEs.



  1. Methodology

Since this study is driven by theoretical research questions based on a patchwork of empirical observations, we adopted case study method, which includes data on innovation activities of GEELY Auto to maximize the validity and reliability according to the theory stipulated by Yin (2009).

A semi-structured form was conducted during the interview process. We interviewed several persons of GEELY respectively, who are executives, technical officers, R&D personnel, senior managers and engineers. The form of those interviews contains formal face to face interviews, interviews in informal occasion, and a certain number of questionnaires. Each interview was typically 90-120 minutes in length, which not only enriches research information, but also helps researchers to identify direction and dimension of relevant research questions by the respondents. We interviewed again 11 persons by telephone and emails to expend on questions in details. After analysis and filtering, nearly 90 percent of interview data were transformed into case study database. It is difficult for researchers to obtain sufficient interview time due to executives are very busy using other open information for enriching data sources and ensure a multi-dimensional research is necessary. Gallager and Parker (2002) and Lynn (1998) have used this method to carry out academic research. Therefore, we searched a number of interviews in related websites, newspapers and magazine as supplement data.

In addition, we collected 10 internal archival documents from GEELY official site. These documents include year reports, corporate developing strategies, R&D plan, internal memo, CEO’s reports, and historical sales volume and avenue materials. We also collected more than 20 public documents pertaining to GEELY, including press releases, statistical yearbooks, industrial research reports, and journal articles. The public data mainly come from China Financial Database (China INFOBANK), State Intellectual Property Office of China (SIPO), and SOHU Auto Database. These documents are very useful and helpful for us to examine and retrospect the interviews to remove some bias.

Because GEELY is a latecomer auto firm with a faster growth than traditional auto companies in China, it is necessary to compare differences of external technology acquisition strategies adopted by traditional auto firms, which can partially explain GEELY’s success in technological catching-up more specifically. We choose Shanghai Auto Industry Corporation (SAIC) to make comparative study on their external technology acquisition strategies, as well as a supplement evidence of technological catching-up process in China’s auto firms.



  1. Case analysis and research findings

4.1. Three stages of accumulating technological capability in GEELY

GEELY is one of top ten auto manufacturers in China, which was a refrigerators and motorcycles manufacture originally. Over the past ten years, GEELY has grown faster than any other company in Chinese auto industry (see Table 4). Although entering low-end market of economy cars, it has increased the level of production and R&D gradually with continuous technology acquisition and learning.



Table 4

Sales data of GEELY from 1999 to 2011



Year

Sales Volume

( units: thousand sets)



Sales Income

( units: thousand yuan)



1999

2

5,746

2000

8

63,603

2001

21

112,572

2002

48

71,820

2003

76

39,872

2004

97

41,123

2005

133

101,411

2006

164

127,006

2007

182

137,209

2008

204

4,863,460

2009

327

15,978,419

2010

416

20,099,388

2011

422

20,964,931

Source: GEELY’s yearbook 2011; not include Volvo.

Stage one: capturing modern production capability (1997-2004)

In 1997, GEELY first car was assembled with parts of Mercedes-Benz and Red Flag cars. Following this, GEELY bought Xiali model to imitate its interior and chassis, which was introduced from Daihatsu-a Japanese car company. Depending on accumulated knowledge from reverse engineering, GEELY successfully finished the development of Pride (in 1998), Meiri (in 2000) and Ulio (in 2001) cars. Later, GEELY began Beauty Leopard project, the first realization of full data graphic guidance design.

As for key components, GEELY started the first engine (JL479Q) project in 1999 using Toyota 8A engine as a prototype. After hunting experts from other companies, GEELY carried out the variable valve timing (VVT) engine development in 2003. It also utilized knowledge learned from patents and communication with suppliers to develop automatic transmission (AT) and production equipment.

Stage two: building basic product development capability (2003-2007)

Through cooperation with Daewoo in 2004, CK-1 became the first fully forward project of GEELY in accordance with international development pattern. King Kong was another cooperative result with Beijing CH Auto Technology Company and Taiwan Fu Zhen. The partners designed product appearance, leaving all the chassis, powertrain, and electrical design completed by GEELY. From 2005 to 2006, GEELY launched new models of Huapu, Vision, and made an excellent entry into mid-end field. “The construction of three systems makes GEELY transfer into platform mode, which refer to product development system, technology management system and product validation system, and the product development cycle is shortened greatly through simultaneous engineering” said by Fuquan Zhao, the leader of GEELY Automobile Research Institute, who worked at Chrysler before. This make GEELY not only emphasize basic models development but also variants on these platforms, such as sedan, hatchback, and different engine configurations.

GEELY also got breakthroughs on key components through cooperative R&D with auto parts companies. By integration of supplier's expertise, and guiding them to establish R&D centers, GEELY built “unified planning and management, complementary advantages, cooperative development”, a new R&D organization, to realize key components innovation, which greatly reduces development cost and shortens development cycle at the same time.

At the same time, GEELY began technical output of Freeship and Vision cars assembled in Malaysia through CKD and CBU cooperation with Malaysia IGC. By the end of 2006, GEELY has 26 agents and 128 sales and service outlets overseas, with total exports of nearly 40,000 sets, accounting for 63.7 percent of Chinese cars exports.



Stage three: upgrading technological innovation capability (2007-till date)

Since international financial crisis, global auto market has undergone major changes. GEELY seized this opportunity and acquired DSI, the second large AT company in the world. Two years later, the six-speed AT has been successfully put into production in GEELY Xiangtan base, filling the gap in high-grade AT field of self-brand vehicles in China. In 2010, GEELY got 100% equity of Volvo Car Corporation, including global ownership, trademark, sustainable platforms, vehicle plants, auto parts companies, R&D team, more than 2,000 sales and service outlets in over 100 countries, and 10,000 patents.

GEELY captured a large number of key technologies by means of M&A. Such as the breakthrough of blow-out monitoring and brake system (BMBS), and the first five-star car of China-New Car Assessment Program(C-NCAP) in self-brand market, which mark its products have shrunk distance with multinational enterprises (MNEs) in similar type. Recently, GEELY is developing full collision mitigation system similar as Volvo city anti-collision system. GEELY’s technology system was also integrated: Technology Division of GEELY Group, responsible for unified planning and management of entire technology system; GEELY Automobile Research Institute, responsible for R&D projects; Zhejiang Automobile Engineering College, responsible for cultivation of automotive talents.

Meanwhile, CKD assembly products in Russia and Indonesian accumulated experience for GEELY overseas strategic objectives. At present, GEELY has more than 400 sales and service outlets overseas.

In summary, GEELY’s technological capability accumulating process shows these characteristics in Table 5 and a double development path of vehicle and key component in Figure 1.

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