UGF Lecture 7

Management > Global Firm > Basis for I > Internalisation > Decision process 1 > Decision process 2 > Decision 2 continued

Decision process - example 2 continued

Seller uncertainty

The technology market also suffers from "seller uncertainty", deriving from the a lack of knowledge of the buyer's firm and its plans for the technology. This is related to the "appropriability" problem, as the seller is unsure if will be able to appropriate benefits that the knowledge generates for the buyer.

Current technology has two uses:

1. Embodied in current products and production processes
2. Basis for further research and innovation

These uses could be seen as a potential threat by the seller, depending on the capabilities possessed by the buyer and which the seller is unable to completely assess.

The threat may be limited if the seller if it licenses the technology to the buyer and constrains the buyer from selling the resulting products in a market for which the seller wants exclusivity. It will also have to monitor the agreement and take legal action if necessary, causing high transaction costs.

The possibility for the buyer to benefit from the technology in the longer term, through innovations, is another threat which the seller cannot predict. Again, contracts may be drawn, but the monitoring of behaviours over such a period of time is difficult and expensive.

Dealing with seller uncertainty may thus cause internalisation of technology. In addition, seller uncertainty would cause the seller to charge a higher price, to offset the risk of the buyer benefiting more from the technology and thus threatening the seller's future position.

The two-way pressures on price from buyers and sellers can mean that no price can be agreed upon, meaning that the market will have failed and the seller will opt to internalise the technology.

Negative LAs