Technological Catching-upof Latecomer Firms through External Technology Acquisition: Evidence from GEELY Auto Company in China
Abstract
External technology acquisition has been viewed as an important methodto realize technological catching-up. However, only a few studies havebeen on technology acquisition strategyof auto firms. This study developstheoriesrelatedtechnological catching-up through external technology acquisitionofa Chinese auto firm to reveal that:first, integrating different streams of technological knowledgeiscrucial to innovation; second, external technology acquisition apparently in terms of technological performance is based onaccumulation of internal R&D inputs. These results provide important suggestions forlate starting companiesto catch up with leaders, formulate technology acquisition strategy and strengthen technological capabilities.
Keywords:External technology acquisition; Catching-up; Innovation performance; Chinese auto firms
- 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 latecomerfirms 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). Mosttechnology-oriented views focus on explaining how NIEs have tried to catch up with advanced countries by acquiring matured technology fromthem and increasingabsorptive 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 upby 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 asexternal 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 chooseappropriate technology strategy for acquiringneeded technology (Chesbrough, 2006; Chesbrough and Crowther, 2006).
Comparing withtechnology 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 technologicalinnovation inauto sector and viewing it as an engine forcatching-up with advanced countries.Increasingly complex technologies prompt more and more autofirms to acquire external technologythat 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 suggestspecific themes such asmicrocosmic mechanisms onthe absorption of acquired technology and the implementation of proper technology acquisition strategyof auto firms. This study intends to fill this gap inliterature by studyingtechnologicalcatching-upprocess 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 VolvoCars 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 / Events1984 / 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 / Becomingfirst 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 GEELYraises several issues to be studied. First, how doesGEELY accumulate technological capability in such a short time span? Second, which technology acquisition strategies doesGEELY adopt duringdifferent 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 strategiesand the impact of external technology acquisition on technological performance withinternal R&D efforts observed in GEELYAuto are detailed in the following sections. Some conclusions and implicationsfromGEELY’s practice in technological catching-up through external technology acquisition are presented in the closing section.
- Literature review
2.1. Technologicalcatching-upof latecomer firms
In terms oftechnological 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 scholarsargue that technology development in Korea seems to followreverse 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 processin firm-levelas 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 innovationfocus on quick imitationand 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 thatlatecomers do not simply follow the path of technological development of advanced countries incatching-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 / StagesPath 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 foryears, and researchers have developed diverse definitions of technological capability (Dutrénit, 2000). During the early 1980s, technological capability was defined as theability to utilize technological knowledgeand classified into production capability, investment capability, and innovation capability (Westphal etal., 1985). Recently, the concept of technological capability has expanded to include the ability to utilize existing knowledge effectively in addition tocreate 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 acquisitionand performance
Technology acquisition can be defined as a process of planned, selective, focalized importation of advanced technology whichenterprise has notmaster, 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. Thefirst perspective is discovering different kinds of technological acquisition modes.These modes includeM&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 3showssome 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 literatureIndustry-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)
Purchasingtechnology / 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 seconddomain 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 ofmultinational 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 ofM&A.By examining a sampling ofelectronic 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 andR&Dactivities)is the most significant factor influencing the determination of technology acquisition mode.
The thirddomain highlightstechnology acquisition and performance relationship. Jones et al. (2001) investigate 188subsidiaries of multinational firms, and show that internally available resources enhance the effect ofexternal technology acquisition on product performance. Based on ananalytical sampleof 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 industriesindicate that a company's direct ties, indirect ties with other firms intechnology 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 performanceis 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 affectingdecision-making of technology acquisition andtechnology acquisition–performance relationship, there still remain some questions needed to be studied: first, these studies focus on advanced countries mostly, which may be different fromNIEs; 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 investigatedfirms or industries, which may cause an unclear cognition on the application oftechnologyacquisition. This study here focuses ontechnological 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 performanceinNIEs.
- 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 reliabilityaccording to the theory stipulated by Yin (2009).
A semi-structured form was conducted during the interview process. We interviewed several persons of GEELYrespectively, who are executives, technical officers, R&D personnel, senior managers and engineers. The form of those interviews containsformal 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 enrichesresearch information, but also helps researchers to identifydirection 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.
BecauseGEELY is a latecomer auto firm with a faster growth than traditional auto companies in China, it is necessary to compare differences ofexternal technology acquisition strategies adopted bytraditional auto firms, which can partially explainGEELY’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.
- 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 arefrigerators and motorcycles manufacture originally. Over the past ten years, GEELY has grown faster than any other company in Chinese autoindustry (see Table 4).Althoughentering 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 forkey 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.