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Multinational Corporations, Strategic Investing, and Technology Commercialization Dr. Eric J. Novotny

Practical Issues of Financing Technology Transfer in Modern Ukraine: How to Deal with Investors� Kyiv, March 31, 2009


Supporting Scientific Achievement in Ukraine CRDF works closely with the Ukrainian Ministry of Education and Science to develop and implement collaborative programs to bolster scientific achievement in Ukraine. Since 1996, CRDF has • Awarded 560 grants in Ukraine • Engaged 1685 Ukrainian researchers, including 521 former weapons scientists • Committed more than $11 ml in funding to support science and technology in Ukraine • The government of Ukraine has committed more than $1.8 million in a cost share for these programs

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CRDF’s Higher Education Programs • •

Carried out in partnership with Ministries of Education & Science Three-year core grants of $300K to $1M to establish Research and Education Centers in universities – Provide modern equipment for high-level research – Support faculty and students – Also cover travel to conferences, journal subscriptions, etc.

Emphasis placed on: – – – –

Research carried out by students Integrating research results into educational curriculum Promoting local and international collaboration Preparing the next generation of scientists

Programs in 6 countries to date – Russia (BRHE), Ukraine (CREST), Armenia (BRAU), Moldova (CERIM), Azerbaijan (AzURE), Georgia (CoRE)

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CREST – Cooperation in Research, Education, Science, and Technology

Kyiv

Ivano-Frankivsk Dnipropetrovsk

Ukraine 4


About CRDF and Innovation •

Mission: To improve and expand global scientific cooperation

Critical elements to fulfilling this mission are: – Innovation – Technology commercialization /transfer – Transition to a knowledge-based economy • Higher education • Entrepreneurship • Institution and capacity building • Growing role of information and communications technologies

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What is Strategic Investing? •

Technology commercialization: classical model – Laboratory or “bread board” technological advancement /invention developed from applied research – Establishment of intellectual property rights – Financing through venture funds or venture capital – Additional product development, marketing, sales

Today, large companies are also deeply in the game: – To enhance their internal development projects – Gain early exposure to promising technologies – Develop desirable products more rapidly or cheaply – Move against a competitor or monopoly supplier – Respond to a customer need – Acquire human talent or skills they do not have 6


IBM Survey of 765 CEOs of Major Corporations, 2006 •

Think broadly, act personally and manage the innovation mix – Create and manage a broad mix of innovation that emphasizes business model change

Make your business model deeply different – Find ways to substantially change how you add value in your current industry or in another

Ignite innovation through business and technology integration – Use technology as an innovation catalyst by combining it with business and market insights

Defy collaboration limits – Collaborate on a massive, geographydefying scale to open a world of possibilities

Force an outside look...every time – Push the organization to work with outsiders more, making it first systematic and, then, part of your culture. 7


Advantages for Innovators •

Source for immediate capital infusion with or without dilution

Externalizes risks of product development, marketing, and the associated financial exposure

Allows the scientists and technologists to keep doing science and technology and be rewarded for it by a partner who will assume other responsibilities

Rapid access to existing customers, markets, and established distribution channels

Integration of new components into finished goods or legacy systems without competition or customization

Gain experience in large-scale development, administrative skills, business development and marketing, pricing, supply chain management

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Taxonomy of Strategic Investments

Contract

Alliance

Non-Equity Short-term cash contracts or intellectual property licenses

Equity Passive stock holdings

Medium-term Joint venture, bilateral exchange consortium, or agreement or cross holdings contract for services

Exclusive supplier Wholly owned affiliate or Integration subsidiary Adapted from: Teece (1992), p. 190.

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Characteristics of Strategic Investing •

Contracts: – Typically by a business operating unit – Motive is to strengthen its core business – Tactical in nature: 2 years or less

Alliances: – Typically corporate business development unit – Motive is to take significant move forward – Strategic in nature: 2 to 7 years

Integration: – – – – –

Internal venture fund Industry or geographical focus May have multiple components and technologies Major strategic, competitive move 10 to 15 year commitment

Adapted from: Rind, p. 2.

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Strategies for Innovators • Multinational corporations can be a major source of financing for new technologies where entrepreneurs are seeking market access and development funds • Dealing with large companies can be intimidating: – Be prepared for intensive examination of your technologies and your organization – Negotiations may be drawn out—large companies sometimes act like bureaucracies – Get good external negotiating advice from those who know the company, its markets and its products well – Make sure all intellectual property claims and rights are established and understood – Ensure that confidentiality agreements and other protections are in place when negotiations begin – Ensure that the large partner genuinely wants to use the technology and not constrain its development 11


Be Aware of Typical Problems and Issues •

Need to attract and retain appropriately skilled people – Some people enjoy the “small” company environment and will not make the transition – Large company employees may not want to risk long term benefits or work outside the company’s mainstream activities

Differences in objectives – Whose interests are served in decision-making? – Will exclusive arrangements act as a constraint? – Are financial, engineering-driven, and marketing-driven goals understood and complimentary?

Assumption of residual risk – Is there an exit strategy? – Will that serve the innovator’s interests?

Time horizon – Are results expected too quickly? – Will adequate resources be available if current resources are inadequate to meet expectations?

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Summary •

Multinationals will continue to use technology acquisition strategies to improve their competitive position and to break into new markets

Globalization dynamics will make timely, rapid technological advance all the more important to them

Small innovators can use these forces to their advantage in arrangements with large multinational corporations

Multinationals will remain an important and potentially lucrative source of financing for the small high technology innovator in years to come

When these arrangements are reached through equitable and fair negotiations, the results can be highly beneficial for all sides

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Acknowledgments and Sources Rigas Arvanitis and Nicholas S. Vonortas, “Technology Transfer and Learning through Strategic Technical Alliances: International Experiences,” Journal of Technology Transfer 25 (March 2000):9-12. IBM Corporation, The Global CEO Study, 2006. Magnus Larsson, et al, “Technology Transfer: Why Some Succeed and Others Do Not,” ABB Corporate Research Department, 2006. Ulrich Lichenthaler, et al “Organization of International External Technology Acquisition Projects,” International Journal of Technology Transfer and Commercialization 3 (August 2004):291-307. Rodney W. Nichols, “Innovation, Change, and Order: Reflections on Science and Technology in India, China, and The United States,” Technology in Society (2008), forthcoming. Kenneth Rind, “Dealing With The Corporate Strategic Investor.” (unpublished manuscript). “Something New Under the Sun: A Special Report on Innovation,” The Economist, 13 October 2007. David J. Teece, “Strategies for Capturing the Benefits from Technological Innovation,” in Technology and the Wealth of Nations, Nathan Rosenberg et al, eds. Stanford University Press, 1992.

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Thank You and Good Luck with All New Ventures!

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Presenter Information •

Dr. Eric J. Novotny is presently Senior Vice President of the U.S. Civilian Research & Development Foundation (CRDF) and Professor of International Relations at the American University, Washington, DC. He is formerly Vice President, Marketing, for Lockheed Martin Space Systems and Vice President, Europe, for the Hughes Electronics Company. He holds a Ph.D. in political science from Georgetown University and a diploma in management studies from Oxford.

CRDF 1530 Wilson Boulevard, Third Floor Arlington, Virginia 22209 USA +1.703.526.9720 x374 enovotny@crdf.org www.crdf.org 16


Note: These slides represent an incomplete record of the presentation without the accompanying oral remarks

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Multinational Corporations, Strategic Investing, and Technology Commercialization