A technology valuation model to support technology transfer negotiations

Dong-Hyun Baek1, Wonsik Sul2, Kil-Pyo Hong3 and Hun Kim3

Department of Business Administration, Hanyang University, 1271 Sa-l dong, Sangnok-ku, Ansan, Kyeonggi-do, 426791, Korea. estarbaek@hanyang.ac.kr 2 Corresponding author: Division of Business Administration, Sookmyung Womens University, Hyochangwongil 52, Yongsan-ku, Seoul, 140-742, Korea. wssul@sookmyung.ac.kr 3 Division of Business and Commerce, 115 Anseo-dong, Cheonan-city, Chungcheongnam-do, 330704, Korea. kphong@bu.ac.kr, hkim@bu.ac.kr
1

The development and commercialization of advanced technologies will depend increasingly on efcient technology transfer and technology trading systems. This requires the development of technology markets or exchanges and hence a reliable technology valuation methodology. This paper develops a methodology for an objective and impartial valuation of fully developed technologies. A web-based technology valuation system is developed with which interested users can make efcient and real-time evaluations of technologies.

1. Introduction

t is an established notion that technology innovation plays a vital role in building national competitiveness, and every state and corporation is concentrating on fortifying their global competitiveness with high technology development capability that is difcult to imitate. In order to facilitate the advancement and development process of high technology, a market for technology transfer must be promoted. In Korea, to do this, Technology Transfer Committee was established in February 2000, along with Korea Technology Transfer Center and Certied Value Advisor in April and December of the same year, respectively, to provide institutional support for encouraging technology transfer. Institutional support such as technology brokerage and exchange is necessary for active

trade and transfer of technology, but information, especially reliable information on the value of technology is as important. The problem arises because information on technology cannot be provided like general goods, and, thus the role of a technology valuation as a complementary measure becomes very important. There is a special need to evaluate the value of a specic technology from an objective perspective in order to encourage technology transfer. As the market price is used for the basis on price negotiation in trading goods, an objective value of a specic technology must be presented in advance for the negotiation to be carried between buyers and sellers of technology. Accordingly, much attention has been focused on evaluating the objective value of technology in Korea. Many organizations including Korea Institute of Industrial Technology Evaluation and 123

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Dong-Hyun Baek, Wonsik Sul, Kil-Pyo Hong and Hun Kim Planning, Korea Institute of Science & Technology Evaluation and Planning, and Korea Technology Credit Guarantee Fund have been using various valuation models to perform evaluations for aiding decisions regarding investment and putting up technology as collateral. Yet, it is difcult to promote technology trade and transfer with the usual valuation process that focuses on the technology itself. Valuation models thus far have assessed the value of technology from the perspective of the rm in possession of the technology, but such assessment is greatly inuenced by the rms technological capability, capitalization, brand, and human resources. However, what the market needs is the worth of technology as a product to be traded in the market, and this calls for an impartial and objective value that is not inuenced by the specic company that owns it. But, as no appropriate valuation method has been proposed thus far, there is a need for a new way of appraisal. The systems that encourage technology transfer can be classied into two in general: a simple system that just builds and offers data on the information about the technology to transfer and the other one that encourages technology transfer by making evaluations of technologies in various perspectives. One of the examples of the former is the Tech-Net run by SBA (Small Business Administration) of USA and the latter is ValueBased Modeling of Defense Diversication Agency in Britain and the TOP-Index system of National Technology Transfer Center in USA. This papers objective is the development of a technology valuation system that will support the development of technology valuation models and the valuation process according to those models with the intention of promoting technology trade and transfer. According to Simons (1960) identication of different types of decision-making problems, assessing the value of technology can be seen as an unstructured problem. As no regulation or procedure for technology valuation exists, the decision-makers judgment becomes absolutely inuential. By applying the technology valuation model suggested by this research, however, this unstructured problem is converted into a semi-structured problem with some regulation and procedure. Yet, there still remains the difculty of having to rely on the subjective judgment of the decision maker for estimation of diverse parameters used in the evaluation. The technology valuation system developed in this research will not only guide the assessment process, but will provide prompt information for each step in 124
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the process, enabling an objective and reliable appraisal with the use of as much objective information as possible in the estimation of parameters. This paper is organized as follows. Section 2 introduces previous research on technology valuation. Section 3 introduces the technology valuation model presented by this research, while the explanation on the technology valuation system will be given in Section 4. Finally, Section 5 follows up with the conclusion.

2. Concept of technology valuation and previous research 2.1. Concept of technology, value, and technology valuation
Technology, which becomes the object of technology valuation, is divided into broad and narrow denition of technology. Narrow concept of technology refers to intellectual property including patent, utility model patent, and trademark in addition to disparate technology such as knowhow, trade secret, and computer software. Broad concept is not limited to individual technology, but covers the rms total technological capability as well. Technology is valuable as an asset and is identied as an intangible asset. Intangible assets with technical basis are varied in character and include patent rights, trade secret, knowhow, computer software, database, and operations guide. Intellectual property alludes to those whose possession is recognized and protected by the law, and it is comprised of trademark, copyright, computer software, patent, industrial design, and trade secrets. Technologies that are not dened as intellectual properties are mostly those that are difcult to recognize or difcult to assess their value independent of the owner (company, individual), and it is rare for such technology to become the object of valuation. Economically speaking, the value refers to the opportunity cost, which becomes the standard of the transaction, while the market price becomes the exchange value when a perfect market is assumed. However, as the market for technology cannot be created easily, a difculty arises in determining the exchange value of technology through the market mechanism efciently. Accordingly, additional effort in estimating the fair market value, supposing a competitive market, is required. Generally, the fair market value is dened as the price at which willing parties, who have not
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Model to support technology transfer negotiations been coerced and possess rational information, have agreed to trade their asset (Seol, 2000). It is almost impossible, however, to come across such a perfect deal in reality, and, thus this value assumes a transaction between virtual buyer and seller. Particularly, it presupposes an economic or market condition occurring at a specic point of evaluation. Such fair market value is at times simply called the market value, and it assumes that the capital market is in its advanced stage where it remains in a nearly perfectly competitive form. The technology valuation attempts to estimate this market value. Nonetheless, the content of technology valuation can vary in accordance with the perspective taken by the assessor. Seol (2000) suggested that technology valuation has four aspects, each with a different theoretical basis, while Lees (2001) research proposed various concepts and methods of technology valuation, such as assessment of companys internal competence and technology forecast for analysing changing trends. From the viewpoint of government policy, these varying technology valuation methods exhibit a strong tendency to survey technologys environmental and socioeconomic impact, while assaying the side effect on the industry from the macroeconomic perspective. Also, while the manager of government research and development investment will nd it necessary to set a priority on proposed technology development projects, the individual corporation will be interested in evaluating a technology for its economic efciency. Various outlooks regarding technology valuation is organized in Figure 1. With so many different perspectives on technology valuation, it is very challenging to present a generally applicable technology valuation model. The difculty is attributed to the fact that the model, the range of its variables, and the measurement range for each variable are all affected by the intent of valuation. This research limits itself to technology valuation that is represented by the monetary, economic value of the rm and its business units.

2.2. Previous research on technology valuation

When valuing technology in order to evaluate its economic worth from a microscopic point of view, previous research have suggested cost approach methods, market approach methods, income approach methods, and real options as major valuation methods. First, the cost approach methods estimates the cost of recreating the future utility of the technology being valuated, and assumes this value to be the future returns from the technology (Smith and Parr, 2000). Technology assessment is done by calculating the reproduction cost of acquiring the same technology or the substitute cost of acquiring a similar asset, and then reecting depreciation. The cost approach method is useful when assessing intangible assets such as software, but its weakness lies in that equal amount of investment does not always result in the same level of technology and that it does not take into account important elements such as future risks and economic benets that can be obtained from the assets. Secondly, a technology valuation model based on the market approach method estimates the market price of a similar technology that has already been traded on the market and applies it

Economic Value

Economic Impact Analysis

Technology Valuation
Cost Benefit Analysis

Technology Assessment
Non-Economic Value

Competence Evaluation Technology Foresight

Country Level

Industry Level

Firm Level

<Macro>
Figure 1. Various outlooks regarding technology valuation.

<Micro>

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Dong-Hyun Baek, Wonsik Sul, Kil-Pyo Hong and Hun Kim to their assessment (Reilly and Schweihs, 1998). Generally, if there already exists a comparative market where assets are being actively traded, and if information on the transaction costs is readily available, it can become a practical method. In this sense, while it is effective for assessing real estate, vehicles, general purpose computer software, liquor license, and franchises, it is not effective for assessing the cases like most intangible assets or intellectual property, where similar instances of transactions are infrequent or the details of the transactions are not revealed. Thirdly, the income approach method considers the sum of the present values of future cash ows of the technology as the value of the technology. This concept, disregarding the costs of technology development, determines the value of the technology according to its feasibility of creating expected prots (Boer, 1999). The income approach method is currently being subdivided into different branches according to its various facets surrounding the assessment of the future expected prot. These facets include the estimation of the income generation period, the estimation of future income, the risks of no prot, and the conversion of future earning into present value. Among these, the discounted cash ow method is the most widely used. The discounted cash ow rst subtracts expenses from the cash ow received from the usage of assets, and then this net cash ow is adjusted at a proper discount rate. This method, while suitable for patents, registered trademarks, copyright, and other intellectual properties that can create a future prot, it has the disadvantage of being unable to accurately reect the value of technology that does not create a direct prot but, nevertheless, bring value to the company, or technologies where future prots are hard to estimate. The fourth method of real options incorporates the nancial concept of options in technology valuation, and as options are not considered as an obligation but a right, the investors have the opportunity to correct their decision according to future environment (Copeland and Antikarov, 2001). Using real options in investment decisions such as research and development projects and technology transfer can guarantee exibility against future uncertainty in decision making. Heo (2000) stated that real options is not simply a model that expresses the value of an option attached to an investment alternative, but that by itself is a complete valuation model of an investment alternative. The real options model does not need to rely on a subjective assessment of ex126
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pected returns, and while its benet is that it recognizes uncertainty as an opportunity, its downside is the difculty of applying the model to a real situation because of complexity of calculating important variables and the tacit acceptance of the rationality assumption (Hong et al., 2002). Majority of the studies done already has chosen the most appropriate model out of the existing ones based on the goals and perspective of the evaluator. However, more and more attempts have been made to create an integrated model that combines individual and different models into one. For example, Boers Technology Valuation Solutions focuses on how to integrate cash ow, decision tree, and real options approaches (Boer, 1999). As the goals, assumptions, and the approach of different models vary greatly, the technology valuator up till now had always ended up choosing the model that best suits his objective and perspective.

3. Designing technology valuation model for promoting technology transfer

This research aims to suggest a technology valuation model that is based on the income approach method and the real options and can express the objective value of a specic technology in economic terms (monetary amount). In so far as an objective value of a technology can become the starting point of a price negotiation between the buyer and the seller, technology transfer will be further promoted by having such a reference price. The technology valuation model outlined by this research can be divided into three steps as can be seen in Figure 2. The expected returns analysis (Step I) utilizes product market and cost structure analysis according to different technology types in order to calculate the amount of prot that can be created during a specic period. The amount of prot is then converted into its present value based on the discounted cash ow model. Technology contribution analysis (Step II) calculates technologys degree of contribution (technology contribution coefcient) to expected returns by taking into account the technologys level of innovation and the characteristics of the industry it belongs. The technology contribution coefcient is then corrected to reect technologys dominance, exclusivity, and limitations. The expected returns from Step I is multiplied by the technology contribution coefcient in Step II to
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I. Expected returns analysis

Calculating the amount of operating income
The annual operating profits profit generation period Scrap value of technology Present value of returns

Analyzing market and cost structure

The annual expected market size (average growth rate) The annual expected Operating profits (average operating profit rate)

Calculating the present value of operating income

profit generation period core product (classification) Generation type of technology value

Analyzing profit generation period Analyzing scrap value

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The annual expected market size A Title scrap period

profit generation period A title scrap period

Estimating the returns contributed by technology

returns contributed by technology Calculation of technology contribution

Analyzing technology outline

technology classifications (special permission classification)

II. Technology contribution analysis

Calculating Technologys Degree of contribution
Calculation of technology contribution

Analyzing technology characteristics

Steps of technological innovation Industrial characteristics

Adjusting Technology contribution

Calculating fluctuation fluctuation

computing the value of technology from the buyer's perspective

Industry cost risk-free interest rate profit generation period

Model to support technology transfer negotiations

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Technologys dominance Exclusive dominance

Limitation Of technology estimate

III.Technology valuation from buyers perspective

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Figure 2. Technology valuation model.

Dong-Hyun Baek, Wonsik Sul, Kil-Pyo Hong and Hun Kim

technology

New market creation technology Produce profits by creating new product or services

Existing penetration technology Produce profits By substituting

Cost structure improvement technology Produce profits by improving cost efficiency

The present value of expected returns

Figure 3. Classication of technologies.

produce returns contributed by technology, which is the objective value of a particular technology. The technology valuation from the buyers perspective (Step III) considers additional development costs, adjustment period and costs for commercialization, and dynamics of prot to assess the value of technology from the buyers position. The decision on whether or not to purchase a particular technology depends on the comparison of this value to the returns contributed by technology calculated in Step II. Each step will be explained in detail in this chapter.

3.1. Analysis of expected returns

The rst step of technology valuation is calculating the present value of expected returns from the technology. A classication of technologies must be made for this purpose. Figure 3 classies technology into three types, and the new market creation technology and existing market penetration technology are product technologies that produce prots by creating new markets or by substituting existing ones. On the other hand, cost structure improvement technology is a manufacturing technology that does not increase the revenue or the size of the market, but it improves the protability by altering the cost structure. Earlier studies have focused on product technology as it was more convenient to estimate their prots, but manufacturing technology is also an important object of technology valuation. Expected returns from new market creation and existing market penetration technologies is calculated by projecting the time period during which surplus prots can be gained, estimating the amount of prot per year, and by adding the 128
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residual value of technology. In the case of cost structure improvement technology, it is possible to gure out the market size for the existing product, and thus, the only process required is approximating the rate of additional cost improvement from making use of new technology. Once the expected returns is calculated, it can be divided by appropriate discount rate to be converted into present value. The equation below is used to estimate the present value of expected returns. n X CFt CF1 CF2 NI t 1 1 r 1 r 1 r2 t 1 CFn 1 rn where NI is the present value of expected returns, CFt the future cash ow and r the discount rate.

3.2. Analysis of technologys degree of contribution

Technologys degree of contribution refers to percentage of prot that is purely attributable to technology itself. As there are many sources of prot increasing, and since they cannot be judged to be independent of each other, it is very difcult to extract the amount contributed by technology alone. Accordingly, this research model rst denes the range of general degree of contribution, and then calculates the appropriate degree of contribution coefcient for individual technology, taking into account each technologys trait and the industrial characteristics. As many previous studies and actual practice concerning technology valuation have estimated the proportion of contribution of technological
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Model to support technology transfer negotiations

33~39%

25~33%

19~25%

Core Technology Key Technology

5 4 3 2 1

6 5 4 3 2
Low

7 6 5 4 3

8 7 6 5 4

9 8 7 6 5
7 8 5 6 3 4 2 9

Technology Stage of Innovation

Pacing Technology Emerging Technology Base Technology

Very low

Average

High Very High

Technology Contribution Coefficient according to Industry Characteristic 1

Figure 4. Matrix for technologys degree of contribution.

asset to be around 1/4 to 1/3, this research has also adopted a range of 2533% as standard. Because the industry and the characteristic inherent in the technology itself can exert a great inuence on technology valuation (Seol, 2000; Yang, 2000), we have constructed a matrix that can adjust the degree of technology contribution according to industry and technology specics. The matrix in Figure 4 is composed of two dimensions: (1) the importance of intangible asset or technology as a factor of competitive advantage in the industry and (2) the measure of technologys rarity, development potential, and side effect in line with its stage of innovation. Using this matrix, a technology can be classied from the lowest rank (Level 1: low proportion of intangible asset and low rarity in its stage of innovation) to the highest (Level 9: high proportion of intangible asset and very rare in its stage of innovation, while having a great side effect. After determining the range of degree of contribution in reection of the industry and technology characteristics, the model calculates the adjustment coefcients to take into consideration technologys dominance, exclusivity, and limitations. The nal degree of technology contribution is calculated by reecting the adjustment coefcient upon the coefcient for degree of technology contribution worked out in the previous step. The degree of technology contribution is used to extract the portion of present value of expected future prots that can be attributed to technology,
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and this process will allow the objective value of a technology to be evaluated in monetary terms. Generally, many research and eld works concerning technology valuation assumes the degree of contribution of technology assets to be about from 1/4 to 1/3. This is not a logically arrived gure, but rather an assumption that takes into consideration the general practice of identifying intangible assets into three or four types and believes such gure to be reasonable in light of eld experience. Yet as such number is illogical, and as reality dictates that individual categories of intangible assets are not mutually independent, technology valuation becomes difcult and quantifying the valuation even more so (Yang, 2000). According to a study by Lee (1999), technologys degree of contribution is generally determined to be 10%, 25%, and 30%, and this ratio is determined by the evaluation committee according to the technologys eld, industry, and characteristics. Moons (2000) research revealed that the 25% rule is generally applied in accordance with customary commercial laws, and this method sets the royalty received from using licensed intellectual property to be 25% of earnings before tax deduction. Hagelin (2004) mentioned that The 25 Percent Rule is often claimed to be the most widely used license valuation method. Goldheim et al.s (2005) study also suggested that 25% rule is the hybrid and advanced method that considers additional factors to arrive at a more insightful valuation.
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Dong-Hyun Baek, Wonsik Sul, Kil-Pyo Hong and Hun Kim Thus, the most practical method of estimating the weight of factors that inuence technologys degree of contribution would be to rely on qualitative evaluation of professionals who would take into account the characteristic of individual technology and the industry. Yet it is recommended that the Analytic Hierarchy Process be used to increase the degree of condence by extracting the relative weight of factors inuencing technological contribution from many professional groups. been made to traditional BlackScholes model to turn it into a real options model. The value of call option in the original model has been changed to the value of technology from the buyers perspective, the price of the underlying asset into the present value of expected returns from technology, the exercise price into the amounts of investment needed to commercialize the technology, the volatility of the underlying asset into the volatility of expected returns, and the time to maturity into the time period during which commercialization can be attempted without losing rights to the technology. Black-Scholes option model has been applied in diverse formats in the real option model as it is seen in the studies done by McGrath and MacMillan (2000), Remer et al. (2001). When applying the real options on research and development (R&D) or project investment, S usually refers to present value of the expected cash inows from project, while X indicates present value of the expenditures needed to accomplish project (Remer et al., 2001, p. 99). When applying our model in this perspective, X means the additional investment to commercialization and S refers to the present value of expected returns from technology as the purchaser needs to make investment to commercialize the technology later.

3.3. Technology valuation from the buyers perspective

The objective value of individual technology can become an important reference for technology transfer. However, from the buyers perspective, the information on the amount of expected earnings in the future may be more important. Individual technologys future protability can vary according to who owns the technology, and it signies that the value of technology can change in tune with the owners capital strength, technology, and human resources. As expected gains from technology can uctuate depending on the buyer, a technology valuation model that can reect the uncertain future must be introduced. Thus, the real options model has been added to this purpose. Various real option models exist by applying the concept of options traded in the nancial market to technology valuation, but this research has utilized an altered BlackScholes option pricing model. Figure 5 depicts changes that have

4. Technology valuation system

In order for individuals to be able to review quickly and accurately the value of a particular technology by using the technology valuation models explained in Chapter III, a technology
rT

= N (d1 )S N (d

) Xe

d 1 = [ln( S / X ) + ( r + 0 . 5

)T ] /

= d1

V = the value of technology from buyer s position S = the present value of expected returns from technology X = the additional investment to commercialization r = the risk-free rate iod for commercialization without losing rights to the technology T = the time peri = the volatility of expected returns from technology N(d) = the cumulative normal probability of unit normal variable d

Figure 5. Real options model for technology valuation.

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Model to support technology transfer negotiations valuation system that guides them through the process, supplies the necessary data, and calculates the value of the technology according to the value assessment formula within the assessment model needs to be developed. To achieve this goal, through this research, a web-based technology valuation system was created that can be used by technology suppliers, technology buyers, those wanting technology development, and those able to develop new technologies. Under this system, the user will able to assess technologies constantly, rapidly, and efciently, and therefore this system will contribute to the acceleration of technology transfer, proliferation, and commercialization. This system will be available for use on the webpage of Korea Institute of Science and Technology Information (KISTI) at http://www. itechvalue.org by accessing it using your web browser. On the upper section of the webpage, there is a Technology Valuation menu, and it is divided into general and professional use. You can access the general use section if you complete user registration, and you have to register as a professional in order to use the professional section. Once you sign in, the technology valuation starts with User Information Entry and Technology Outline Input. At User Information Entry, there is room to ll in various information such as the name of the user, his/her afliated organization, contact information, and the purpose of technology valuation. For Technology Outline Input, the user lls in the name of the technology and an explanation of the technology. If it is a patented technology, and the user enters the patent application number, the patent database transmits to the system pertinent information such as the IPC classication, the application date, the name of the applicant, and the name of the inventor. Using the technology valuation system developed in this study, value of more than 30 technologies has been estimated. So we would like to explain the function and analysis process of the technology evaluation system with one example. The case mentioned here in this study is the personal network storage device for a Korean venture rm, M. As technology that has something to do with the network storage device, this technology links the physical network device to a hard disk driver, and les can be shared between different types of machines by installing an Internet le system in a way that it allows the storing and sharing of the les by making access to the
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window system. This is an actual case to which the methodology presented in the study has been applied in order to estimate the value of the technology of a network storing device before technology transfer or granting loans for the technology.

4.1. Analysis of expected returns

When considering the market size created by a peculiar technology and its cost of production, expected returns analysis is a process in deciding its estimated prot potentials. The steps of the expected returns analysis are Entering the prot generation period and the type of technology Estimating the market size Estimating the cost structure Estimating the present value of expected returns. 4.1.1. Entry of prot generation period and the type of technology The user enters the prot generation period and the type of technology using the same screen as shown in Figure 6. The prot generation period is the number of years during which excess prot can continue to be created by the pertaining technology. It is not an easy task estimating the period of prot generation; however, a rational estimation is possible by analysing the current situation in the industry and the market outlook. Hong et al. (2001) states several useful methods in estimating this period. For the manufacturing industry, this term is usually under 5 years, and according to an analysis of contract period of Koreas international technology transfer, this term is usually between 3 and 7 years. It can be helpful to refer to these data when determining the prot generation period. Estimating the prot generation period of an individual technology is a very complicated process, and it is nearly impossible to attain a degree of condence. Therefore, such estimation tends to depend on the subjective judgement of the developer or the owner of technology. It is possible, however, to indirectly estimate the prot generation period of a similar technology by using the Bibliometrics method for instance, a measure that makes use of patents information. Should the technology in question be registered with the US patents ofce, its technology life cycle can be predicted by analysing the number of times it has been referenced by other technologies. One may also estimate the technology life cycle by applying this analysis of reference frequency to
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Figure 6. Prot generation period and technology classication.

similar patent technologies or those belonging to related technology group. The performance of research and development activities can be assessed through the reference frequency method relying on Bibliometrics (Moed, 1989). Also, by expanding upon previous research, which states that the mapping of research and development areas can be used to grasp dynamic and structural aspects of technology, such as the direction of technological development and infrastructure, the effectiveness of technology can be estimated using the reference frequency, and this information can be used as a complementary resource for estimating the prot generation period (Braam, 1991). The residual value period refers to the period during which the technology still maintains its residual value after the prot generation period has ended. The time required to commercialize and the amount of required expenses are data used when assessing the value of a technology from the perspective of the buyer. Besides these, the user selects the core product and the industry that relies on the technology. As explained before, risk-free interest rate is used as a discount rate 132
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when converting future-expected prot to present value. As shown at the bottom portion of the gure, the user has to choose one of the technology classications. 4.1.2. Market size estimation In the case of the new market creation technology, a new product market is created based upon the new technology, and therefore the market size must be estimated during the prot generation period. In the case of the existing market penetration technology, the total market size and the market share of the product based on the new technology is estimated during the prot generation period. For the cost structure improvement technology, as the market has been already formed by an existing product, it is relatively an easy task gauging the market size. The case mentioned in this research is an existing market penetration technology, and therefore the total market size and market share during 4 years of prot generation period have to be inputted. Figure 7 is the result screen after having sized up the market size, and therefore it
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Model to support technology transfer negotiations

Figure 7. Estimation of market size.

shows the yearly trend of total market size and the market share of the technology. Though it is not shown in the gure, annual data on the market size and the growth rate of the industry, to which the technologys product belongs to, is actually shown at the bottom part of the page and can be very helpful. This page is designed so that the data can be extracted and attached as a reference to support any assessments. 4.1.3. Cost structure estimation This is step for indirectly estimating the cost structure by estimating operations protability during the prot generation period. There is an input window for entering the rate of operating income during 4 years of prot generation. To assist in gauging the rate, this system provides the average industry rate of operating income along with the average rate of operating income for companies (the user can select up to three) that are most closely related to the technology under evaluation. In the case of personal network storage device technology, the rate of operating income during the prot generation period has been estimated as 2025%. Once the estimation of market size and the rate of operating income for the prot generation
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period is completed, the annual expected returns is automatically calculated by the formula. Expected returns in this research relied on operating income, and annual expected returns is extracted by multiplying the yearly market size with the rate of operating income. 4.1.4. Estimating the present value of expected returns At this point, the expected returns from technology is converted into present value. This step arises from the need to consider the present value of future prots in order to make a decision about technology transfer. The expected returns is easily converted into present value by using the formula explained in Chapter 3.1. The residual value of technology must also be taken into account to estimate the present value. One must determine whether or not to count the residual value of technology that remains after the prot generation period is over. This is a question that must be answered in consideration of each technologys characteristics, however, this case analyzed the residual value to last for 1 year. Here we assumed the residual value to equal the expected return (on the last year of prot generation period) depreciated at a rate of 50% each year. In this
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Dong-Hyun Baek, Wonsik Sul, Kil-Pyo Hong and Hun Kim case, the present value is estimated to be 1,667,000,000 wons with residual value, and 1,184,500,000 wons without. very feasible approach to use when it comes to a consistent classication to determine the life cycle of technologies in the same industry. However, in the area of the technology evaluation, we see fusion technologies across different industries come up quite often and they also have a high economic value. This research added core technology to the technology classication considering technologys potential competitiveness, degree of actualization, extent of proliferation, and effect on other industries. In the system, core technology is very essential in securing competitiveness as it has a quite signicant impact on the cost, quality, and function of a product. It is also dened as a technology that has percussion to other industries and high potential for expansion. A technology is classied into base technology, emerging technology, pacing technology, key technology, and core technology, and in addition, technologys potential competitiveness, degree of actualization, extent of proliferation, and effect on other industries are also evaluated. Figure 10 is the screen for classication of industry characteristics and technologys level of innovation. Industry characteristics measures the importance of technology as an intangible asset in the industry, and this data can be deduced from the industry average R&D investment ratio (vs. total sales) and the ratio of intangible asset to total sales. Using the KSICs added value to tangible assets ratio information provided by the Korea National Statistical Ofce, 99 industries have been divided equally into ve groups. The industries were classied according to the size of their added value to intangible assets ratio in the order of very low, low, average, high, and very high. In this case, the classication is automated by entering the industry classication code in Figure 7. Then the user is presented with a set of survey questions whose answer will determine

4.2. Analysis of technologys degree of contribution

The objective of this analysis is to gure out the portion contributed purely by technology to the present value of expected returns calculated in the earlier chapter. The analysis proceeds as follows: Calculating the technology contribution coefcient according to level of innovation and industry characteristic classication Adjusting the technology contribution coefcient Calculation of prot contributed purely by technology. 4.2.1. Calculation of technology contribution coefcient according to classication of stage of innovation and industry characteristics This research applied the stage of innovation and industry characteristics to calculate the technology contribution coefcient. Figure 8 explains the process of calculating the contribution coefcient. This process identies technologys stage of innovation and industry characteristics, and then utilizes the technology contribution matrix in Figure 4 to determine the ranking of contribution (Levels 19) The contribution coefcient for each ranking is not a single value, but it is a range of value where the upper and lower 50% of the value overlaps with that of adjacent ranks. Figure 9 portrays the logic behind the process of judging the stage of innovation for the technology under evaluation. According to ADL denitions, the stages in technology life cycle are classied into base technology, emerging technology, pacing technology, and key technology (Burgelman et al., 1988). This classication is a

Technology Stage of Innovation

Matrix for technology's degree of contribution

Industry Characteristics

determine the ranking of contribution

The contribution coefficient for each ranking 1: 19~23% 2: 21~25% 3: 23~27% 4: 25~29% 5: 27~31% 6: 29~33% 7: 31~35% 8: 33~37% 9: 35~39%

Figure 8. Calculation process for technology contribution coefcient.

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Model to support technology transfer negotiations

Potential competence
Level (1)Basic (2) Emerging (3) Pacing (4) Key Definition Low level of impact on competency. Relatively well-known and also commonly shared. The potential influence on competitive power is uncertain. The potential value has been proved, however, it ha s not been realized by end product or process. Critical impact on the cost, quality, and performance of the product.
New technology, and the potential value is uncertain

(2)

The potential competence has been proved

Level of Realization
The technology has not been realized by end product or process.

(3)

The technology has been realized by end product or process.

Level of Spread
Low level of impact on competency. Well-known and commonly shared.

(1)

Essential tech as only certain companies possess it

(5) Core

Critical impact on the cost, quality, and performance of the product. In addition, it is extendable to other industries as well.

Extension to other industry

Extension to other industry is uncertain.

(4)
No Applied to other industry. Critical impact on competitiveness

Easily extendable to other industry.

(5)
Figure 9. Logics to decide the stage of innovation.

Yes

Figure 10. Industry characteristics.

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Dong-Hyun Baek, Wonsik Sul, Kil-Pyo Hong and Hun Kim the technologys stage of innovation. For the case of personal network storage device technology, the level of innovation is key technology, while industrial characteristic is very high. Thus, the technology receives a ranking of Level 8 in the technology contribution matrix, and the range of technology contribution coefcient is 3337%. 4.2.2. Adjustment of technology contribution coefcient Although there is little doubt that the stage of innovation and industry characteristics are important factors to consider when calculating the technology contribution coefcient, it is also apparent that this coefcient must be adjusted to reect other factors that inuence technology contribution. This research thought it necessary to include technologys dominance, exclusiveness, and limitations. Technologys dominance refers to the superiority of technology itself and how much of a differentiated value the technology can offer in comparison with other technologies. It also measures technologys applicability and transferability. Technologys exclusiveness deals with whether or not there is any difculty in exercising the exclusive right to possess and use the technology and how convenient it is to protect the use of that technology. Finally, technologys limitations are concerned with any competitive or socioeconomic restraints on commercializing and utilizing the given technology. In order to assess these other factors, the technology valuation system presents a 10-question survey, which the valuator must ll out for each factor using a ve-point scale. The results of the questionnaires are used to adjust the technology contribution coefcient, and the range of adjustment has been xed at 60%. This paper, however, will exclude a detailed explanation on the content of the survey questions and the reasoning behind the adjustment of technology contribution coefcient. 4.2.3. Calculation of returns contributed by technology Figure 11 is a screen displaying the calculated result of returns contributed by technology. The estimated present value and returns attributed to technology are shown for both cases where the residual value is considered and where it is not. As the technology contribution coefcient has a range of values as explained beforehand, the returns contributed by technology is also pre-

Figure 11. Amount of technology value.

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Model to support technology transfer negotiations

Owner
Min. (Expected profit of importer, the cost of alternative technology)

Importer
Sum (Transfer Cost, Opportunity Cost)

Negotiation scope

Min. (Expected profit of importer, the cost of alternative technology, Internal development cost, Opportunity cost of unauthorized usage)

Sum (Transfer cost of tech owner)

Figure 12. Negotiation model of technology transfer cost between provider and importer.

sented as a range of values. It seems more reasonable to show returns contributed by technology as a range of values rather than a single price. For the personal network storage device technology investigated in this case, the returns contributed by technology with residual value is 501 million % 567 million wons, while without residual value is 356 million % 403 million wons.

Figure 12 can be used to set a range of possible negotiation for technology price.

5. Conclusion
At a period when the national competitiveness increasingly depends on technology, there is an urgent need for technology, in the manner of other goods, to contribute to dissemination of knowledge through active exchanges. In this research, we worked out an objective value of technology, a value that is of utmost importance to vitalizing technology trade and transfer, and attempted to embody this impartial value in a technology valuation system. Unlike the previous research that mainly assessed technology value from the interest of the holder of technology, this research tried to assay the value of technology from an impartial and objective point of view, and such value can be used as the basic data for technology transfer price negotiations. Also, with the creation of a web-based technology valuation system, both the buyer and the seller can easily measure the value of any technology of interest. As this research evaluates already fully developed technology for the purpose of transfer, it may not be completely suitable for evaluating technology for public or corporation research and development programs or investment decisions regarding technology development. Having a scientic and well-organized system at the assessment and selection process is necessary to increase the effectiveness and efciency of research and development programs. For instance,
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4.3. Technology valuation from the buyers perspective

The time it takes for commercialization, risk-free interest rate, and the expected returns, which have all been entered in Figure 6, are automatically inserted into the formula explained in Chapter 3.3 to compute the value of technology from the buyers perspective. The estimated value of technology is listed at the bottom of Figure 11. The value with residual value is 354 million % 420 million wons, while without residual value is 209 million % 256 million wons. The value of technology assessed by our research model is a different concept from the transfer price between buyers and sellers of technology transfer. Transfer price is determined not only by technology value, but by variables such as bargaining power of parties to transaction, uncertainty of commercialization, and the economic outlook. Thus, for an individual company seeking to use this researchs valuation model to analyze the price of technology transfer in a negotiation, the technology transfer price negotiation model in
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Dong-Hyun Baek, Wonsik Sul, Kil-Pyo Hong and Hun Kim many leading nations carry out an economic analysis on proposed projects to create a priority list of research programs. To reect such demands, the results of this research must not be limited to technology valuation of already completed technology, but must be expanded to become a model to aid in evaluation and selection of research and development programs. There was one technology that has actually been traded on the Korea Technology Transfer Center out of the ones whose value were evaluated using the Technology Valuation System that we developed. The actual price at which the technology was traded was within the price range that the Technology Valuation System came up with. However, one case is not enough to support that this is superior to alternative or has some objective value. So this is the limit that this study has. In an attempt to overcome this limit, we would like to try the following two approaches. First one is to track the technologies that have actually been traded out of the ones whose value were evaluated using the technology valuation system that we developed so that the values that the system estimated can be compared with the actual values at which they are traded. Second one is to apply the technology valuation system on the technologies that are traded in the technology exchange in order to compare the values that the system came up with and the actual ones. These approaches are expected to allow us to rene the methodologies that we suggested in the study and verify the feasibility and superiority of the methodology suggested in the study.
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