Technology Transfer, Contracting, and Product Market Competition

We examine aspects of how new technology may be transferred to firms that use it in a final product market. Should technology transfer take place to a single firm or to more than one, and should it happen gradually or at once? How do the incompleteness of contracts and the nature of product market competition affect the transfer of technology? Such issues are central in the challenges that multinationals face when they need to transfer technology to local firms. First, we review the main related ideas in the literature. Second, we set up a simple model of gradual transfer of a cost-reducing innovation by its owner to the product market. We illustrate why, in the absence of vertical integration and complete contracts, technology transfer tends to be slower and at a lower than the optimal level and discuss the crucial role of potential competition in determining the level and allocation of profits between the upstream and the downstream firms.