a technology valuation model to support technology ... valuation.pdf · a technology valuation...

A technology valuation modelto support technologytransfer negotiations

Dong-Hyun Baek1, Wonsik Sul2, Kil-Pyo Hong3

and Hun Kim3

1Department of Business Administration, Hanyang University, 1271 Sa-l dong, Sangnok-ku,Ansan, Kyeonggi-do, 426–791, Korea. [email protected] author: Division of Business Administration, Sookmyung Women’s University,Hyochangwongil 52, Yongsan-ku, Seoul, 140-742, Korea. [email protected] of Business and Commerce, 115 Anseo-dong, Cheonan-city, Chungcheongnam-do,330–704, Korea. [email protected], [email protected]

The development and commercialization of advanced technologies will depend increasingly on

efficient 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

efficient and real-time evaluations of technologies.

1. Introduction

It is an established notion that technologyinnovation plays a vital role in building na-

tional competitiveness, and every state and cor-poration is concentrating on fortifying theirglobal competitiveness with high technology de-velopment capability that is difficult to imitate. Inorder to facilitate the advancement and develop-ment process of high technology, a market fortechnology transfer must be promoted. In Korea,to do this, Technology Transfer Committee wasestablished in February 2000, along with KoreaTechnology Transfer Center and Certified ValueAdvisor in April and December of the same year,respectively, to provide institutional support forencouraging technology transfer.

Institutional support such as technologybrokerage and exchange is necessary for active

trade and transfer of technology, but informa-tion, especially reliable information on the valueof technology is as important. The problem arisesbecause information on technology cannot beprovided like general goods, and, thus the roleof a technology valuation as a complementarymeasure becomes very important. There is aspecial need to evaluate the value of a specifictechnology from an objective perspective in orderto encourage technology transfer. As the marketprice is used for the basis on price negotiation intrading goods, an objective value of a specifictechnology must be presented in advance for thenegotiation to be carried between buyers andsellers of technology.

Accordingly, much attention has been focusedon evaluating the objective value of technology inKorea. Many organizations including Korea In-stitute of Industrial Technology Evaluation and

R&D Management 37, 2, 2007. r 2007 The Authors. Journal compilation r 2007 Blackwell Publishing Ltd, 1239600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA

Planning, Korea Institute of Science & Technol-ogy Evaluation and Planning, and Korea Tech-nology Credit Guarantee Fund have been usingvarious valuation models to perform evaluationsfor aiding decisions regarding investment andputting up technology as collateral. Yet, it isdifficult to promote technology trade and transferwith the usual valuation process that focuses onthe technology itself. Valuation models thus farhave assessed the value of technology from theperspective of the firm in possession of the tech-nology, but such assessment is greatly influencedby the firm’s technological capability, capitaliza-tion, brand, and human resources. However,what the market needs is the worth of technologyas a product to be traded in the market, and thiscalls for an impartial and objective value that isnot influenced by the specific company that ownsit. But, as no appropriate valuation method hasbeen proposed thus far, there is a need for a newway of appraisal.

The systems that encourage technology transfercan be classified into two in general: a simplesystem that just builds and offers data on theinformation about the technology to transfer andthe other one that encourages technology transferby making evaluations of technologies in variousperspectives. One of the examples of the formeris the Tech-Net run by SBA (Small BusinessAdministration) of USA and the latter is Value-Based Modeling of Defense DiversificationAgency in Britain and the TOP-Index system ofNational Technology Transfer Center in USA.

This paper’s objective is the development of atechnology valuation system that will support thedevelopment of technology valuation models andthe valuation process according to those modelswith the intention of promoting technology tradeand transfer. According to Simon’s (1960) identi-fication of different types of decision-makingproblems, assessing the value of technology canbe seen as an unstructured problem. As noregulation or procedure for technology valuationexists, the decision-maker’s judgment becomesabsolutely influential. By applying the technologyvaluation model suggested by this research, how-ever, this unstructured problem is converted intoa semi-structured problem with some regulationand procedure. Yet, there still remains the diffi-culty of having to rely on the subjective judgmentof the decision maker for estimation of diverseparameters used in the evaluation. The technol-ogy valuation system developed in this researchwill not only guide the assessment process, butwill provide prompt information for each step in

the process, enabling an objective and reliableappraisal with the use of as much objectiveinformation as possible in the estimation ofparameters.

This paper is organized as follows. Section 2introduces previous research on technology va-luation. Section 3 introduces the technologyvaluation model presented by this research, whilethe explanation on the technology valuation sys-tem will be given in Section 4. Finally, Section 5follows up with the conclusion.

2. Concept of technology valuation andprevious research

2.1. Concept of technology, value, andtechnology valuation

Technology, which becomes the object of technol-ogy valuation, is divided into broad and narrowdefinition of technology. Narrow concept of tech-nology refers to intellectual property includingpatent, utility model patent, and trademark inaddition to disparate technology such as kno-whow, trade secret, and computer software. Broadconcept is not limited to individual technology,but covers the firm’s total technological capabilityas well. Technology is valuable as an asset and isidentified as an intangible asset. Intangible assetswith technical basis are varied in character andinclude patent rights, trade secret, knowhow,computer software, database, and operationsguide. Intellectual property alludes to those whosepossession is recognized and protected by the law,and it is comprised of trademark, copyright,computer software, patent, industrial design, andtrade secrets. Technologies that are not defined asintellectual properties are mostly those that aredifficult to recognize or difficult to assess theirvalue independent of the owner (company, indi-vidual), and it is rare for such technology tobecome the object of valuation.

Economically speaking, the value refers to theopportunity cost, which becomes the standard ofthe transaction, while the market price becomes theexchange value when a perfect market is assumed.However, as the market for technology cannot becreated easily, a difficulty arises in determining theexchange value of technology through the marketmechanism efficiently. Accordingly, additional ef-fort in estimating the fair market value, supposinga competitive market, is required.

Generally, the fair market value is defined as‘the price at which willing parties, who have not

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

124 R&D Management 37, 2, 2007 r 2007 The Authors

Journal compilation r 2007 Blackwell Publishing Ltd

been coerced and possess rational information,have agreed to trade their asset’ (Seol, 2000). It isalmost impossible, however, to come across sucha perfect deal in reality, and, thus this valueassumes a transaction between virtual buyer andseller. Particularly, it presupposes an economic ormarket condition occurring at a specific point ofevaluation. Such fair market value is at timessimply called the market value, and it assumesthat the capital market is in its advanced stagewhere it remains in a nearly perfectly competitiveform. The technology valuation attempts to esti-mate this market value.

Nonetheless, the content of technology valua-tion can vary in accordance with the perspectivetaken by the assessor. Seol (2000) suggested thattechnology valuation has four aspects, each witha different theoretical basis, while Lee’s (2001)research proposed various concepts and methodsof technology valuation, such as assessment ofcompany’s internal competence and technologyforecast for analysing changing trends. From theviewpoint of government policy, these varyingtechnology valuation methods exhibit a strongtendency to survey technology’s environmentaland socioeconomic impact, while assaying theside effect on the industry from the macroeco-nomic perspective. Also, while the manager ofgovernment research and development invest-ment will find it necessary to set a priority onproposed technology development projects, theindividual corporation will be interested in eval-uating a technology for its economic efficiency.Various outlooks regarding technology valuationis organized in Figure 1.

With so many different perspectives on tech-nology valuation, it is very challenging to presenta generally applicable technology valuation

model. The difficulty is attributed to the factthat the model, the range of its variables, andthe measurement range for each variable are allaffected by the intent of valuation. This researchlimits itself to technology valuation that is repre-sented by the monetary, economic value of thefirm and its business units.

2.2. Previous research on technologyvaluation

When valuing technology in order to evaluate itseconomic worth from a microscopic point ofview, previous research have suggested cost ap-proach methods, market approach methods, in-come approach methods, and real options asmajor valuation methods. First, the cost ap-proach methods estimates the cost of recreatingthe future utility of the technology being valuated,and assumes this value to be the future returnsfrom the technology (Smith and Parr, 2000).Technology assessment is done by calculatingthe reproduction cost of acquiring the sametechnology or the substitute cost of acquiring asimilar asset, and then reflecting depreciation.The cost approach method is useful when asses-sing intangible assets such as software, but itsweakness lies in that equal amount of investmentdoes not always result in the same level oftechnology and that it does not take into accountimportant elements such as future risks andeconomic benefits that can be obtained from theassets.

Secondly, a technology valuation model basedon the market approach method estimates themarket price of a similar technology that hasalready been traded on the market and applies it

<Macro> <Micro>

Country Level Industry Level Firm Level

Economic Value

Non-Economic Value

TechnologyAssessment

Economic ImpactAnalysis

CompetenceEvaluation

Technology Foresight

Cost Benefit Analysis

TechnologyValuation

Figure 1. Various outlooks regarding technology valuation.

Model to support technology transfer negotiations

r 2007 The Authors


R&D Management 37, 2, 2007 125

to their assessment (Reilly and Schweihs, 1998).Generally, if there already exists a comparativemarket where assets are being actively traded, andif information on the transaction costs is readilyavailable, it can become a practical method. Inthis sense, while it is effective for assessing realestate, vehicles, general purpose computer soft-ware, liquor license, and franchises, it is noteffective for assessing the cases like most intangi-ble assets or intellectual property, where similarinstances of transactions are infrequent or thedetails of the transactions are not revealed.

Thirdly, the income approach method consid-ers the sum of the present values of future cashflows of the technology as the value of thetechnology. This concept, disregarding the costsof technology development, determines the valueof the technology according to its feasibility ofcreating expected profits (Boer, 1999). The in-come approach method is currently being sub-divided into different branches according to itsvarious facets surrounding the assessment ofthe future expected profit. These facets include theestimation of the income generation period, theestimation of future income, the risks of no profit,and the conversion of future earning into presentvalue. Among these, the discounted cash flowmethod is the most widely used. The discountedcash flow first subtracts expenses from the cashflow received from the usage of assets, and thenthis net cash flow is adjusted at a proper discountrate. This method, while suitable for patents,registered trademarks, copyright, and other in-tellectual properties that can create a futureprofit, it has the disadvantage of being unable toaccurately reflect the value of technology thatdoes not create a direct profit but, nevertheless,bring value to the company, or technologieswhere future profits are hard to estimate.

The fourth method of real options incorporatesthe financial concept of options in technologyvaluation, and as options are not considered asan obligation but a right, the investors have theopportunity to correct their decision according tofuture environment (Copeland and Antikarov,2001). Using real options in investment decisionssuch as research and development projects andtechnology transfer can guarantee flexibilityagainst future uncertainty in decision making.Heo (2000) stated that real options is not simplya model that expresses the value of an optionattached to an investment alternative, but that byitself is a complete valuation model of an invest-ment alternative. The real options model does notneed to rely on a subjective assessment of ex-

pected returns, and while its benefit is that itrecognizes uncertainty as an opportunity, itsdownside is the difficulty of applying the modelto a real situation because of complexity ofcalculating important variables and the tacit ac-ceptance of the rationality assumption (Hong etal., 2002).

Majority of the studies done already has chosenthe most appropriate model out of the existingones based on the goals and perspective of theevaluator. However, more and more attemptshave been made to create an integrated modelthat combines individual and different modelsinto one. For example, Boer’s Technology Valua-tion Solutions focuses on how to integrate cashflow, decision tree, and real options approaches(Boer, 1999). As the goals, assumptions, and theapproach of different models vary greatly, thetechnology valuator up till now had always endedup choosing the model that best suits his objectiveand perspective.

3. Designing technology valuation modelfor promoting technology transfer

This research aims to suggest a technology valua-tion model that is based on the income approachmethod and the real options and can express theobjective value of a specific technology in eco-nomic terms (monetary amount). In so far as anobjective value of a technology can become thestarting point of a price negotiation between thebuyer and the seller, technology transfer will befurther promoted by having such a referenceprice.

The technology valuation model outlined bythis research can be divided into three steps as canbe seen in Figure 2. The expected returns analysis(Step I) utilizes product market and cost structureanalysis according to different technology types inorder to calculate the amount of profit that can becreated during a specific period. The amount ofprofit is then converted into its present valuebased on the discounted cash flow model.

Technology contribution analysis (Step II) cal-culates technology’s degree of contribution (tech-nology contribution coefficient) to expectedreturns by taking into account the technology’slevel of innovation and the characteristics of theindustry it belongs. The technology contributioncoefficient is then corrected to reflect technology’sdominance, exclusivity, and limitations. The ex-pected returns from Step I is multiplied by thetechnology contribution coefficient in Step II to




Ana

lyzi

ngte

chno

logy

outli

ne

Ana

lyzi

ngpr

ofit

gene

ratio

npe

riod

Ana

lyzi

ngsc

rap

valu

e

Ana

lyzi

ngm

arke

tand

co

stst

ruct

ure

Cal

cula

ting

the

amou

ntof

oper

atin

gin

com

e

Cal

cula

ting

the

pres

ent

valu

e of

op

erat

ing

inco

me

Est

imat

ing

the

retu

rns

cont

ribu

ted

byte

chno

logy

Cal

cula

tion

ofte

chno

logy

cont

ribu

tion

prof

itge

nera

tion

peri

odA

title

scra

ppe

riod

The

annu

alex

pect

ed

mar

kets

ize

(ave

rage

gro

wth

rat

e)T

hean

nual

expe

cted

O

pera

ting

prof

its(a

vera

geop

erat

ing

prof

itra

te)

prof

itge

nera

tion

peri

od

The

annu

al

oper

atin

gpr

ofits

Scra

pva

lue

ofte

chno

logy

The

annu

alex

pect

edm

arke

tsiz

eA

Tit

le s

crap

per

iod

retu

rns

cont

ribu

ted

byte

chno

logy

I. E

xpec

ted

retu

rns

anal

ysis

Ana

lyzi

ngte

chno

logy

char

acte

rist

ics

Cal

cula

ting

Tec

hnol

ogy’

sD

egre

eof

cont

ribu

tion

Adj

ustin

gT

echn

olog

yco

ntri

butio

nS

teps

ofte

chno

logi

cal

inno

vatio

nIn

dust

rial

char

acte

rist

ics

Cal

cula

tion

ofte

chno

logy

cont

ribu

tion

Tec

hnol

ogy’

sdo

min

ance

Exc

lusi

vedo

min

ance

Lim

itatio

nO

fte

chno

logy

esti

mat

e

II. T

echn

olog

y co

ntri

buti

on a

naly

sis

com

putin

gth

eva

lue

ofte

chno

logy

from

the

buye

r'spe

rspe

ctiv

e

Indu

stry

cost

risk

-fre

ein

tere

stra

te

prof

itge

nera

tion

peri

od

fluc

tuat

ion

III.

Tec

hnol

ogy

valu

atio

nfr

om b

uyer

‘s p

ersp

ecti

ve

prof

itge

nera

tion

peri

odco

repr

oduc

t(cl

assi

fica

tion)

Gen

erat

ion

type

ofte

chno

logy

valu

e

tech

nolo

gycl

assi

fica

tions

(s

peci

alpe

rmis

sion

clas

sifi

catio

n)

Pres

entv

alue

ofre

turn

s

Cal

cula

ting

fluc

tuat

ion

Figure2.Technologyvaluationmodel.


r 2007 The Authors



produce returns contributed by technology, whichis the objective value of a particular technology.

The technology valuation from the buyer’sperspective (Step III) considers additional devel-opment costs, adjustment period and costs forcommercialization, and dynamics of profit toassess the value of technology from the buyer’sposition. The decision on whether or not topurchase a particular technology depends on thecomparison of this value to the returns contrib-uted by technology calculated in Step II. Eachstep will be explained in detail in this chapter.

3.1. Analysis of expected returns

The first step of technology valuation is calculat-ing the present value of expected returns from thetechnology. A classification of technologies mustbe made for this purpose. Figure 3 classifiestechnology into three types, and the new marketcreation technology and existing market penetra-tion technology are product technologies thatproduce profits by creating new markets or bysubstituting existing ones. On the other hand, coststructure improvement technology is a manufac-turing technology that does not increase therevenue or the size of the market, but it improvesthe profitability by altering the cost structure.Earlier studies have focused on product technol-ogy as it was more convenient to estimate theirprofits, but manufacturing technology is also animportant object of technology valuation.

Expected returns from new market creationand existing market penetration technologies iscalculated by projecting the time period duringwhich surplus profits can be gained, estimatingthe amount of profit per year, and by adding the

residual value of technology. In the case of coststructure improvement technology, it is possibleto figure out the market size for the existingproduct, and thus, the only process required isapproximating the rate of additional cost im-provement from making use of new technology.Once the expected returns is calculated, it can bedivided by appropriate discount rate to be con-verted into present value. The equation below isused to estimate the present value of expectedreturns.

NI ¼Xn

t¼1

CFt

ð1þ rÞt¼ CF1

ð1þ rÞ1þ CF2

ð1þ rÞ2

þ � � � þ CFn

ð1þ rÞn

where NI is the present value of expected returns,CFt the future cash flow and r the discount rate.

3.2. Analysis of technology’s degree ofcontribution

Technology’s degree of contribution refers topercentage of profit that is purely attributable totechnology itself. As there are many sources ofprofit increasing, and since they cannot be judgedto be independent of each other, it is very difficultto extract the amount contributed by technologyalone. Accordingly, this research model first de-fines the range of general degree of contribution,and then calculates the appropriate degree ofcontribution coefficient for individual technology,taking into account each technology’s trait andthe industrial characteristics.

As many previous studies and actual practiceconcerning technology valuation have estimatedthe proportion of contribution of technological

technology

The present value of expected returns

New market creationtechnology

Produce profits bycreating new product

or services

Existing penetrationtechnology

Produce profits

By substituting

Cost structureimprovement technology

Produce profitsby improvingcost efficiency

Figure 3. Classification of technologies.




asset to be around 1/4 to 1/3, this research hasalso adopted a range of 25–33% as standard.Because the industry and the characteristic in-herent in the technology itself can exert a greatinfluence on technology valuation (Seol, 2000;Yang, 2000), we have constructed a matrix thatcan adjust the degree of technology contributionaccording to industry and technology specifics.The matrix in Figure 4 is composed of twodimensions: (1) the importance of intangible assetor technology as a factor of competitive advan-tage in the industry and (2) the measure oftechnology’s rarity, development potential, andside effect in line with its stage of innovation.Using this matrix, a technology can be classifiedfrom the lowest rank (Level 1: low proportion ofintangible asset and low rarity in its stage ofinnovation) to the highest (Level 9: high propor-tion of intangible asset and very rare in its stage ofinnovation, while having a great side effect.

After determining the range of degree of con-tribution in reflection of the industry and technol-ogy characteristics, the model calculates theadjustment coefficients to take into considerationtechnology’s dominance, exclusivity, and limita-tions. The final degree of technology contributionis calculated by reflecting the adjustment coeffi-cient upon the coefficient for degree of technologycontribution worked out in the previous step. Thedegree of technology contribution is used to ex-tract the portion of present value of expectedfuture profits that can be attributed to technology,

and this process will allow the objective value of atechnology to be evaluated in monetary terms.

Generally, many research and field works con-cerning technology valuation assumes the degreeof contribution of technology assets to be aboutfrom 1/4 to 1/3. This is not a logically arrivedfigure, but rather an assumption that takes intoconsideration the general practice of identifyingintangible assets into three or four types andbelieves such figure to be reasonable in light offield experience.

Yet as such number is illogical, and as realitydictates that individual categories of intangibleassets are not mutually independent, technologyvaluation becomes difficult and quantifying thevaluation even more so (Yang, 2000). Accordingto a study by Lee (1999), technology’s degree ofcontribution is generally determined to be 10%,25%, and 30%, and this ratio is determined by theevaluation committee according to the technol-ogy’s field, industry, and characteristics. Moon’s(2000) research revealed that the 25% rule isgenerally applied in accordance with customarycommercial laws, and this method sets the royaltyreceived from using licensed intellectual propertyto be 25% of earnings before tax deduction.Hagelin (2004) mentioned that ‘The 25 PercentRule is often claimed to be the most widely usedlicense valuation method.’ Goldheim et al.’s (2005)study also suggested that 25% rule is the hybridand advanced method that considers additionalfactors to arrive at a more insightful valuation.

65432

54321

76543

87654

98765

Technology Contribution Coefficientaccording to Industry Characteristic

Very low Very High

Technology Stageof Innovation

Emerging Technology

Pacing Technology

Key Technology

Core Technology

Base Technology

LowAverage

High

25~33%

33~39%

19~25%

9

78

6

5

4

3

2

1

Figure 4. Matrix for technology’s degree of contribution.


r 2007 The Authors



Thus, the most practical method of estimatingthe weight of factors that influence technology’sdegree of contribution would be to rely on qua-litative evaluation of professionals who wouldtake into account the characteristic of individualtechnology and the industry. Yet it is recom-mended that the Analytic Hierarchy Process beused to increase the degree of confidence byextracting the relative weight of factors influen-cing technological contribution from many pro-fessional groups.

3.3. Technology valuation from thebuyer’s perspective

The objective value of individual technology canbecome an important reference for technologytransfer. However, from the buyer’s perspective,the information on the amount of expected earn-ings in the future may be more important. In-dividual technology’s future profitability can varyaccording to who owns the technology, and itsignifies that the value of technology can changein tune with the owner’s capital strength, technol-ogy, and human resources. As expected gainsfrom technology can fluctuate depending on thebuyer, a technology valuation model that canreflect the uncertain future must be introduced.Thus, the real options model has been added tothis purpose.

Various real option models exist by applyingthe concept of options traded in the financialmarket to technology valuation, but this researchhas utilized an altered Black–Scholes option pri-cing model. Figure 5 depicts changes that have

been made to traditional Black–Scholes model toturn it into a real options model. The value of calloption in the original model has been changed tothe value of technology from the buyer’s perspec-tive, the price of the underlying asset into thepresent value of expected returns from technol-ogy, the exercise price into the amounts of invest-ment needed to commercialize the technology, thevolatility of the underlying asset into the volatilityof expected returns, and the time to maturity intothe time period during which commercializationcan be attempted without losing rights to thetechnology.

Black-Scholes option model has been applied indiverse formats in the real option model as it is seenin the studies done by McGrath and MacMillan(2000), Remer et al. (2001). When applying the realoptions on research and development (R&D) orproject investment, S usually refers to ‘presentvalue of the expected cash inflows from project,’while X indicates ‘present value of the expendituresneeded to accomplish project’ (Remer et al., 2001,p. 99). When applying our model in this perspec-tive, X means ‘the additional investment to com-mercialization’ and S refers to ‘the present value ofexpected returns from technology’ as the purchaserneeds to make investment to commercialize thetechnology later.

4. Technology valuation system

In order for individuals to be able to reviewquickly and accurately the value of a particulartechnology by using the technology valuationmodels explained in Chapter III, a technology

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

T = the time periiod for commercialization without losing rights to the technology

σ = the volatility of expected returns from technology

N(d) == the cumulative normal probability of unit normal variable d

rTXedNSdNV

−−= )()(

21

TTrXSd σσ /])5.0()/[ln(2

1++=

Tdd σ−= 12

Figure 5. Real options model for technology valuation.




valuation system that guides them throughthe process, supplies the necessary data, andcalculates the value of the technology accordingto the value assessment formula within the assess-ment model needs to be developed. To achievethis goal, through this research, a web-basedtechnology valuation system was created thatcan be used by technology suppliers, technologybuyers, those wanting technology development,and those able to develop new technologies.Under this system, the user will able to assesstechnologies constantly, rapidly, and efficiently,and therefore this system will contribute to theacceleration of technology transfer, proliferation,and commercialization.

This system will be available for use on thewebpage of Korea Institute of Science and Tech-nology Information (KISTI) at ‘http://www.itechvalue.org’ by accessing it using your webbrowser. On the upper section of the webpage,there is a ‘Technology Valuation’ menu, and itis divided into general and professional use. Youcan access the general use section if you completeuser registration, and you have to register as aprofessional in order to use the professionalsection.

Once you sign in, the technology valuationstarts with ‘User Information Entry’ and ‘Tech-nology Outline Input.’ At ‘User InformationEntry,’ there is room to fill in various informationsuch as the name of the user, his/her affiliatedorganization, contact information, and the pur-pose of technology valuation. For ‘TechnologyOutline Input,’ the user fills in the name of thetechnology and an explanation of the technology.If it is a patented technology, and the user entersthe patent application number, the patent data-base transmits to the system pertinent informa-tion such as the IPC classification, the applicationdate, the name of the applicant, and the name ofthe inventor.

Using the technology valuation system devel-oped in this study, value of more than 30 tech-nologies has been estimated. So we would like toexplain the function and analysis process of thetechnology evaluation system with one example.The case mentioned here in this study is thepersonal network storage device for a Koreanventure firm, M. As technology that has some-thing to do with the network storage device, thistechnology links the physical network device to ahard disk driver, and files can be shared betweendifferent types of machines by installing an Inter-net file system in a way that it allows the storingand sharing of the files by making access to the

window system. This is an actual case to whichthe methodology presented in the study has beenapplied in order to estimate the value ofthe technology of a network storing device beforetechnology transfer or granting loans for thetechnology.

4.1. Analysis of expected returns

When considering the market size created by apeculiar technology and its cost of production,expected returns analysis is a process in decidingits estimated profit potentials. The steps of theexpected returns analysis are Entering the profitgeneration period and the type of technologyEstimating the market size Estimating the coststructure Estimating the present value ofexpected returns.

4.1.1. Entry of profit generation period and thetype of technologyThe user enters the profit generation period andthe type of technology using the same screen asshown in Figure 6. The profit generation period isthe number of years during which excess profitcan continue to be created by the pertainingtechnology. It is not an easy task estimating theperiod of profit generation; however, a rationalestimation is possible by analysing the currentsituation in the industry and the market outlook.Hong et al. (2001) states several useful methods inestimating this period. For the manufacturingindustry, this term is usually under 5 years, andaccording to an analysis of contract period ofKorea’s international technology transfer, thisterm is usually between 3 and 7 years. It can behelpful to refer to these data when determiningthe profit generation period.

Estimating the profit generation period of anindividual technology is a very complicated pro-cess, and it is nearly impossible to attain a degreeof confidence. Therefore, such estimation tends todepend on the subjective judgement of the devel-oper or the owner of technology. It is possible,however, to indirectly estimate the profit genera-tion period of a similar technology by using theBibliometrics method for instance, a measure thatmakes use of patents information. Should thetechnology in question be registered with the USpatents office, its technology life cycle can bepredicted by analysing the number of times ithas been referenced by other technologies. Onemay also estimate the technology life cycle byapplying this analysis of reference frequency to


r 2007 The Authors



similar patent technologies or those belonging torelated technology group. The performance ofresearch and development activities can be as-sessed through the reference frequency methodrelying on Bibliometrics (Moed, 1989). Also, byexpanding upon previous research, which statesthat the mapping of research and developmentareas can be used to grasp dynamic and structuralaspects of technology, such as the direction oftechnological development and infrastructure, theeffectiveness of technology can be estimated usingthe reference frequency, and this information canbe used as a complementary resource for estimat-ing the profit generation period (Braam, 1991).

The residual value period refers to the periodduring which the technology still maintains itsresidual value after the profit generation periodhas ended. The time required to commercializeand the amount of required expenses are dataused when assessing the value of a technologyfrom the perspective of the buyer. Besides these,the user selects the core product and the industrythat relies on the technology. As explained before,risk-free interest rate is used as a discount rate

when converting future-expected profit to presentvalue. As shown at the bottom portion of thefigure, the user has to choose one of the technol-ogy classifications.

4.1.2. Market size estimationIn the case of the new market creation technol-ogy, a new product market is created based uponthe new technology, and therefore the market sizemust be estimated during the profit generationperiod. In the case of the existing market penetra-tion technology, the total market size and themarket share of the product based on the newtechnology is estimated during the profit genera-tion period. For the cost structure improvementtechnology, as the market has been alreadyformed by an existing product, it is relatively aneasy task gauging the market size.

The case mentioned in this research is anexisting market penetration technology, andtherefore the total market size and market shareduring 4 years of profit generation period have tobe inputted. Figure 7 is the result screen afterhaving sized up the market size, and therefore it

Figure 6. Profit generation period and technology classification.




shows the yearly trend of total market size andthe market share of the technology. Though it isnot shown in the figure, annual data on themarket size and the growth rate of the industry,to which the technology’s product belongs to, isactually shown at the bottom part of the page andcan be very helpful. This page is designed so thatthe data can be extracted and attached as areference to support any assessments.

4.1.3. Cost structure estimationThis is step for indirectly estimating the coststructure by estimating operations profitabilityduring the profit generation period. There is aninput window for entering the rate of operatingincome during 4 years of profit generation. Toassist in gauging the rate, this system provides theaverage industry rate of operating income alongwith the average rate of operating income forcompanies (the user can select up to three) thatare most closely related to the technology underevaluation. In the case of personal network sto-rage device technology, the rate of operatingincome during the profit generation period hasbeen estimated as 20–25%.

Once the estimation of market size and the rateof operating income for the profit generation

period is completed, the annual expected returnsis automatically calculated by the formula. Ex-pected returns in this research relied on operatingincome, and annual expected returns is extractedby multiplying the yearly market size with the rateof operating income.

4.1.4. Estimating the present value of expectedreturnsAt this point, the expected returns from technol-ogy is converted into present value. This steparises from the need to consider the present valueof future profits in order to make a decision abouttechnology transfer. The expected returns is easilyconverted into present value by using the formulaexplained in Chapter 3.1. The residual value oftechnology must also be taken into account toestimate the present value. One must determinewhether or not to count the residual value oftechnology that remains after the profit genera-tion period is over. This is a question that must beanswered in consideration of each technology’scharacteristics, however, this case analyzed theresidual value to last for 1 year. Here we assumedthe residual value to equal the expected return(on the last year of profit generation period)depreciated at a rate of 50% each year. In this

Figure 7. Estimation of market size.


r 2007 The Authors



case, the present value is estimated to be1,667,000,000 wons with residual value, and1,184,500,000 wons without.

4.2. Analysis of technology’s degree ofcontribution

The objective of this analysis is to figure out theportion contributed purely by technology to thepresent value of expected returns calculated inthe earlier chapter. The analysis proceeds asfollows: Calculating the technology contributioncoefficient according to level of innovation andindustry characteristic classification Adjustingthe technology contribution coefficient Calcula-tion of profit contributed purely by technology.

4.2.1. Calculation of technology contributioncoefficient according to classification of stage ofinnovation and industry characteristicsThis research applied the stage of innovation andindustry characteristics to calculate the technol-ogy contribution coefficient. Figure 8 explains theprocess of calculating the contribution coefficient.This process identifies technology’s stage of in-novation and industry characteristics, and thenutilizes the technology contribution matrix inFigure 4 to determine the ranking of contribution(Levels 1–9) The contribution coefficient for eachranking is not a single value, but it is a range ofvalue where the upper and lower 50% of the valueoverlaps with that of adjacent ranks.

Figure 9 portrays the logic behind the processof judging the stage of innovation for the tech-nology under evaluation. According to ADLdefinitions, the stages in technology life cycle areclassified into base technology, emerging technol-ogy, pacing technology, and key technology(Burgelman et al., 1988). This classification is a

very feasible approach to use when it comes to aconsistent classification to determine the life cycleof technologies in the same industry. However, inthe area of the technology evaluation, we seefusion technologies across different industriescome up quite often and they also have a higheconomic value. This research added core tech-nology to the technology classification consider-ing technology’s potential competitiveness, degreeof actualization, extent of proliferation, and effecton other industries. In the system, core technol-ogy is very essential in securing competitivenessas it has a quite significant impact on the cost,quality, and function of a product. It is alsodefined as a technology that has percussion toother industries and high potential for expansion.

A technology is classified into base technology,emerging technology, pacing technology, keytechnology, and core technology, and in addition,technology’s potential competitiveness, degree ofactualization, extent of proliferation, and effecton other industries are also evaluated.

Figure 10 is the screen for classification ofindustry characteristics and technology’s level ofinnovation. Industry characteristics measures theimportance of technology as an intangible asset inthe industry, and this data can be deduced fromthe industry average R&D investment ratio (vs.total sales) and the ratio of intangible asset tototal sales. Using the KSIC’s added value totangible assets ratio information provided by theKorea National Statistical Office, 99 industrieshave been divided equally into five groups. Theindustries were classified according to the size oftheir added value to intangible assets ratio in theorder of very low, low, average, high, and veryhigh. In this case, the classification is automatedby entering the industry classification code inFigure 7. Then the user is presented with a setof survey questions whose answer will determine

Technology Stageof Innovation

IndustryCharacteristics

Matrix for technology'sdegree 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%

determine the ranking of contribution

Figure 8. Calculation process for technology contribution coefficient.




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

Critical impact on the cost, quality, and performance of the product.

The potential value has been proved,however, it has not been realized by endproduct or process.

The potential influence on competitive power is uncertain.

Low level of impact on competency. Relatively well-known and also commonly shared.

Definition

(5)Core

(4)Key

Level

(1)Basic

(3)Pacing

(2)Emerging

New technology, and thepotential value is

uncertain

The potential competence has been

proved

Potential competence

The technology has notbeen realized by endproduct or process.

The technology hasbeen realized by endproduct or process.

Level of Realization

(2)

(3)

Low level of impact oncompetency. Well-knownand commonly shared.

Essential tech as only certain companies possess it

Level of Spread

(1)

Extension toother industry isuncertain.

Easily extendable toother industry.

Extension to other industry

(4)

Applied to otherindustry. Critical impact on competitiveness

(5)Yes

No

Figure 9. Logics to decide the stage of innovation.

Figure 10. Industry characteristics.


r 2007 The Authors



the technology’s stage of innovation. For the caseof personal network storage device technology,the level of innovation is ‘key technology,’ whileindustrial characteristic is ‘very high.’ Thus, thetechnology receives a ranking of Level 8 in thetechnology contribution matrix, and the range oftechnology contribution coefficient is 33–37%.

4.2.2. Adjustment of technology contributioncoefficientAlthough there is little doubt that the stage ofinnovation and industry characteristics are im-portant factors to consider when calculating thetechnology contribution coefficient, it is alsoapparent that this coefficient must be adjustedto reflect other factors that influence technologycontribution. This research thought it necessaryto include technology’s dominance, exclusiveness,and limitations.

Technology’s dominance refers to the super-iority of technology itself and how much of adifferentiated value the technology can offer incomparison with other technologies. It also mea-sures technology’s applicability and transferabil-ity. Technology’s exclusiveness deals withwhether or not there is any difficulty in exercisingthe exclusive right to possess and use the technol-

ogy and how convenient it is to protect the use ofthat technology. Finally, technology’s limitationsare concerned with any competitive or socioeco-nomic restraints on commercializing and utilizingthe given technology.

In order to assess these other factors, thetechnology valuation system presents a 10-ques-tion survey, which the valuator must fill out foreach factor using a five-point scale. The results ofthe questionnaires are used to adjust the technol-ogy contribution coefficient, and the range ofadjustment has been fixed at �6–0%. This paper,however, will exclude a detailed explanation onthe content of the survey questions and thereasoning behind the adjustment of technologycontribution coefficient.

4.2.3. Calculation of returns contributed bytechnologyFigure 11 is a screen displaying the calculatedresult of returns contributed by technology. Theestimated present value and returns attributed totechnology are shown for both cases where theresidual value is considered and where it is not.As the technology contribution coefficient has a‘range’ of values as explained beforehand, thereturns contributed by technology is also pre-

Figure 11. Amount of technology value.




sented as a range of values. It seems morereasonable to show returns contributed by tech-nology as a range of values rather than a singleprice. For the personal network storage devicetechnology investigated in this case, the returnscontributed by technology with residual value is501 million � 567 million wons, while withoutresidual value is 356 million � 403 millionwons.

4.3. Technology valuation from thebuyer’s perspective

The time it takes for commercialization, risk-freeinterest rate, and the expected returns, which haveall been entered in Figure 6, are automaticallyinserted into the formula explained in Chapter 3.3to compute the value of technology from thebuyer’s perspective. The estimated value of tech-nology is listed at the bottom of Figure 11. Thevalue with residual value is 354 million � 420million wons, while without residual value is 209million � 256 million wons.

The value of technology assessed by our re-search model is a different concept from thetransfer price between buyers and sellers of tech-nology transfer. Transfer price is determined notonly by technology value, but by variables such asbargaining power of parties to transaction, un-certainty of commercialization, and the economicoutlook. Thus, for an individual company seekingto use this research’s valuation model to analyzethe price of technology transfer in a negotiation,the technology transfer price negotiation model in

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

5. Conclusion

At a period when the national competitivenessincreasingly depends on technology, there is anurgent need for technology, in the manner ofother goods, to contribute to dissemination ofknowledge through active exchanges. In this re-search, we worked out an objective value oftechnology, a value that is of utmost importanceto vitalizing technology trade and transfer, andattempted to embody this impartial value in atechnology valuation system.

Unlike the previous research that mainly as-sessed technology value from the interest of theholder of technology, this research tried to assaythe value of technology from an impartial andobjective point of view, and such value can beused as the basic data for technology transferprice negotiations. Also, with the creation of aweb-based technology valuation system, both thebuyer and the seller can easily measure the valueof any technology of interest.

As this research evaluates already fully devel-oped technology for the purpose of transfer, itmay not be completely suitable for evaluatingtechnology for public or corporation researchand development programs or investment deci-sions regarding technology development. Havinga scientific and well-organized system at theassessment and selection process is necessary toincrease the effectiveness and efficiency of re-search and development programs. For instance,

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

Sum(Transfer Cost, Opportunity Cost)

Min.(Expected profit of importer, the cost of alternative technology, Internaldevelopment cost,Opportunity cost of unauthorizedusage)

Sum(Transfer cost of tech owner)

Negotiation scope

Owner

Importer

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


r 2007 The Authors



many leading nations carry out an economicanalysis on proposed projects to create a prioritylist of research programs. To reflect such de-mands, the results of this research must not belimited to technology valuation of already com-pleted technology, but must be expanded tobecome a model to aid in evaluation and selectionof research and development programs.

There was one technology that has actuallybeen traded on the Korea Technology TransferCenter out of the ones whose value were evalu-ated using the Technology Valuation System thatwe developed. The actual price at which thetechnology was traded was within the price rangethat the Technology Valuation System came upwith. However, one case is not enough to supportthat this is superior to alternative or has someobjective value. So this is the limit that this studyhas. In an attempt to overcome this limit, wewould like to try the following two approaches.First one is to track the technologies that haveactually been traded out of the ones whose valuewere evaluated using the technology valuationsystem that we developed so that the values thatthe system estimated can be compared with theactual values at which they are traded. Secondone is to apply the technology valuation systemon the technologies that are traded in the tech-nology exchange in order to compare the valuesthat the system came up with and the actual ones.These approaches are expected to allow us torefine the methodologies that we suggested in thestudy and verify the feasibility and superiorityof the methodology suggested in the study.

References

Boer, F.P. (1999) The Valuation of Technology. New

York: John Wiley & Sons.

Braam, R.R. (1991) Mapping of Science: Foci of

Intellectual Interest in Scientific Literature, Ph.D.

Thesis, Leiden.

Burgelman, R.A., Kosnik, T.J. and Poel, M. (1988)

Toward an innovative capabilities audit framework.

In Burgelman, R.A. and Maidique, M.A. (eds),

Strategic Management of Technology and Innovation.

Homewood, IL: Irwin, pp. 31–44.

Copeland, T. and Antikarov, V. (2001) Real Options:

A Practitioner’s Guide. London: Texere.

Goldheim, D., Slowinski, G., Daniele, J., Hummel, E.

and Tao, J. (2005) Extracting value from intellectual

asset. Research Technology Management, 48, 2,

43–48.

Hagelin, T. (2004) Valuation of patent licenses. Texas

Intellectual Property Law Journal, 12, 423–441.

Heo, E.N. (2000) Recent developments on economic

valuation method: CVA MAUA and ral option

pricing. Journal of Korea Technology Innovation

Society, 3, 1, 37–54.

Hong, G.P., Kim, H. and Sul, W. (2001) Technology

Valuation Model for Technology Transfer, KISTI

Research Paper.

Hong, G.P., Kim, H., Sul, W. and Baek, D.H. (2002),

Technology Valuation Model for Effective R&D

Investment Decision-makings, KISTI Research

Paper.

Lee, J.O. (2001) A comprehensive model of economic

valuation for technology. STEPI Journal of Science

& Technology Policy, 11, 2, 21–35.

Lee, S.P. (1999) Valuation Model for Individual Tech-

nology, Small and Medium Business Administration

Research Paper.

McGrath, R.G. and MacMillan, I.C. (2000) Assessing

technology projects using real options reasoning.

Research Technology Management, 43, 2, 35–49.

Moed, H.F. (1989) Bibliometric measurement of

research performance and Price’s theory of differ-

ences among the sciences. Scientometrics, 15, 5–6,

473–485.

Moon, Y.H. (2000), How assess the value of technol-

ogy?, KINITI Research Paper BW112.

Reilly, R.F. and Schweihs, R.P. (1998) Valuing

Intangible Assets, McGraw-Hill, New York.

Remer, S., Ang, S.H. and Baden-Fuller, C. (2001)

Dealing with uncertainties in the biotechnology

industry: the use of real options reasoning. Journal

of Commercial Biotechnology, 8, 2, 95–105.

Seol, S.S. (2000) A theoretical framework for the

valuation of technology. Journal of Korea

Technology Innovation Society, 3, 1, 5–21.

Simon, H.A. (1960) The New Science of Management

Decision. New York: Harper and Row.

Smith, G.V. and Parr, R.L. (2000) Valuation of

Intellectual Property and Intangible Assets (3rd ed).

New York: John Wiley & Sons.

Yang, D.W. (2000) Valuation for technology on the

practical viewpoint. Journal of Korea Technology

Innovation Society, 3, 1, 68–84.




a technology valuation model to support technology ... valuation.pdf · a technology valuation...

Documents