A technology valuation model

to support technology
transfer negotiations
Dong-Hyun Baek1, Wonsik Sul2, Kil-Pyo Hong3
and Hun Kim3
1
Department of Business Administration, Hanyang University, 1271 Sa-l dong, Sangnok-ku,
Ansan, Kyeonggi-do, 426–791, Korea. estarbaek@hanyang.ac.kr
2
Corresponding author: Division of Business Administration, Sookmyung Women’s 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,
330–704, Korea. kphong@bu.ac.kr, hkim@bu.ac.kr

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 trade and transfer of technology, but informa-

tion, especially reliable information on the value

I t is an established notion that technology

innovation plays a vital role in building na-
tional competitiveness, and every state and cor-
of technology is as important. The problem arises
because information on technology cannot be
provided like general goods, and, thus the role
poration is concentrating on fortifying their of a technology valuation as a complementary
global competitiveness with high technology de- measure becomes very important. There is a
velopment capability that is difficult to imitate. In special need to evaluate the value of a specific
order to facilitate the advancement and develop- technology from an objective perspective in order
ment process of high technology, a market for to encourage technology transfer. As the market
technology transfer must be promoted. In Korea, price is used for the basis on price negotiation in
to do this, Technology Transfer Committee was trading goods, an objective value of a specific
established in February 2000, along with Korea technology must be presented in advance for the
Technology Transfer Center and Certified Value negotiation to be carried between buyers and
Advisor in April and December of the same year, sellers of technology.
respectively, to provide institutional support for Accordingly, much attention has been focused
encouraging technology transfer. on evaluating the objective value of technology in
Institutional support such as technology Korea. Many organizations including Korea In-
brokerage and exchange is necessary for active stitute of Industrial Technology Evaluation and

R&D Management 37, 2, 2007. r 2007 The Authors. Journal compilation r 2007 Blackwell Publishing Ltd, 123
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
Dong-Hyun Baek, Wonsik Sul, Kil-Pyo Hong and Hun Kim

Planning, Korea Institute of Science & Technol- the process, enabling an objective and reliable
ogy Evaluation and Planning, and Korea Tech- appraisal with the use of as much objective
nology Credit Guarantee Fund have been using information as possible in the estimation of
various valuation models to perform evaluations parameters.
for aiding decisions regarding investment and This paper is organized as follows. Section 2
putting up technology as collateral. Yet, it is introduces previous research on technology va-
difficult to promote technology trade and transfer luation. Section 3 introduces the technology
with the usual valuation process that focuses on valuation model presented by this research, while
the technology itself. Valuation models thus far the explanation on the technology valuation sys-
have assessed the value of technology from the tem will be given in Section 4. Finally, Section 5
perspective of the firm in possession of the tech- follows up with the conclusion.
nology, but such assessment is greatly influenced
by the firm’s technological capability, capitaliza-
tion, brand, and human resources. However,
what the market needs is the worth of technology
2. Concept of technology valuation and
as a product to be traded in the market, and this
previous research
calls for an impartial and objective value that is
not influenced by the specific company that owns
2.1. Concept of technology, value, and
technology valuation
it. But, as no appropriate valuation method has
been proposed thus far, there is a need for a new Technology, which becomes the object of technol-
way of appraisal. ogy valuation, is divided into broad and narrow
The systems that encourage technology transfer definition of technology. Narrow concept of tech-
can be classified into two in general: a simple nology refers to intellectual property including
system that just builds and offers data on the patent, utility model patent, and trademark in
information about the technology to transfer and addition to disparate technology such as kno-
the other one that encourages technology transfer whow, trade secret, and computer software. Broad
by making evaluations of technologies in various concept is not limited to individual technology,
perspectives. One of the examples of the former but covers the firm’s total technological capability
is the Tech-Net run by SBA (Small Business as well. Technology is valuable as an asset and is
Administration) of USA and the latter is Value- identified as an intangible asset. Intangible assets
Based Modeling of Defense Diversification with technical basis are varied in character and
Agency in Britain and the TOP-Index system of include patent rights, trade secret, knowhow,
National Technology Transfer Center in USA. computer software, database, and operations
This paper’s objective is the development of a guide. Intellectual property alludes to those whose
technology valuation system that will support the possession is recognized and protected by the law,
development of technology valuation models and and it is comprised of trademark, copyright,
the valuation process according to those models computer software, patent, industrial design, and
with the intention of promoting technology trade trade secrets. Technologies that are not defined as
and transfer. According to Simon’s (1960) identi- intellectual properties are mostly those that are
fication of different types of decision-making difficult to recognize or difficult to assess their
problems, assessing the value of technology can value independent of the owner (company, indi-
be seen as an unstructured problem. As no vidual), and it is rare for such technology to
regulation or procedure for technology valuation become the object of valuation.
exists, the decision-maker’s judgment becomes Economically speaking, the value refers to the
absolutely influential. By applying the technology opportunity cost, which becomes the standard of
valuation model suggested by this research, how- the transaction, while the market price becomes the
ever, this unstructured problem is converted into exchange value when a perfect market is assumed.
a semi-structured problem with some regulation However, as the market for technology cannot be
and procedure. Yet, there still remains the diffi- created easily, a difficulty arises in determining the
culty of having to rely on the subjective judgment exchange value of technology through the market
of the decision maker for estimation of diverse mechanism efficiently. Accordingly, additional ef-
parameters used in the evaluation. The technol- fort in estimating the fair market value, supposing
ogy valuation system developed in this research a competitive market, is required.
will not only guide the assessment process, but Generally, the fair market value is defined as
will provide prompt information for each step in ‘the price at which willing parties, who have not

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

Journal compilation r 2007 Blackwell Publishing Ltd
 Model to support technology transfer negotiations

been coerced and possess rational information, model. The difficulty is attributed to the fact
have agreed to trade their asset’ (Seol, 2000). It is that the model, the range of its variables, and
almost impossible, however, to come across such the measurement range for each variable are all
a perfect deal in reality, and, thus this value affected by the intent of valuation. This research
assumes a transaction between virtual buyer and limits itself to technology valuation that is repre-
seller. Particularly, it presupposes an economic or sented by the monetary, economic value of the
market condition occurring at a specific point of firm and its business units.
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
2.2. Previous research on technology
form. The technology valuation attempts to esti-
valuation
mate this market value. When valuing technology in order to evaluate its
Nonetheless, the content of technology valua- economic worth from a microscopic point of
tion can vary in accordance with the perspective view, previous research have suggested cost ap-
taken by the assessor. Seol (2000) suggested that proach methods, market approach methods, in-
technology valuation has four aspects, each with come approach methods, and real options as
a different theoretical basis, while Lee’s (2001) major valuation methods. First, the cost ap-
research proposed various concepts and methods proach methods estimates the cost of recreating
of technology valuation, such as assessment of the future utility of the technology being valuated,
company’s internal competence and technology and assumes this value to be the future returns
forecast for analysing changing trends. From the from the technology (Smith and Parr, 2000).
viewpoint of government policy, these varying Technology assessment is done by calculating
technology valuation methods exhibit a strong the reproduction cost of acquiring the same
tendency to survey technology’s environmental technology or the substitute cost of acquiring a
and socioeconomic impact, while assaying the similar asset, and then reflecting depreciation.
side effect on the industry from the macroeco- The cost approach method is useful when asses-
nomic perspective. Also, while the manager of sing intangible assets such as software, but its
government research and development invest- weakness lies in that equal amount of investment
ment will find it necessary to set a priority on does not always result in the same level of
proposed technology development projects, the technology and that it does not take into account
individual corporation will be interested in eval- important elements such as future risks and
uating a technology for its economic efficiency. economic benefits that can be obtained from the
Various outlooks regarding technology valuation assets.
is organized in Figure 1. Secondly, a technology valuation model based
With so many different perspectives on tech- on the market approach method estimates the
nology valuation, it is very challenging to present market price of a similar technology that has
a generally applicable technology valuation already been traded on the market and applies it

Economic Value
Economic Impact Technology
Analysis Valuation

Cost Benefit Analysis

Competence
Technology Evaluation
Assessment
Non-Economic Value Technology Foresight

Country Level Industry Level Firm Level

<Macro> <Micro>

Figure 1. Various outlooks regarding technology valuation.

r 2007 The Authors R&D Management 37, 2, 2007 125

Journal compilation r 2007 Blackwell Publishing Ltd
Dong-Hyun Baek, Wonsik Sul, Kil-Pyo Hong and Hun Kim

to their assessment (Reilly and Schweihs, 1998). pected returns, and while its benefit is that it
Generally, if there already exists a comparative recognizes uncertainty as an opportunity, its
market where assets are being actively traded, and downside is the difficulty of applying the model
if information on the transaction costs is readily to a real situation because of complexity of
available, it can become a practical method. In calculating important variables and the tacit ac-
this sense, while it is effective for assessing real ceptance of the rationality assumption (Hong et
estate, vehicles, general purpose computer soft- al., 2002).
ware, liquor license, and franchises, it is not Majority of the studies done already has chosen
effective for assessing the cases like most intangi- the most appropriate model out of the existing
ble assets or intellectual property, where similar ones based on the goals and perspective of the
instances of transactions are infrequent or the evaluator. However, more and more attempts
details of the transactions are not revealed. have been made to create an integrated model
Thirdly, the income approach method consid- that combines individual and different models
ers the sum of the present values of future cash into one. For example, Boer’s Technology Valua-
flows of the technology as the value of the tion Solutions focuses on how to integrate cash
technology. This concept, disregarding the costs flow, decision tree, and real options approaches
of technology development, determines the value (Boer, 1999). As the goals, assumptions, and the
of the technology according to its feasibility of approach of different models vary greatly, the
creating expected profits (Boer, 1999). The in- technology valuator up till now had always ended
come approach method is currently being sub- up choosing the model that best suits his objective
divided into different branches according to its and perspective.
various facets surrounding the assessment of
the future expected profit. These facets include the
estimation of the income generation period, the 3. Designing technology valuation model
estimation of future income, the risks of no profit, for promoting technology transfer
and the conversion of future earning into present
value. Among these, the discounted cash flow This research aims to suggest a technology valua-
method is the most widely used. The discounted tion model that is based on the income approach
cash flow first subtracts expenses from the cash method and the real options and can express the
flow received from the usage of assets, and then objective value of a specific technology in eco-
this net cash flow is adjusted at a proper discount nomic terms (monetary amount). In so far as an
rate. This method, while suitable for patents, objective value of a technology can become the
registered trademarks, copyright, and other in- starting point of a price negotiation between the
tellectual properties that can create a future buyer and the seller, technology transfer will be
profit, it has the disadvantage of being unable to further promoted by having such a reference
accurately reflect the value of technology that price.
does not create a direct profit but, nevertheless, The technology valuation model outlined by
bring value to the company, or technologies this research can be divided into three steps as can
where future profits are hard to estimate. be seen in Figure 2. The expected returns analysis
The fourth method of real options incorporates (Step I) utilizes product market and cost structure
the financial concept of options in technology analysis according to different technology types in
valuation, and as options are not considered as order to calculate the amount of profit that can be
an obligation but a right, the investors have the created during a specific period. The amount of
opportunity to correct their decision according to profit is then converted into its present value
future environment (Copeland and Antikarov, based on the discounted cash flow model.
2001). Using real options in investment decisions Technology contribution analysis (Step II) cal-
such as research and development projects and culates technology’s degree of contribution (tech-
technology transfer can guarantee flexibility nology contribution coefficient) to expected
against future uncertainty in decision making. returns by taking into account the technology’s
Heo (2000) stated that real options is not simply level of innovation and the characteristics of the
a model that expresses the value of an option industry it belongs. The technology contribution
attached to an investment alternative, but that by coefficient is then corrected to reflect technology’s
itself is a complete valuation model of an invest- dominance, exclusivity, and limitations. The ex-
ment alternative. The real options model does not pected returns from Step I is multiplied by the
need to rely on a subjective assessment of ex- technology contribution coefficient in Step II to

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

Journal compilation r 2007 Blackwell Publishing Ltd
 I. Expected returns analysis

The annual
Calculating
Calculating
Analyzing operating profits the present
the amount of
market and value of
The annual expected operating
cost structure market size operating

r 2007 The Authors

income
(average growth rate) income
Present value of returns
The annual expected profit generation
Operating profits period
(average operating
Scrap value of technology
profit rate)
profit generation period
core product (classification) Analyzing
Generation type of technology value profit
Analyzing
generation
scrap value
period

profit generation period

A title scrap period Estimating

Journal compilation r 2007 Blackwell Publishing Ltd

the returns
The annual expected market size contributed by
A Title scrap period technology
returns contributed
Analyzing by technology
technology
outline Calculation of
technology contribution
technology classifications
(special permission
classification) II. Technology contribution analysis computing
the value of
Calculating Calculating fluctuation technology
Analyzing Adjusting fluctuation
Technology’s from the buyer's
technology Technology
Steps of technological Degree of Calculation of perspective
characteristics technology contribution
innovation contribution
Industrial characteristics contribution
Industry cost
risk-free interest rate
profit generation period
Limitation
Technology’s Exclusive III.Technology valuation
Of technology
dominance dominance from buyer‘s perspective
estimate

R&D Management 37, 2, 2007

Model to support technology transfer negotiations

127
Figure 2. Technology valuation model.
Dong-Hyun Baek, Wonsik Sul, Kil-Pyo Hong and Hun Kim

technology

New market creation Existing penetration Cost structure

technology technology improvement technology

Produce profits by Produce profits Produce profits

creating new product by improving
or services By substituting cost efficiency

The present value of expected returns

Figure 3. Classification of technologies.

produce returns contributed by technology, which residual value of technology. In the case of cost
is the objective value of a particular technology. structure improvement technology, it is possible
The technology valuation from the buyer’s to figure out the market size for the existing
perspective (Step III) considers additional devel- product, and thus, the only process required is
opment costs, adjustment period and costs for approximating the rate of additional cost im-
commercialization, and dynamics of profit to provement from making use of new technology.
assess the value of technology from the buyer’s Once the expected returns is calculated, it can be
position. The decision on whether or not to divided by appropriate discount rate to be con-
purchase a particular technology depends on the verted into present value. The equation below is
comparison of this value to the returns contrib- used to estimate the present value of expected
uted by technology calculated in Step II. Each returns.
step will be explained in detail in this chapter. Xn
CFt CF1 CF2
NI ¼ t ¼ 1
þ
t¼1 ð1 þ rÞ ð1 þ rÞ ð1 þ rÞ2
CFn
3.1. Analysis of expected returns þ


þ
ð1 þ rÞn
The first step of technology valuation is calculat-
where NI is the present value of expected returns,
ing the present value of expected returns from the
CFt the future cash flow and r the discount rate.
technology. A classification of technologies must
be made for this purpose. Figure 3 classifies
technology into three types, and the new market
creation technology and existing market penetra-
3.2. Analysis of technology’s degree of
tion technology are product technologies that
contribution
produce profits by creating new markets or by Technology’s degree of contribution refers to
substituting existing ones. On the other hand, cost percentage of profit that is purely attributable to
structure improvement technology is a manufac- technology itself. As there are many sources of
turing technology that does not increase the profit increasing, and since they cannot be judged
revenue or the size of the market, but it improves to be independent of each other, it is very difficult
the profitability by altering the cost structure. to extract the amount contributed by technology
Earlier studies have focused on product technol- alone. Accordingly, this research model first de-
ogy as it was more convenient to estimate their fines the range of general degree of contribution,
profits, but manufacturing technology is also an and then calculates the appropriate degree of
important object of technology valuation. contribution coefficient for individual technology,
Expected returns from new market creation taking into account each technology’s trait and
and existing market penetration technologies is the industrial characteristics.
calculated by projecting the time period during As many previous studies and actual practice
which surplus profits can be gained, estimating concerning technology valuation have estimated
the amount of profit per year, and by adding the the proportion of contribution of technological

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

Journal compilation r 2007 Blackwell Publishing Ltd
 Model to support technology transfer negotiations

33~39%

25~33%

19~25% 5 6 7 8 9
Core Technology

Key Technology 4 5 6 7 8
Technology Stage
of Innovation Pacing Technology 3 4 5 6 7

Emerging Technology 2 3 4 5 6
9
Base Technology 1 2 3 4 5
7
Very low Low High Very High 8
Average
5
Technology Contribution Coefficient
6
according to Industry Characteristic
3
4
1
2

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

asset to be around 1/4 to 1/3, this research has and this process will allow the objective value of a
also adopted a range of 25–33% as standard. technology to be evaluated in monetary terms.
Because the industry and the characteristic in- Generally, many research and field works con-
herent in the technology itself can exert a great cerning technology valuation assumes the degree
influence on technology valuation (Seol, 2000; of contribution of technology assets to be about
Yang, 2000), we have constructed a matrix that from 1/4 to 1/3. This is not a logically arrived
can adjust the degree of technology contribution figure, but rather an assumption that takes into
according to industry and technology specifics. consideration the general practice of identifying
The matrix in Figure 4 is composed of two intangible assets into three or four types and
dimensions: (1) the importance of intangible asset believes such figure to be reasonable in light of
or technology as a factor of competitive advan- field experience.
tage in the industry and (2) the measure of Yet as such number is illogical, and as reality
technology’s rarity, development potential, and dictates that individual categories of intangible
side effect in line with its stage of innovation. assets are not mutually independent, technology
Using this matrix, a technology can be classified valuation becomes difficult and quantifying the
from the lowest rank (Level 1: low proportion of valuation even more so (Yang, 2000). According
intangible asset and low rarity in its stage of to a study by Lee (1999), technology’s degree of
innovation) to the highest (Level 9: high propor- contribution is generally determined to be 10%,
tion of intangible asset and very rare in its stage of 25%, and 30%, and this ratio is determined by the
innovation, while having a great side effect. evaluation committee according to the technol-
After determining the range of degree of con- ogy’s field, industry, and characteristics. Moon’s
tribution in reflection of the industry and technol- (2000) research revealed that the 25% rule is
ogy characteristics, the model calculates the generally applied in accordance with customary
adjustment coefficients to take into consideration commercial laws, and this method sets the royalty
technology’s dominance, exclusivity, and limita- received from using licensed intellectual property
tions. The final degree of technology contribution to be 25% of earnings before tax deduction.
is calculated by reflecting the adjustment coeffi- Hagelin (2004) mentioned that ‘The 25 Percent
cient upon the coefficient for degree of technology Rule is often claimed to be the most widely used
contribution worked out in the previous step. The license valuation method.’ Goldheim et al.’s (2005)
degree of technology contribution is used to ex- study also suggested that 25% rule is the hybrid
tract the portion of present value of expected and advanced method that considers additional
future profits that can be attributed to technology, factors to arrive at a more insightful valuation.

r 2007 The Authors R&D Management 37, 2, 2007 129

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

Thus, the most practical method of estimating been made to traditional Black–Scholes model to
the weight of factors that influence technology’s turn it into a real options model. The value of call
degree of contribution would be to rely on qua- option in the original model has been changed to
litative evaluation of professionals who would the value of technology from the buyer’s perspec-
take into account the characteristic of individual tive, the price of the underlying asset into the
technology and the industry. Yet it is recom- present value of expected returns from technol-
mended that the Analytic Hierarchy Process be ogy, the exercise price into the amounts of invest-
used to increase the degree of confidence by ment needed to commercialize the technology, the
extracting the relative weight of factors influen- volatility of the underlying asset into the volatility
cing technological contribution from many pro- of expected returns, and the time to maturity into
fessional groups. the time period during which commercialization
can be attempted without losing rights to the
technology.
Black-Scholes option model has been applied in
3.3. Technology valuation from the diverse formats in the real option model as it is seen
buyer’s perspective in the studies done by McGrath and MacMillan
The objective value of individual technology can (2000), Remer et al. (2001). When applying the real
become an important reference for technology options on research and development (R&D) or
transfer. However, from the buyer’s perspective, project investment, S usually refers to ‘present
the information on the amount of expected earn- value of the expected cash inflows from project,’
ings in the future may be more important. In- while X indicates ‘present value of the expenditures
dividual technology’s future profitability can vary needed to accomplish project’ (Remer et al., 2001,
according to who owns the technology, and it p. 99). When applying our model in this perspec-
signifies that the value of technology can change tive, X means ‘the additional investment to com-
in tune with the owner’s capital strength, technol- mercialization’ and S refers to ‘the present value of
ogy, and human resources. As expected gains expected returns from technology’ as the purchaser
from technology can fluctuate depending on the needs to make investment to commercialize the
buyer, a technology valuation model that can technology later.
reflect the uncertain future must be introduced.
Thus, the real options model has been added to
this purpose. 4. Technology valuation system
Various real option models exist by applying
the concept of options traded in the financial In order for individuals to be able to review
market to technology valuation, but this research quickly and accurately the value of a particular
has utilized an altered Black–Scholes option pri- technology by using the technology valuation
cing model. Figure 5 depicts changes that have models explained in Chapter III, a technology

− rT
V = N (d1 )S − N (d 2
) Xe
2
d 1 = [ln( S / X ) + ( r + 0 . 5 σ )T ] / σ T
d 2 = d1 − σ T

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

Figure 5. Real options model for technology valuation.

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 Model to support technology transfer negotiations

valuation system that guides them through window system. This is an actual case to which
the process, supplies the necessary data, and the methodology presented in the study has been
calculates the value of the technology according applied in order to estimate the value of
to the value assessment formula within the assess- the technology of a network storing device before
ment model needs to be developed. To achieve technology transfer or granting loans for the
this goal, through this research, a web-based technology.
technology valuation system was created that
can be used by technology suppliers, technology
buyers, those wanting technology development, 4.1. Analysis of expected returns
and those able to develop new technologies.
Under this system, the user will able to assess When considering the market size created by a
technologies constantly, rapidly, and efficiently, peculiar technology and its cost of production,
and therefore this system will contribute to the expected returns analysis is a process in deciding
acceleration of technology transfer, proliferation, its estimated profit potentials. The steps of the
and commercialization. expected returns analysis are Entering the profit
This system will be available for use on the generation period and the type of technology
webpage of Korea Institute of Science and Tech- Estimating the market size Estimating the cost
nology Information (KISTI) at ‘http://www. structure Estimating the present value of
itechvalue.org’ by accessing it using your web expected returns.
browser. On the upper section of the webpage,
there is a ‘Technology Valuation’ menu, and it 4.1.1. Entry of profit generation period and the
is divided into general and professional use. You type of technology
can access the general use section if you complete The user enters the profit generation period and
user registration, and you have to register as a the type of technology using the same screen as
professional in order to use the professional shown in Figure 6. The profit generation period is
section. the number of years during which excess profit
Once you sign in, the technology valuation can continue to be created by the pertaining
starts with ‘User Information Entry’ and ‘Tech- technology. It is not an easy task estimating the
nology Outline Input.’ At ‘User Information period of profit generation; however, a rational
Entry,’ there is room to fill in various information estimation is possible by analysing the current
such as the name of the user, his/her affiliated situation in the industry and the market outlook.
organization, contact information, and the pur- Hong et al. (2001) states several useful methods in
pose of technology valuation. For ‘Technology estimating this period. For the manufacturing
Outline Input,’ the user fills in the name of the industry, this term is usually under 5 years, and
technology and an explanation of the technology. according to an analysis of contract period of
If it is a patented technology, and the user enters Korea’s international technology transfer, this
the patent application number, the patent data- term is usually between 3 and 7 years. It can be
base transmits to the system pertinent informa- helpful to refer to these data when determining
tion such as the IPC classification, the application the profit generation period.
date, the name of the applicant, and the name of Estimating the profit generation period of an
the inventor. individual technology is a very complicated pro-
Using the technology valuation system devel- cess, and it is nearly impossible to attain a degree
oped in this study, value of more than 30 tech- of confidence. Therefore, such estimation tends to
nologies has been estimated. So we would like to depend on the subjective judgement of the devel-
explain the function and analysis process of the oper or the owner of technology. It is possible,
technology evaluation system with one example. however, to indirectly estimate the profit genera-
The case mentioned here in this study is the tion period of a similar technology by using the
personal network storage device for a Korean Bibliometrics method for instance, a measure that
venture firm, M. As technology that has some- makes use of patents information. Should the
thing to do with the network storage device, this technology in question be registered with the US
technology links the physical network device to a patents office, its technology life cycle can be
hard disk driver, and files can be shared between predicted by analysing the number of times it
different types of machines by installing an Inter- has been referenced by other technologies. One
net file system in a way that it allows the storing may also estimate the technology life cycle by
and sharing of the files by making access to the applying this analysis of reference frequency to

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

Figure 6. Profit generation period and technology classification.

similar patent technologies or those belonging to when converting future-expected profit to present
related technology group. The performance of value. As shown at the bottom portion of the
research and development activities can be as- figure, the user has to choose one of the technol-
sessed through the reference frequency method ogy classifications.
relying on Bibliometrics (Moed, 1989). Also, by
expanding upon previous research, which states 4.1.2. Market size estimation
that the mapping of research and development In the case of the new market creation technol-
areas can be used to grasp dynamic and structural ogy, a new product market is created based upon
aspects of technology, such as the direction of the new technology, and therefore the market size
technological development and infrastructure, the must be estimated during the profit generation
effectiveness of technology can be estimated using period. In the case of the existing market penetra-
the reference frequency, and this information can tion technology, the total market size and the
be used as a complementary resource for estimat- market share of the product based on the new
ing the profit generation period (Braam, 1991). technology is estimated during the profit genera-
The residual value period refers to the period tion period. For the cost structure improvement
during which the technology still maintains its technology, as the market has been already
residual value after the profit generation period formed by an existing product, it is relatively an
has ended. The time required to commercialize easy task gauging the market size.
and the amount of required expenses are data The case mentioned in this research is an
used when assessing the value of a technology existing market penetration technology, and
from the perspective of the buyer. Besides these, therefore the total market size and market share
the user selects the core product and the industry during 4 years of profit generation period have to
that relies on the technology. As explained before, be inputted. Figure 7 is the result screen after
risk-free interest rate is used as a discount rate 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 period is completed, the annual expected returns
the market share of the technology. Though it is is automatically calculated by the formula. Ex-
not shown in the figure, annual data on the pected returns in this research relied on operating
market size and the growth rate of the industry, income, and annual expected returns is extracted
to which the technology’s product belongs to, is by multiplying the yearly market size with the rate
actually shown at the bottom part of the page and of operating income.
can be very helpful. This page is designed so that
the data can be extracted and attached as a 4.1.4. Estimating the present value of expected
reference to support any assessments. returns
At this point, the expected returns from technol-
4.1.3. Cost structure estimation ogy is converted into present value. This step
This is step for indirectly estimating the cost arises from the need to consider the present value
structure by estimating operations profitability of future profits in order to make a decision about
during the profit generation period. There is an technology transfer. The expected returns is easily
input window for entering the rate of operating converted into present value by using the formula
income during 4 years of profit generation. To explained in Chapter 3.1. The residual value of
assist in gauging the rate, this system provides the technology must also be taken into account to
average industry rate of operating income along estimate the present value. One must determine
with the average rate of operating income for whether or not to count the residual value of
companies (the user can select up to three) that technology that remains after the profit genera-
are most closely related to the technology under tion period is over. This is a question that must be
evaluation. In the case of personal network sto- answered in consideration of each technology’s
rage device technology, the rate of operating characteristics, however, this case analyzed the
income during the profit generation period has residual value to last for 1 year. Here we assumed
been estimated as 20–25%. the residual value to equal the expected return
Once the estimation of market size and the rate (on the last year of profit generation period)
of operating income for the profit generation 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 very feasible approach to use when it comes to a
1,667,000,000 wons with residual value, and consistent classification to determine the life cycle
1,184,500,000 wons without. of technologies in the same industry. However, in
the area of the technology evaluation, we see
fusion technologies across different industries
4.2. Analysis of technology’s degree of come up quite often and they also have a high
contribution economic value. This research added core tech-
nology to the technology classification consider-
The objective of this analysis is to figure out the ing technology’s potential competitiveness, degree
portion contributed purely by technology to the of actualization, extent of proliferation, and effect
present value of expected returns calculated in on other industries. In the system, core technol-
the earlier chapter. The analysis proceeds as ogy is very essential in securing competitiveness
follows: Calculating the technology contribution as it has a quite significant impact on the cost,
coefficient according to level of innovation and quality, and function of a product. It is also
industry characteristic classification Adjusting defined as a technology that has percussion to
the technology contribution coefficient Calcula- other industries and high potential for expansion.
tion of profit contributed purely by technology. A technology is classified into base technology,
emerging technology, pacing technology, key
4.2.1. Calculation of technology contribution technology, and core technology, and in addition,
coefficient according to classification of stage of technology’s potential competitiveness, degree of
innovation and industry characteristics actualization, extent of proliferation, and effect
This research applied the stage of innovation and on other industries are also evaluated.
industry characteristics to calculate the technol- Figure 10 is the screen for classification of
ogy contribution coefficient. Figure 8 explains the industry characteristics and technology’s level of
process of calculating the contribution coefficient. innovation. Industry characteristics measures the
This process identifies technology’s stage of in- importance of technology as an intangible asset in
novation and industry characteristics, and then the industry, and this data can be deduced from
utilizes the technology contribution matrix in the industry average R&D investment ratio (vs.
Figure 4 to determine the ranking of contribution total sales) and the ratio of intangible asset to
(Levels 1–9) The contribution coefficient for each total sales. Using the KSIC’s added value to
ranking is not a single value, but it is a range of tangible assets ratio information provided by the
value where the upper and lower 50% of the value Korea National Statistical Office, 99 industries
overlaps with that of adjacent ranks. have been divided equally into five groups. The
Figure 9 portrays the logic behind the process industries were classified according to the size of
of judging the stage of innovation for the tech- their added value to intangible assets ratio in the
nology under evaluation. According to ADL order of very low, low, average, high, and very
definitions, the stages in technology life cycle are high. In this case, the classification is automated
classified into base technology, emerging technol- by entering the industry classification code in
ogy, pacing technology, and key technology Figure 7. Then the user is presented with a set
(Burgelman et al., 1988). This classification is a of survey questions whose answer will determine

Technology Stage Matrix for technology's

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

Figure 8. Calculation process for technology contribution coefficient.

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

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 Model to support technology transfer negotiations

Potential competence

New technology, and the The potential

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

Critical impact on the cost, quality, and

performance of the product. In addition, it is Extension to other industry
(5) extendable to other industries as well.
Core Extension to Easily extendable to
other industry is (4) other industry.
uncertain.
No
Applied to other
Yes industry. Critical
(5) impact on
competitiveness

Figure 9. Logics to decide the stage of innovation.

Figure 10. Industry characteristics.

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

the technology’s stage of innovation. For the case ogy and how convenient it is to protect the use of
of personal network storage device technology, that technology. Finally, technology’s limitations
the level of innovation is ‘key technology,’ while are concerned with any competitive or socioeco-
industrial characteristic is ‘very high.’ Thus, the nomic restraints on commercializing and utilizing
technology receives a ranking of Level 8 in the the given technology.
technology contribution matrix, and the range of In order to assess these other factors, the
technology contribution coefficient is 33–37%. technology valuation system presents a 10-ques-
tion survey, which the valuator must fill out for
4.2.2. Adjustment of technology contribution each factor using a five-point scale. The results of
coefficient the questionnaires are used to adjust the technol-
Although there is little doubt that the stage of ogy contribution coefficient, and the range of
innovation and industry characteristics are im- adjustment has been fixed at 6–0%. This paper,
portant factors to consider when calculating the however, will exclude a detailed explanation on
technology contribution coefficient, it is also the content of the survey questions and the
apparent that this coefficient must be adjusted reasoning behind the adjustment of technology
to reflect other factors that influence technology contribution coefficient.
contribution. This research thought it necessary
to include technology’s dominance, exclusiveness, 4.2.3. Calculation of returns contributed by
and limitations. technology
Technology’s dominance refers to the super- Figure 11 is a screen displaying the calculated
iority of technology itself and how much of a result of returns contributed by technology. The
differentiated value the technology can offer in estimated present value and returns attributed to
comparison with other technologies. It also mea- technology are shown for both cases where the
sures technology’s applicability and transferabil- residual value is considered and where it is not.
ity. Technology’s exclusiveness deals with As the technology contribution coefficient has a
whether or not there is any difficulty in exercising ‘range’ of values as explained beforehand, the
the exclusive right to possess and use the technol- 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
Min.
Sum
(Expected profit of importer, the cost
(Transfer Cost, Opportunity Cost) Negotiation scope 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 Figure 12 can be used to set a range of possible
reasonable to show returns contributed by tech- negotiation for technology price.
nology as a range of values rather than a single
price. For the personal network storage device
technology investigated in this case, the returns 5. Conclusion
contributed by technology with residual value is
501 million  567 million wons, while without At a period when the national competitiveness
residual value is 356 million  403 million increasingly depends on technology, there is an
wons. urgent need for technology, in the manner of
other goods, to contribute to dissemination of
knowledge through active exchanges. In this re-
search, we worked out an objective value of
technology, a value that is of utmost importance
4.3. Technology valuation from the to vitalizing technology trade and transfer, and
buyer’s perspective attempted to embody this impartial value in a
The time it takes for commercialization, risk-free technology valuation system.
interest rate, and the expected returns, which have Unlike the previous research that mainly as-
all been entered in Figure 6, are automatically sessed technology value from the interest of the
inserted into the formula explained in Chapter 3.3 holder of technology, this research tried to assay
to compute the value of technology from the the value of technology from an impartial and
buyer’s perspective. The estimated value of tech- objective point of view, and such value can be
nology is listed at the bottom of Figure 11. The used as the basic data for technology transfer
value with residual value is 354 million  420 price negotiations. Also, with the creation of a
million wons, while without residual value is 209 web-based technology valuation system, both the
million  256 million wons. buyer and the seller can easily measure the value
The value of technology assessed by our re- of any technology of interest.
search model is a different concept from the As this research evaluates already fully devel-
transfer price between buyers and sellers of tech- oped technology for the purpose of transfer, it
nology transfer. Transfer price is determined not may not be completely suitable for evaluating
only by technology value, but by variables such as technology for public or corporation research
bargaining power of parties to transaction, un- and development programs or investment deci-
certainty of commercialization, and the economic sions regarding technology development. Having
outlook. Thus, for an individual company seeking a scientific and well-organized system at the
to use this research’s valuation model to analyze assessment and selection process is necessary to
the price of technology transfer in a negotiation, increase the effectiveness and efficiency of re-
the technology transfer price negotiation model in search and development programs. For instance,

r 2007 The Authors R&D Management 37, 2, 2007 137

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

many leading nations carry out an economic Copeland, T. and Antikarov, V. (2001) Real Options:
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list of research programs. To reflect such de- Goldheim, D., Slowinski, G., Daniele, J., Hummel, E.
mands, the results of this research must not be and Tao, J. (2005) Extracting value from intellectual
limited to technology valuation of already com- asset. Research Technology Management, 48, 2,
43–48.
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There was one technology that has actually valuation method: CVA MAUA and ral option
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Center out of the ones whose value were evalu- Society, 3, 1, 37–54.
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