internal research provides the necessary knowledge to extract greater rents from alliances. In-house capabilities of a more fundamental nature help in directing external investments toward those alliances with greater potential payoff.17


Our results bear upon another important question regarding the biotechnology sector as well. As widely discussed among economists, managers, and analysts, an important question about the future of the biotech industry (and more generally of the pharmaceutical industry) is whether the new division of innovative labor is merely a transient phenomenon. We saw that transaction-cost perspectives lead to the view that once large firms acquire sufficient knowledge, they will tend to withdraw from external linkages and revert to in-house R&D alone. The available evidence is mixed, but on the whole it supports the idea that while the patterns of specialization and division of labor have changed over time, no clear trend towards extensive internalization and integration exists.18

Moreover, we submit that a modest decline in the number of alliances between large firms and NBFs is not inconsistent with the division of innovative labor. Instead it reflects greater learning about external linkages on the part of agents involved. Market forces are increasingly selecting the NBFs not only according to their ability to perform "good science," but also according to their ability to translate science into commercializable outcomes. Thus, fewer NBFs survive as more than transient start-up "gamblers," which has a negative scale effect on the number of alliances. More importantly, large firms, and especially the most innovative ones, have now become sufficiently familiar with the knowledge base of biotechnology, and particularly with its upstream scientific base. As the results discussed in the previous section would suggest, firms have therefore become more discerning in their choice of partners, and hence form fewer but potentially more valuable alliances.

A final question is whether a division of innovative labor in biotechnology is socially desirable. Florida and Kenney (1990), inter alia, see the emergence of NBFs as socially undesirable. They claim that venture capital funding leads to a


Max Link, the CEO of Sandoz Pharma Ltd., epitomized this view: "We believe that the stronger a multinational is in a particular field, the higher the probability that a cooperation will yield positive results" (Scrip, 1991).


Some recent reports about the industry suggest a moderate decline in the number of alliances between large firms and NBFs (Burrill and Lee, 1991). On the other hand, Barabanti et al. (1992) find an increase in the total number of collaborations of 21 major pharmaceutical companies in biotechnology, as well as in the average number of collaborations per firm, in these three periods: up to 1983, 1984–1987, 1988–1991. Their results also indicate considerable volatility in the patterns of collaborative alliances.

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