Technology and Global Industry Companies and Nations in the World Economy (1987) / Chapter Skim
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Capturing Value from Technological Innovation: Integration, Strategic Partnering, and Licensing Decisions
Capturing Value from Technological Innovation: Integration, Strategic Partnering, and Licensing Decisions
Pages 65-95
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From page 65... ...
This chapter examines why firms and nations can lose ground in the commercialization of advanced technologies at a time when they are the principal sources for major technological innovations of industrial significance; the capacity for scientific and technological innovation may be the last rather than the first advantage that a mature economy loses as it enters its declining phase. The framework developed here helps identify the factors that determine who wins from innovation: The firm Mat is first to market, follower firms, or firms that have related capabilities that the innovator needs.
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From page 66... ...
Although EM} was initially successful with its CAT scanner, within 6 years of its introduction into the United States in 1973, the company had lost market leadership and by He eighth year had dropped out of the CAT scanner business. Over companies successfully dominated the market, though they were late entrants, and are still profiting in He business today.
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From page 67... ...
Quadrant 4 and its corollary quadrant 2 are the focus of this paper. PROFITING FROM INNOVATION: BASIC BUILDING BLOCKS To develop a coherent framework within which to explain the distnbution of outcomes illustrated in Figure 1, three fundamental building blocks must be put in place: the appropriability regime, He dominant design paradigm, and complementary assets.
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From page 68... ...
The Dominant Design Paradigm Two stages are commonly recognized in the evolutionary development of a given branch of a science: the pre-paradigmatic stage when there is no single, generally accepted conceptual treatment of die phenomenon in a field of study, and the paradigmatic stage, which begins when a body of theory appears to have passed He canons of scientific acceptability. The emergence of a dominant paradigm signals scientific maturity and He acceptance of agreed-upon '~standards" by which what has been referred to as 'normal" scientific research can proceed.
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From page 69... ...
Reduced uncertainty over product design provides an opportunity to amortize specialized long-lived investments. Innovation is not necessarily halted once the dominant design emerges; as Clarke (1985)
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From page 70... ...
dominant design emerges, the innovator might well end up in a disadvantageous position relative to a follower. Hence, when imitation is coupled with design modification before the emergence of a dominant design, followers have a good chance that their modified product will be annointed as the industry stan~d, often to He great disadvantage of the innovator.
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From page 71... ...
Specialized assets are those where there Is unilateral dependence between the innovation and the complementary asset. Cospecialized assets are those for which Here is a bilateral dependence.
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From page 72... ...
TEECE o c c o o C c Q C) ~ ·[ it/ ~ /~0 ~ / genenc ~ AGE / .~ He'd ~\\~&eta~ he \/ \\~ed at sect I ' Dependence of Innovation on Complementary Assets FIGURE 4 Complementary assets: genenc, specialized, and cospecialized.
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From page 73... ...
Accordingly, the innovator may find it prudent to expand by acquiring or developing specialized and cospecialized assets. Fortunately, the factors that render imitation difficult will enable the innovator to build or acquire those complementary assets without competing with i~rutators for their control.
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From page 74... ...
As a general principle, it appears that innovators in loose appropriability regimes need to be intimately coupled to the market so that user needs can affect designs. When multiple parallel and sequential protot~rping is
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From page 75... ...
It is at this point Hat specialized and cospecialized assets become critically important. Generalized equipment and skills, almost by definition, are always available in an industry, and even if Hey are unavailable, Hey do not entail significant i~reversibilities.
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From page 76... ...
The fimns Mat control the cospecialized assets, such as distribution channels and specialized manufacturing capacity, are clearly in an advantageous position relative to an innovator. ~deed, in the rare instances in which incumbent firms possess an al ght monopoly over specialized assets, and the innovator is in a regime of loose appropnabili~, all of the profits from the innovation could conceivably accrue to those firms, who should be able to get the upper hand.
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From page 77... ...
Consider, first, the appropriability regime. As discussed earlier, the protection offered by patents is fairly easily enforced, particularly for process technology, in the petrochemical industry.
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From page 78... ...
Smaller, less integrated companies are often eager to sign on win established companies because of the name recognition and reputation spiBovers. For instance, Cipher Data Products, Inc., contracted win IBM to develop a low-priced version of IBM's 3480 half-inch streaming cartndge drive, which is likely to become Be industry standard.
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From page 79... ...
The innovator will then find that it has created a competitor who is better positioned Can the innovator to take advantage of the market opportunity at hand. Business Week has expressed concerns along these lines in its discussion of He "hollow corporations It is important to bear in mind, however, Hat contractual or partnering strategies in certain cases are ideal.
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From page 80... ...
There is no point in attempting to build a specialized asset, for instance, if one's imitators can do it faster and cheaper. It should be self-evident that if the innovator is already a large enterprise with control over many of the relevant complementary assets, integration is not likely to be the issue it might otherwise be, as the innovating firm will already control many of the relevant specialized and cospecialized assets.
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From page 81... ...
TIME REQUIRED TO ACHIEVE FAVORABLE COMPETITIVE POSITION Long Short OK If Timing Full Steam Not Critical Ahead Forget It OK If Cost Position Tolerable FIGU" 5 Specialized complementary assets and loose appropuability: integration calculi.
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From page 82... ...
It shows the appropriate strategies for the innovators and predicts the expected outcomes for the venous players. Tree classes of players are of interest: innovators, imitators, and Me owners of cospecialized assets (for example, distributors)
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From page 83... ...
Appropriability Regime \ Weak 1 Yes / | Access I Specialized ) ~ \ /: \ / Cash \ Position \ OK / / _ Yes ~ t_ r | No / Imitators/ Integrate ~( Competitors \ Better \ Postponed FIGURE 6 Flow chart for integration versus contract design.
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From page 84... ...
/ Integrate / /Innovator / should / Ann / _ / Degree 0! Protection for Intellectual Propelty Innovator Poorly Positioned Versus Imitators Ninth Respect to Cotta mi~ning CornplemenWy Assets (3)
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From page 85... ...
IBM's stake in Intel Corporation, which began with a 12 percent purchase in 1982, is most probably not a transitional phase leading to 100 percent purchase, because both companies realized that the two corporate cultures are not compatible, and IBM may not be as impressed with Intel's technology as it once was. The CAT Scanner and the IBM PC: insights from the Framework EMI's failure to reap significant returns from the CAT scanner can be explained in large measure by reference to the concepts developed above.
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From page 86... ...
In October 1979 Geoffrey Hounsfield of EMI sham He Nobel Prize for invention of He CAT scanner. Despite this honor, and He public recognition of EMI's role in bonging this medical breakthrough to the world, He collapse of its scanner business forced EM]
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From page 87... ...
IBM estimated Hat by m~d-1983, at least 3,000 hardware and software products were available for He PC.' Put differendy, IBM pulled together the complementary assets, particularly software, required for success and did not even use contacts, let alone integration. This was despite He fact that the software developers were creating assets Hat were In part cospecialized to He IBM PC, at least in He first in stance.
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From page 88... ...
The innovating firm can improve its total return to R&D, however, by adjusting its R&D investment portfolio to maximize Be probability Mat the technological discoveries Mat emerge will be easy to protect win existing property law or will require for commercialization cospecialized assets already within the firm's repertoire of capabilities. Put differently, if an innovating fine does not target its R&D resources toward new products and processes that it can conunercialize advantageously relative to potential imitators or followers, then it is unlikely to profit from its investment in R&D.
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From page 89... ...
Regimes of Appropriability and Industry Structure In industries where legal methods of protection are effective, or where new products are just hard to copy, the strategic necessity for innovating firms to obtain cospecialized assets would appear to be less compelling than in industries where legal protection is weak. In cases where legal protection is weak or nonexistent, the control of cospecialized assets will be needed for long-run survival.
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From page 90... ...
Hence, as industries in which legal protection is weak begin to mature, integration into innovation-spec~fic cospecialized assets will occur. Often this will take the forth of backward, forward, and lateral integration.
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From page 91... ...
In this context, concern that the decline of manufacturing threatens the entire economy appears to be well founded. A related implication is that as the technology gap closes, the basis of competition in an industry will shift to the cospecialized assets.
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From page 92... ...
If the cost and infrastructure characteristics of the host country are such that it is the world's lowest cost manufacturing site, and if domestic industry is competitive, then by acting as a monopsonist the government of the host country ought to be able to adjust the terms of access to the complementary assets to appropriate a greater share of the profits generated by the innovation.'0 If, on the other hand, the host country offers no unique complementary assets except access to its own market, restrictive practices by the government will only redistribute profits with respect to domestic rawer than worldwide sales. Implications for the International Distribution of the Benefits from Innovation Thus, it is clear that Hi, 7 _ nnovators who do not have access to the relevant specialized and cospecialized assets may end up ceding profits to imitators
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From page 93... ...
But to ensure Hat domestic rather Han foreign cospecialized assets capture He largest share of the externalities spilling over to complementary assets, He supporting infrastructure for those complementary assets must not be aBowed to decay. In short, if a nation has prowess at innovation, then in He absence of ironclad protection for intellectual property, it must maintain weD-developed complementary assets if it is to capture He spillover benefits Tom innovation.
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From page 94... ...
NOTES 1. Ice EMI story is summarized in Michael Martin, Managing Technological Innovation and Entrepreneurship (Reston, Va.: Reston Publishing Company, 1984)
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From page 95... ...
10. If the host country market structure is monopolistic, private actors might be able to achieve Be same benefit.
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