Facoltà di Economia U niversità degli Studi di Parma Cooperation and Competition Among Firms

1. Facoltà di EconomiaUniversità degli Studi di ParmaCooperation and Competition Among Firms Ch. 1 Provisional Version 2013-14

2. OBJECTIVES OF THE COURSE

3. OBJECTIVES OF THE COURSE Cooperative and non-cooperative solutions are central issues in real life as well as in game theory; sometimes it is a basic trade off in exchanges between firms or among individuals. Sandler 2004: Cooperation “arises when the efforts of two or more individuals are needed to achive an outcome”.

4. OBJECTIVES OF THE COURSE In recent years, a rich literature and wide empirical experience have been accumulated on cooperation and competition among firms.

5. OBJECTIVES OF THE COURSE In recent years, a rich literature and wide empirical experience have been accumulated on cooperation and competition among firms. The course presents a critical discussion of the essentials. Students will acquire basic knowledge of the main theories of cooperative strategy between firms and single agents and will be able to assess feasibility of individual or collective courses of action.

6. Questions • Where is cooperation more efficient than competition? • What are the costs and benefits of cooperation? • Do regulation and coordination costs influence cooperative results? • Do social variables impact on the success of economic cooperation? • What is the role of sanctioning mechanisms?

7. Outline • Definitions • Forms • Trends • General Evidence • Purposes & Motives • Costs (I): Regulatory Costs • Costs (II): Coordination Costs • Risks • Partner Selection • Procedures & Norms • Social Capital • Trust • Network Contractual Safeguards & Sanctions • Structure & Governance • Impact • Failure & Success • Institutional Role

8. Teaching Methods • Lectures, simulations, practical tests and students’ presentations.

9. Reading Lists • General Reading List • Special Topics Reading List: • 01 Interfirm Cooperation & Objectives.Benefits • 02 Interfirm Cooperation & Costs and Failure Risks • 03 Interfirm Cooperation & Partner Selection • 04 Interfirm Cooperation & Governance Mechanisms • 05 Intefirm Cooperation & Social Structure • 06 Interfirm Cooperation & Performances • 07 Interfirm Cooperation & Developing Countries

11. Why and How Strategic Alliances Today Cisco

12. Type of interactions between firms • Competitive relationships (market forms) • Proprietary relationships (acquisitions, groups of firms) • Exchange relationships (contractual transactions) • Cooperative relationships (L-T agreements, joint ventures, strategic alliances, etc)

13. Definition of Strategic Alliance(Yoshino and Rangan, 1995). • A strategic alliance involves at least two partner firms that: • remain legally independent after the alliance is formed; • share benefits and managerial control over the performance of assigned tasks; • and make continuing contributions in one or more strategic areas, such as technology or products

14. Costs & Risks • Research indicates that the number of alliances is growing rapidly, at an average rate of 25 percent per year (Parise, S. & Casher, A., 2003). • Participation in an alliance may require a firm to reorganize, reduce, or terminate other business relations in order to oblige a new partner’s interests. This post-decision adjustment leads to foreclosures of some future business opportunities and their associated loss of potential benefits and profits (Todeva Knoke 2005) • Firms in alliances often try to get ahead of their partners through learning races, which may result in the loss of firm-specific knowledge for some firms (Bleeke and Ernst, 1995; Hamel, 1991; Teng&Das 2008) • “The essentially fickle and tentative nature of partner cooperation should not be overlooked” because it renders many strategic alliances “fundamentally self-defeating, unstable, and transitional in nature” (Das&Teng 1998)

15. Costs & Risks • A collaborative agreement may terminate through complete project dissolution, either before or after achieving its formal objectives; by a joint venture’s acquisition by one of its partners; or through an organizational merger of the parent firms. Researchers have investigated several factors that may affect the survival rates and end states of various types of alliances (Todeva & Knoke 2005). • Most analysts found high levels of strategic alliance instability and dissolution, with failure rates approaching 50 percent (Harrigan, 1988b; Kogut, 1988; Dacin et al., 1997). • Alliances in the technologically volatile telecommunications industry exhibit an “alarming tendency to fall apart due to fickle behaviour of members” (Curwen, 1999).

16. Costs & Risks • Bleeke and Ernst (1993) used unpublished reports and interviews with insiders of top companies in the USA, Europe and Japan to determine that, among 49 cross-border alliances, 51 percent were successful for both partners while 33 percent resulted in failure for both. Success meant that the partners achieved their own strategic objectives and recovered their financial capital costs. • An event history analysis of 186 joint ventures among US and Japanese electronics firms between 1979-1988 found a 43 percent dissolution rate, with an average life span of less than five years (Park and Ungson, 1997). • This overall lack of success is probably due in large measure due to the frequent tensions between competition and co-operation inherent in alliances (Bharat and Tarun, 2004).

17. Strategic alliance forms(Todeva & Knoke 2005)( or “hybrids” combining varying degrees of market interaction and bureaucratic integration (Williamson, 1975). • (1) Hierarchical relations: through acquisition or merger, one firm takes full control of another’s assets and coordinates actions by the ownership rights mechanism. • (2) Joint ventures: two or more firms create a jointly owned legal organization that serves a limited purpose for its parents, such as R&D or marketing. • (3) Equity investments: a majority or minority equity holding by one firm through a direct stock purchase of shares in another firm. • (4) Cooperatives: a coalition of small enterprises that combine, coordinate, and manage their collective resources.

18. Strategic alliance forms(Todeva Knoke 2005)(or “hybrids” combining varying degrees of market interaction and bureaucratic integration (Williamson, 1975). • (5) R&D consortia: inter-firm agreements for research and development collaboration, typically formed in fast-changing technological fields. • (6) Strategic cooperative agreements: contractual business networks based on joint multi-party strategic control, with the partners collaborating over key strategic decisions and sharing responsibilities for performance outcomes. • (7) Cartels: large corporations collude to constrain competition by cooperatively controlling production and/or prices within a specific industry. • (8) Franchising: a franchiser grants a franchisee the use of a brand-name identity within a geographic area, but retains control over pricing, marketing, and standardized service norms. • (9) Licensing: one company grants another the right to use patented technologies or production processes in return for royalties and fees.

19. Strategic alliance forms(Todeva Knoke 2005)(or “hybrids” combining varying degrees of market interaction and bureaucratic integration (Williamson, 1975). • (10) Subcontractor networks: inter-linked firms where a subcontractor negotiates its suppliers’ long-term prices, production runs, and delivery schedules. • (11) Industry standards groups: committees that seek the member organizations’ agreements on the adoption of technical standards for manufacturing and trade. • (12) Action sets: short-lived organizational coalitions whose members coordinate their lobbying efforts to influence public policy making. (GIE in France) • (13) Market relations: arm’s-length transactions between organizations coordinated only through the price mechanism.

20. Motives for organizations to engage in alliance formation(Agarwal and Ramaswami, 1992; Auster, 1994; Doz and Hamel, 1999; Doz et al.,2000; Harrigan, 1988a; Hennart, 1991; Lorange and Roos, 1993; Zajac, 1990) • Market seeking; • Acquiring means of distribution; • Gaining access to new technology, and converging technology; • Learning and internalization of tacit, collective and embedded skills; • Obtaining economies of scale; • Achieving vertical integration, recreating and extending supply links

21. How to mantain strategic alliances over time? (Alliances AMA)

22. Motives for organizations to engage in alliance formation • Adjust to environmental changes; • Diversifying into new businesses; • Restructuring, improving performance; • Cost sharing, pooling of resources; • Developing products, technologies, resources; • Risk reduction and risk diversification; • Developing technical standards;

23. Motives for organizations to engage in alliance formation • Achieving competitive advantage; • Cooperation of potential rivals, or pre-empting competitors; • Complementarity of goods and services to markets; • Co-specialization; • Overcoming legal/regulatory barriers; and • Legitimisation, bandwagon effect, following industry trends.

24. Ranking of the importance of specific factors for strategic alliances

25. Interfirm Cooperation Empirical Evidence

26. Evidence • Strategic alliances contribute to superior production performance by the parents. Research on 142 Canadian biotechnology startup firms from 1991-1996 found that their initial performances were enhanced by establishing alliance networks that provided access to “diverse information and capabilities with minimum costs of redundancy, conflict, and complexity,” gave more opportunities to learn from established rivals, but avoided risky intra-alliance rivalries (Baum et al., 2000, p. 287).

27. Evidence • In particular, the startups’ alliance networks boosted their innovativeness as measured by rates of patenting and R&D growth. • A comparative study of alliance networks among 138 steel and 130 semiconductor firms from 1990-1994 found that the influence of network characteristics on firm performance varied with industry contexts (Todeva & Knoke 2005) • In another analysis of semiconductor firms from 1985-1991, Stuart (2000) investigated the impact of alliances on innovation rates and economic growth. He measured innovation as the number of patents granted and growth as annual semiconductor sales.

28. Evidence • Among alliances between firms within same industry, a bigger stock price jump occurred for technical than for marketing agreements, suggesting “that partnering firms from the same industry can better take advantage of technological complementarities” (Chan et al., 1997). • Multiple recurrent R&D projects among members of an alliance network may create opportunities for collusion by firms that simultaneously compete across multiple product markets (Vonortas, 2000).

29. Reading Lists General Reading List Special Topics Reading List: 01 Interfirm Cooperation & Objectives.Benefits 02 Interfirm Cooperation & Costs and Failure Risks 03 Interfirm Cooperation & Partner Selection 04 Interfirm Cooperation & Governance Mechanisms 05 Intefirm Cooperation & Social Structure 06 Interfirm Cooperation & Performances 07 Interfirm Cooperation & Developing Countries

30. R&D Partnership (1960-1998) Source: Hagedoorn & van Kranenburg 2003

31. Share (%) of Joint ventures in R&D partnerships (1960-1990) Source: Hagedoorn 2002

32. The share (%) of high-tech, medium-tech and low-tech industries in R&D partnerships (1960-1990) Source: Hagedoorn 2002

33. The share (%) of high tech industries in R&D partnerships (1960-1998) Source: Hagedoorn 2002

34. The share (%) of international R&D agreements in R&D partnerships (1960-1998) Source: Hagedoorn 2002

35. Distribution of R&D partnerships by regions (1960-1998) Source: Hagedoorn 2002

36. Distribution of R&D partnerships by regions (1960-1998) Source: Hagedoorn 2002

37. Top ten firms in pharmaceutical biothcnology (no. of partnerships in different periods) Source: Roijakkers & Hagedoorn 2005

38. R&D Partnerships in Pharmaceutical Biotechnology (1975-79) Source: Roijakkers & Hagedoorn 2005

39. R&D Partnerships in Pharmaceutical Biotechnology (1980-84) Source: Roijakkers & Hagedoorn 2005

40. R&D Partnerships in Pharmaceutical Biotechnology (1985-89) Source: Roijakkers & Hagedoorn 2005

41. R&D Partnerships in Pharmaceutical Biotechnology (1990-94) Source: Roijakkers & Hagedoorn 2005

42. R&D Partnerships in Pharmaceutical Biotechnology (1990-94) Source: Roijakkers & Hagedoorn 2005

43. Tecnological Agreements Between Firms in Most Advanced Countries

46. Long Term Cooperation with Suppliers (% of the buyer firms) Source: Arrighetti 2001

47. On which alliance do you bet? (and why?) Ricoh & Heidelberg https://www.youtube.com/watch?v=lM_Vi7fSS3E Cisco & Wipro https://www.youtube.com/watch?v=MBqqKj3jFLg

48. Consortia by Industries in Italy (2003) • Agriculture 7,8 • Mining/General Buildings 12,8 • Manufacturing 8,6 • Trade/Retail 14,3 • Transport 9,2 • Services 3,7 • Training, Medical Services 5,8 • Utility 10,3 • Multi-industry 27,5 • TOTAL 100,0 Source: Arrighetti&Lasagni 2004

49. Firms that have subscribed agreements or entered consortia by size in 1997 (in %) Fonte: Istat (2000)

50. Why and how to build up a ‘global’ partnership?(11.45) Cisco