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POLICIES KNOWLEDGE-INTENSIVE COLLABORATIVE NETWORKS

POLICIES KNOWLEDGE-INTENSIVE COLLABORATIVE NETWORKS. Nicholas S. Vonortas Center for International Science and Technology Policy & Department of Economics The George Washington University. PART I INTRODUCING BUSINESS PARTNERSHIPS: Definitions - Rationale.

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POLICIES KNOWLEDGE-INTENSIVE COLLABORATIVE NETWORKS

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  1. POLICIESKNOWLEDGE-INTENSIVE COLLABORATIVE NETWORKS Nicholas S. VonortasCenter for International Science and Technology Policy& Department of EconomicsThe George Washington University

  2. PART IINTRODUCINGBUSINESS PARTNERSHIPS:Definitions - Rationale

  3. INTRODUCINGSTRATEGIC BUSINESS PARTNERSHIPS • During the past 3 decades, collaborative strategies in international business have gained popularity. • Particularly in high technology industries, leading firms have increasingly used joint ventures, joint R&D, technology exchange agreements, direct minority investments, and sourcing relationships.

  4. INTRODUCINGSTRATEGIC BUSINESS PARTNERSHIPS • All these inter-firm relationships are short of complete merger, but deeper than arm’s-length market exchanges. • Such relationships involve mutual dependence and shared decision-making between two or more independent firms. When R&D is a focus of the partnership, universities and other research institutes may also participate. • They are characterized here as strategic business partnerships (or alliances).

  5. INTRODUCINGSTRATEGIC BUSINESS PARTNERSHIPS • Several databases tracking strategic partnerships show that the rate of formation of such partnerships has accelerated dramatically since the late 1970s. • This dramatic increase reflects non-equity agreements by and large. In contrast, equity based partnerships have kept a fairly low profile. • Current conditions in the global economy make these alliances advantageous, perhaps necessary, for firm competitiveness in many industries.

  6. INTERNATIONALSTRATEGIC BUSINESS PARTNERSHIPS Three major and inter-related factors have been driving the surge of international partnering. • Globalization • Multinational companies have relentlessly pushed into new geographical and product markets. • Technological Change • The pace of technological advance has accelerated, partly as a result of increasing competition through globalization. • The notion of “core competency” • Increasing international competition and rapid technological advance have robbed firms of their ability to be self-sufficient in everything they do. The idea now is, do internally what you do best and outsource the rest through partnerships

  7. DEFINITION: JOINT VENTURES • In the mid-1980s, OECD defined joint ventures as activities “…in which the operations of two or more firms are partially, but not totally, functionally integrated in order to carry out activities in one or more of the following areas: • buying or selling operations; • natural resource exploration, development and/or production operations; • research and development operations; • engineering and construction operations”

  8. DEFINITION: JOINT VENTURES • In general, the motives for setting up a joint venture were understood to include: • using complementary technology or research techniques; • raising capital; • spreading the risks associated with establishing an enterprise in a new product or geographical area; • achieving economies of scale; • overcoming entry barriers to domestic and international markets; and, • acquiring market power.”

  9. HISTORY OF JOINT VENTURES • Up until the late 1970s, inter-firm cooperation was dominated by equity partnerships • There were few exceptions, involving research consortia organized under government auspices in industrialized countries such as the Engineering Research Associations in Japan and several research consortia organized in the United States in the 1970s to tackle energy problems

  10. HISTORY OF JOINT VENTURES • Two important changes have taken place since the early 1980s in terms of inter-firm cooperation: • First, the extent of cooperation has increased very much resulting in big numbers of national and international partnerships • Second, the organizational structure of cooperation has changed dramatically, reflecting the increasing importance of organizational flexibility. Non-equity partnerships are currently dominating the landscape

  11. HISTORY OF JOINT VENTURES • Consequently, the joint venture definition shown previously (requiring the establishment of a new entity separate from the parents) proved too rigid to be able to accommodate the rapidly growing variety of institutional mechanisms to transfer organizational and technological knowledge • The need for a better definition was met with a broader concept: the concept of a strategic partnership (alliance)

  12. DEFINITION:STRATEGIC BUSINESS PARTNERSHIPS • A strategic alliance (partnership) was defined by David Teece as a web of agreements whereby two or more partners share the commitment to reach a common goal by pooling their resources together and coordinating their activities. • A strategic partnership denotes some degree of strategic and operational coordination and may include things such as joint research and development (R&D), technology exchanges, exclusionary market and manufacturing rights, and co-marketing agreements. Partnerships may, or may not, involve equity investments.

  13. PRIVATE SECTORINCENTIVES TO PARTNER • Access product and financial markets; • Share costs of large investments such as as R&D; • Share risk, reduce uncertainty; • Access complementary resources and skills of partners, such as finance, complementary technologies; • Benefit from research synergies; • Accelerate return on investments through more rapid diffusion of assets;

  14. PRIVATE SECTORINCENTIVES TO PARTNER • Deploy resources efficiently to create economies of scale, specialisation and/or rationalisation; • Increase strategic flexibility through the creation and optimal exploitation of new investment options; • Unbundle the firm’s portfolio of intangible assets, and selectively transfer components of this portfolio; • Co-opt competition; • Attain legal and political advantages in host countries.

  15. PRIVATE SECTORINCENTIVES TO PARTNER • More broadly, partnerships have such virtues as flexibility, speed, informality, and economy. • They can be put together in little time and be folded up just as quickly. • They can involve little paperwork. In comparison to market internalisation through mergers and acquisitions, a close analogy of partnerships would be “love affairs instead of marriages”.

  16. STRATEGIC TRADE-OFF OF COLLABORATION Regardless of the strategic goal, collaboration with another firm always implies a trade-off between: • greater access - to markets, finance, other resources, capabilities; and • lesser control - of strategic decision making, day to day management, technological and other kinds of knowledge.

  17. PART IIPOLICY FORRESEARCH PARTNERSHIPS

  18. Intervention Rationale • The basic justification for government action was market failure. • In R&D partnerships, the arguments initially revolved around the inability and unwillingness of the private sector to undertake research that is risky and imperfectly appropriable. • Hence the call for supporting collaborative pre-competitive research. This of course agreed with the political constraints of the Commission.

  19. Intervention Rationale • Later the justification expanded to arguments for systemic failure. • Some issues were said to be bigger than any individual organization - or small groups of organizations - to tackle. An example is the transition into new generations of technology. • Such arguments have underlined the ideas of European Technology Platforms and their programmatic implementation into Joint Technology Initiatives in FP7.

  20. Policy for RPs • S&T is one area with relatively little to show in terms of harmonization and cohesion between the policies of EU member states. • The NIS of EU member states remain rather dissimilar due to historical, cultural, and other factors related to the development stage and consequent needs and capabilities. • The STEP-TO-RJVs project demonstrated the same phenomenon in one specific area of S&T policy – cooperation in R&D. Such diversity is increasingly viewed as a strength of the European system.

  21. Policy for RPs • Still, the ERA concept presupposes a certain degree of cohesiveness and basic goal harmonization across member states. • One way the Commission has tried to narrow the gaps (e.g., national R&D funding) and address the discrepancies (e.g., areas of focus and specific policy tools) has been the establishment of the Framework programme. • Among others, the 6th FWP and the current 7th FWP envisioned a genuine partnership between the EU and its member states and with other European scientific cooperation organizations.

  22. Policy for RPs • The project “S&T Policies Towards RJVs” was launched in the late 1990s with teams representing France, Greece, Ireland, Italy, Spain, Sweden and the United Kingdom. That is an amalgam of three kinds of member states, including large R&D-spending states, developed smaller states, and cohesion states. • As a necessary first step was to summarize the S&T policies related to RJVs of these countries plus Japan and the US. In addition, partners also reviewed competition policies and IPR policies that affect RJVs.

  23. Policy for RPs • The support of international consortia has been the main funding mechanism of FWPs since inception. • Awareness and support of cooperative R&D has also increased at the national level: Cohesion states without an extensive tradition of sophisticated industrial and S&T policies have made significant steps in that direction. Most of the rest seem genuinely trying to do more than before. The UK sometimes appeared to consider FWP programmes as substitutes of its own, but continued to promote collaboration and networks in various, largely non-monetary ways.

  24. Policies for RPs Extensive differences between member states were reported: • Policy approaches have ranged from complete indifference to the issue until recently (Ireland), to lukewarm policies (Greece, Italy), to decreasing attention (UK), to established network systems (Sweden), to highly determined programmes to support collaborative R&D (France, Spain). • The level and type of support have varied widely as have the specific policies and programmes, their technological focus, and the numbers and kinds of participating economic agents. Amidst this variation, the European Commission’s policies have played a boosting and cohesive role.

  25. Policies for RPs The policies of Japan and of the US have also been quite different from those in Europe reflecting, at least in part, the general S&T outlook in these countries: • In Japan, the emphasis on cooperative R&D continues. Government sponsored RJVs, however, seem to have made the transition since the 1980s from primarily mechanisms assisting whole sectors to catch up with world practice to mechanisms creating a richer and more effective technological superstructure for a high group of high technology sectors.

  26. Policies for RPs • In retrospect, the US can be argued to have followed a rational approach to accommodating rising levels of R&D cooperation. It first changed its institutional structure and relevant legal system. It then moved forward to put in place specific programmes to actively promote cooperative R&D. • The EU approach appears to have been the reverse of the US approach, but no less rational in the face of the specific situation of the region.

  27. CENTER FOR INTERNATIONAL SCIENCE AND TECHNOLOGY POLICY T h e G e o r g e W a s h i n g t o n U n i v e r s i t y Several landmark policy initiatives between the early 1980s and the mid-1990s paved the way to a new policy approach to innovation and the emerging economy: • Domestic Policy Review of Industrial Innovation – 1978 • Stevenson-Wydler Technology Innovation Act – 1980 • Bayh-Dole University and Small Business Patent Act – 1980 • Research and Experimentation (R&E) Tax Credits – 1981 • Small Business Innovation Development Act – 1982 • Merger Guidelines – 1982 • Eleventh Circuit Court of Appeals for IP – 1982 • President’s Commission on Industrial Competitiveness – 1983 • Engineering Research Centers; Industry-University Cooperative • Research Centers – 1983 • National Cooperative Research Act – 1984 • Federal Technology Transfer Act – 1986 • Omnibus Trade and Competitiveness Act – 1988 • National Cooperative Research and Production Act – 1993

  28. Policy for RPs • Confronted with a large collection of significantly variable national S&T policies, the Commission first moved to put in place its own supra-national programmes for cooperative R&D before trying to harmonize policies across member states. • Harmonization and cohesion continue but the process has been a slow one. • Almost 30 years later, the 6th and 7th FWP and ERA try to bridge the national S&T programmes and form a coherent whole.

  29. Basic Lessons • EU policies have become a force well reckoned by member state governments. EU policies have very much influenced policies at the national level and, in certain cases, shaped them to the extent of straightforward translation (cohesion countries). • Policy-decision makers across countries have placed important value on cooperative R&D but there is extensive variability in policy approaches. • The ERA is supposed to be the cohesive force that recognizes and accepts variability.

  30. PART IIIPARTNERSHIPS & NETWORKING IN S&T FOR DEVELOPMENT

  31. Partnerships for Development The proliferation of partnerships during the past couple of decades has raised expectations of accelerated growth through faster access to markets and technologies and greater learning possibilities. There is evidence that inter-firm partnerships can be an extremely useful tool to assist developing country firms (and poorer regions) in their efforts to catch up. Partnerships can accordingly assist countries speed up the process of establishing competitive indigenous industries. Partnerships can also play a major role in mobilizing the necessary resources and technological expertise to upgrade lagging infrastructure.

  32. Partnerships for Development The evidence is, however, still concentrated in certain geographical areas and sectors. This has been interpreted to imply that the expectations of widespread catch-up opportunities through partnerships have not yet materialized. However, intensive international inter-firm collaboration is a relatively new phenomenon where, with few exceptions, developing countries have made their presence felt only very recently. In other words, it is simply too early to tell.

  33. Partnerships for Development It is also possible that analysts have tried to extrapolate too much too fast from the experience of developed countries, in the process missing important flags. The available empirical information has overwhelmingly been on formal partnerships. In contrast, we have a lot of anecdotal but little systematic information on informal partnerships. Available anecdotal evidence strongly indicates that informal partnering probably accounts for apparently the largest share of partnering activity in industry. It involves firms and all other kinds of organizations, but it involves especially SMEs in proximate geographical areas.

  34. Partnerships for Development We have developed various terms to capture aspects of more informal modes of interaction. We talk about clusters. We talk about districts. We also talk about networks. Each term means something different, but they also share considerable ground: the willingness and ability to interact closely with the surrounding environment, with peers, with buyers and suppliers – by and large on an informal basis. An expanding literature has, in the past few years, tried to amass evidence of such interaction and of policies that promote it in developed and developing countries

  35. Partnerships for Development Formal and informal partnering should be seen as a continuum. Then, the question is not anymore whether partnering helps developing country/region firms to grow competitive. The question rather becomes which kind of partnering may be more appropriate – or more prevalent – at different stages of development and in different sectors.

  36. Partnerships for Development Formal partnerships require strategy formulation and partner contribution, whether in financial resources, intangible assets, market familiarity, market access, etc. Frequently, the required level of strategy sophistication and resource commitment is considerable. It is, thus, quite possible that these requirements raise the bar too high for the mass of (mainly small and unsophisticated) firms in the majority of developing countries. Hence, it could be argued, the relatively slow trickling down of partnering to the majority of developing countries.

  37. Partnerships for Development Still, this leaves many other interactions for these agents to pursue. It seems quite probable that informal partnering through networks and clusters is a way for many relatively disadvantaged developing country firms to become stronger, more competitive, and to meet the minimum capability prerequisites in order to graduate to formal partnerships. Governments may be wise to try addressing most developing country SME problems related to size and competitive position through networks (often more vertical, supplier-buyer relationships) and clusters (regional, more horizontal, agglomerations).

  38. PART IVCOLLABORATE TO COLLUDE? Multimarket and Multiproject Contact in R&D

  39. Collaborate Policy for Industrial R&D Cooperation since 1980s • Competitiveness Challenge & Market Failures • National Cooperative Research Act (1984) • Research Joint Venture (RJV) “Organizations or contractual agreements involving at least two entities with the primary purpose to engage in R&D.” Alleged Advantages Potential Drawbacks • Restore private incentives • Acquire complementary resources • Exploit economies of scope • Create new investment ‘options’ • Restrict parallel approaches • Moral Hazard • Lessen competition • Decrease social surplus

  40. Collaborate New RJV Announcements between 1985 - 1999 Total = 796

  41. Research Joint Ventures (RJVs) Multi-Project Contacts (MPC) Multi-Market Contacts (MMC) Anti- Competitive Behavior Lower Consumer Surplus Collusion Collude Multi-Market Contact Arguments

  42. Question Is Multi-Project Contact through RJVs a Cause of Concern? YES NO MPC & MMC Safeguards against anti-competitive behavior • Multi-Project Contact • Multi-Market Contact • Foreign Participation • Technological & Market Uncertainty • “Porous Constellation”

  43. Data NCRA RJVs (1985 – 1999) • Registered with DOJ & FTC • under NCRA (1984) & NCRPA (1993) Database Structure

  44. 2/3 7% 50% Data Cooperative Activities of All Identified Entities

  45. Multi-Project Contacts in NCRA RJVs: AT&T

  46. MPC & MMC in NCRA RJVs

  47. Foreign Participation Identified Entities by Country

  48. Technological & Market Uncertainty Primary Technical Areas of RJVs

  49. “Porous Constellation” RJV Membership Changes

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