Network Types and Structures in the Danish Maritime Industry

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Copenhagen Business School 2013

Network Types and Structures in the Danish Maritime Industry

A study of the upcoming SOx regulations in the SECA

Steffen Lervad

MSc Management of Innovation and Business Development Master Thesis submitted 01. Marts 2013

Supervisor: René Taudal Poulsen STU count: 152.025 / 79 pages

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Executive summary

The International Maritime Organization (IMO) decided in 2008 on a progressive reduction in airborne sulfur oxides (SOx) emissions from ships. Hence, new legislations entered into force in July 2010 with SOx limitation of 1.00% in selected Emission Control Areas.

These regulations are further reduced to 0.10% from 2015 and ship-owners only sailing inside the SOx Emission Control Areas predict significant challenges as the costs for low content sulfur fuel or abatement technologies are extremely expensive. Consequently, ship-owners are exploring various options and strategies.

This study addresses how networks can facilitate the short sea ship-owners in compliance with these regulations, hence combining the specific SOx challenge with the network literature. Thus, the research objective is to extent the knowledge and usability of various types of networks in the maritime industry, by drawing connections between network literature and practical studies.

Networks are argued systems for innovation and an approach for firms to obtain complementary assets. Thus, ship-owners ability to establish strong networks and access to external resources may support compliance with the upcoming SOx legislation.

The study identified sixth various ideal types of networks that facilitated the short sea ship-owners.

In particular, horizontal network through quasi-integration and standardization are analyzed to encompass several compliance opportunities. In addition, the study contributes to extension of network theories and as a starting point for extensional research.

Keywords: Network types, network structures, network economy, Danish maritime industry, SOx regulations, short sea ship-owners

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List of abbreviations

Annex VI Prevention of Air Pollution by Ships EMA Emission Control Areas

DWT Deadweight Tonnage

HELCOM Helsinki Commission. Part of the Helsinki Convention on the Protection of the Marine Environment of the Baltic Sea Area

HFO Heavy Fuel Oil

ICS International Chamber of Shipping

ISO International Organization for Standardization IMO International Maritime Organization

LNG Liquefied Natural Gas

MARPOL International Convention for the Prevention of Pollution from Ships MDO Marine Diesel Oil

MGO Marine Gas Oil NOx Nitrogen Oxides

ODS Ozone Depleting Substances PM Particulate Matter

SECA Sulfur Emission Control Area SOx Sulfur Oxides

TINV Transportation

TEN-T Trans-European transport network TINV Transport Innovation Network VOC Volatile Organic Compounds

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1. Introduction

Shipping companies worldwide faces new opportunities and challenges in today’s global economy (Adeltoft et al. 2010). Especially increasing public concerns about climate and environmental issues such as environmental protection, resource conservation and pollution caused by shipping activities, are widely debated by business - and political leaders (IMO 2013; The Danish Shipowners’

Association 2013).

As a result of these concerns, the United Nations specialized agency: The International Maritime Organization (IMO) added back in 1997 a new Annex (Annex VI) to the International Convention for the Prevention of Pollution from Ships (MARPOL). This new Annex (MARPOL Annex VI) seek to minimize airborne emissions from ships (SOx, NOx, ODS¹, VOC²) and their contribution to negative externalities in local and global air pollution and environmental problems (IMO 2013).

Annex VI entered into force on 19^th of May 2005 with a revised Annex adopted in October 2008, which entered into force on 1^st of July 2010 (IMO 2013). The main changes to Annex VI are a progressive reduction in emissions of SOx, NOx and particulate matter (PM), and the introduction of selected coastal waters (Emission Control Areas or ECA’s), with more stringent control than globally required (IMO 2013). The sulfur oxide (SOx) emissions limits applicable in the ECA’s were reduced to 1.00 % beginning from 1^st of July 2010 and further reduced to 0.10 % from 1^st of January 2015. The Baltic Sea, the North Sea and the English Channel are together designated as an ECA for SOx emission reductions or Sulfur Emission Control Area (SECA).

Studies predict significant challenges for the ship-owners and in particular short sea operators who only sail inside the SECA as the costs for low sulfur content fuel are argued 40-70 % more expensive than traditionally Heavy Fuel Oil (HFO) (Kalli and Karvonen 2009; Green Ship of the Future 2012; the Danish Shipowners’ Association 2012). This means that the freight rates might increases by 20-30

%. Hence, the Danish Shipowners’ Association forecast that this development will affect the competitiveness of short sea shipping in the Baltic Sea and the North Sea compared to other modes of transportation (the Danish Shipowners’ Association 2012).

1 Ozone Depleting Substances

2 Volatile Organic Compounds

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9 Consequently, ship-owners are exploring alternative solutions to comply with the upcoming SOx regulations, including abatement technological solutions like scrubbers for cleaning smoke, natural gas options³ and increasing the availability of distillated low sulfur content fuel (the Danish Shipowners’ Association 2012).

This study attempt to support short sea ship-owners in the SECA comply with the upcoming SOx regulations by analyzing the various compliance alternatives from a network approach.

Several scholars argue that networks are systems for innovations (Teece 1986; Porter 1990; Lundvall 1992; Freeman 1995; Maskell 2001), and that networks complements firms lack of resources (Teece et al. 1997; Miotti and Sachwald 2003). Modern economics theories address parameters such as core competences and absorptive capacity to the list of competitive parameters (Teece 1986; Cohen and Levinthal 1990; Prahalad and Hamel 2000). Thus, firm’s ability to build strong networks and access external resources and knowledge are significant for businesses in a global network economy (Arora and Gambardella 1990; Lazonick 1991; Hinterhuber Gulati et al. 2000).

This study connects theories on network creation with the specific challenge that short sea ship- owners faces in the SECA, and contribute hereby to the broad discussion on the value of networks in the maritime industry.

With this in mind, this thesis frames the following research question:

How can networks facilitate short sea ship-owners in the SECA comply with the upcoming SOx regulation?

3 Natural Gas has low sulfur content

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1.1 Specification and demarcation of the research objective

To specify the research question in more details, the thesis address some limitations to the study.

There are already several approaches to the study of network creations and the diversity of meaning attached to these theories are enormous. The most prominent are economic, psycho-social and socio-structural, although none by itself may reflect upon the wide variety of characteristics encapsulated in the term networks. Hence, the thesis is limited to sixth various types of networks that represents a certain pattern of business transactions thus viewed as ideal types. The types were chosen, as these were found most appropriate to answer the research objective. In the attempt to fully understand the types of network, the thesis analysis the network on three dimensions: the actors involved, the ties or relation between them and the overall network configuration (Todeva 2006).

The SECA analyzed in this thesis constitutes the Baltic Sea, the North Sea and the English Channel.

Other SECA’s are not explored in this thesis, but are briefly described in appendix.

The shipping activity in the SECA is divided in two categories; short sea shipping and international shipping, where short sea shipping is movement of cargo and passenger without directly crossing an ocean, and is often characterized by vessels trafficking steady routes, for example RoRo or RoPax vessels. The thesis is only concentrating on short sea ship-owners sailing 100 % inside the SECA.

Simultaneously, most network literature concerns multinational corporations, international researches and high-tech industries. This conflicts with this study, as it concentrates on regional settings and a mature industry.

In addition short sea shipping is at forefront of the European Union’s (EU) transportations policy.

One of the goals is establishment of the concept “Motorways of the Seas”; an expansion of existing and introducing new inter-modal maritime logistics chains, shifting cargo from inland traffic to environmental-friendly waterways (TEN-T 2001; TINV 2012). The debate between politicians and ship-owners on transportation policies and increasing competitiveness in SECA forcing transportation of cargo from sea to inland traffic will not be discussed in this thesis. Hence, the thesis will not discuss arguments for and against the SOx legislation nor how to enforce compliance.

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11 Accordingly, the study assume ship-owners responsible for compliance. Thus, the dilemma in responsibility between owning ships and chartering ships is not debated.

The SECA adjacent several nations in the Northern Europe, however the thesis will primarily focus on activities associated with Danish short sea ship-owners and the Danish maritime industry.

Moreover, the thesis only examines three compliance solutions: (I) the use of low sulfur content fuel (Marine Gas Oil), (II) installation of abatement technologies still using HFO and (III) installation of LNG engines, using LNG as fuel. As, these options currently are the most significant ones in the maritime industry (Vihlmann J. 2012) Other alternative fuel options are LPG⁴, DME⁵/methanol, ethanol and hydrogen will not be examined, as these are still early in the development process and prices are difficult to estimate (Schroeder 2011). Additionally, port solutions like shore-based power and kite solutions will neither be discussed.

The thesis explores in-depth two specific projects; DFDS’s installation of a scrubber technology and Fjord Lines installation of a single LNG engine, as case studies. These are considered the most significant projects in the Danish maritime industry and are therefore decided the most appropriated for this research objective (the Danish Shipowners’ Association 2012).

Thus, the thesis correlates and analyze the three compliance options, using the two specific cases with the sixth various types of networks. The research uses the term the SOx challenge as a concept for the challenges associated with the upcoming SOx regulations for the short sea ship-owners. The concrete results of the thesis is suggestions for short sea ship-owners comply with the SOx regulations by network creation. The literary contribution is extensions of the network creation theories, in particular in mature industries.

1.2 Structure of thesis

The thesis is structured as follows: The succeeding chapter 2 is the conceptual framework, where known literature is reviewed. The conceptual framework is divided in four sections, whereas the first part reviews the development of the network economy and defines networks. This part is relevant for answering the research question as it reviews how the thesis understands networks and

4 Liquefied Petroleum Gas

5 Dimethyl ether

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12 the characteristics of the network economy. Continuing, the second part, reviews the drivers behind this development of the network economy. The third part of the conceptual framework provides an overview of the development in Danish maritime industry. The focus in this third part is the changes in organizational design and the innovations processes in the industry. This part is relevant because it portray the relationship among and between the various actors in the maritime industry.

Moreover, it clarifies reasons for the changes in the organizational design and understanding of how innovation is generated in the maritime industry. The last part reviews the literature and reports about the upcoming SOx regulations. This is relevant as it completes the three aspects of the thesis;

network literature and theories, Danish maritime industry literature and the SOx challenge literature.

Chapter 3 outlines the methodology of the thesis, upon which the research is based. This chapter explains the empirical approach and the research strategy.

Chapter 4 is the starting point for the analysis and discussion. The chapter provides an overview of the Danish maritime industry and the Danish maritime cluster, including the current SOx challenge, the compliance solutions and a mapping of current project and activities surrounding the SOx challenge. This chapter is descriptive, with the purpose to understand how the Danish maritime industry relates to the SOx challenge, as it is relevant to understand the impacts and reactions of the upcoming SOx regulations on short sea ship-owners. Based on this chapter and the conceptual framework, the thesis is able to make an analysis on how network can facilitate short sea ship- owners.

Chapter 5 analyses various types of networks. Firstly the chapter analyses assumptions and attributes of network types, thus characterizes these in nodes/actors, ties and configurations.

Secondly, the chapter identifies sixth different ideal types of networks based on these assumptions, attributes and characteristics.

Chapter 6 analyses current initiatives and projects regarding the SOx challenge using findings from the previous chapter 5. Thus, the thesis identifies and characterize the types of networks in the current activities and projects. Secondly, the three different compliance options are analyzed, and the connected networks types are identified and explored. The focus in this last part of chapter 6 is the two major projects; the exhaust gas scrubber installed on a DFDS vessel and the single LNG

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13 engine installed on two Fjord Line ferries. Thus, the thesis uses these two projects as smaller case studies⁶.

Chapter 7 is the discussion on whether/how network can facilitate short sea ship-owners in the SECA comply with the upcoming SOx regulations. The discussion is based on the findings from the analysis.

The first part discusses and combines the sixth various ideal types of network and argues for suggestions. Secondly the types of networks in the two cases studies; DFDS and Fjord Line are discusses. Lastly, the thesis addresses a way forward based on the findings.

Chapter 8 sums up the thesis objectives and findings in a conclusion and make suggestions for further research.

6 The literature used for both cases is secondary data gathered from various company - , organization - and project publications.

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2. Conceptual Framework

This chapter is the conceptual framework and accomplishes several purposes. It shares the results of other studies that are closely related to the one being undertaken. It fills in gaps and extending prior studies thus relates a study to the larger, ongoing dialogue in the literature (Cooper 1984;

Marshall and Rossman 2006 in Creswell 2009). Thus, the conceptual framework establishes the importance of the study as well as benchmarking for comparing the results with other findings (Miller 1991 in Creswell 2009). These are the reasons for writing the scholarly literature into the study.

The first part of the conceptual framework describes the development of the network economy and defines network. The second part of the framework reviews the drivers behind the development of the network economy. These two parts address the relevance and importance of the network economy and network theory. The third part of this chapter reviews literature on networks and innovation processes related to the maritime industry. The final part of this chapter 2 reviews the literature and reports on the SOx challenge.

2.1 The development of the network economy

The importance of networks and shared knowledge in the innovation process is not new, and studies argue that networks have a central role in the concept of innovation systems (Freeman 1995, Lundvall 1992).

Throughout history, the development of new organizational forms has coordinated economic activity. As consequences of the industrial revolution in the 18^th – and beginning of the 19^th century large scaled factories evolved into large scaled organizations (Chandler 1977). This evolvement continued and developed organizational forms like vertical integration, division forms and business units. All forms contributed to the economic growth from increasing economics of scale and scope.

The underlying premise of these organizational forms was to act autonomously and independent (Chandler 1977; Powell 1990; Teece 1980; Williamson 1987).

However, in the 1980s a transition took place, and firms slowly accepted that all resources and competence required did not have to be available in-house and independency was not a necessity (Teece et al. 1997). Instead, collaboration was the norm in the new paradigm of organizations,

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15 where firms focused on core competences and contracted out parts of their production process instead (Prahalad & Hamel 2000). This way of supplier relationship led to inter-firm collaboration and alliances. These alliances are considered the building blocks of networks and are defined as collaborations between independent firms with the aim to create competitive advantage for the partners (Dyer and Singh 1998). Alliances exist when revenue and risk are shared among partners and the contracts are often implicit and open-ended (Jones et all 1997). Additionally, firms are increasingly embedded in networks of alliances and partnerships closer to their core competences because the knowledge sharing and knowledge development is at center (Prahalad & Hamel 2000;

Dyer and Singh 1998).

In 1991 Lazonick, William addressed, that the economy was no longer a market economy nor an organization economy but a network economy (Lazonick 1991). This is acknowledge by Todeva, Emanuela, who in 2006 described business networks as an essential concept that can explain the organization of the contemporary economy and society and the behavior of interconnected business actors (Todeva 2006). This network economy can be described as a system, where substantial amount of business activities is conducted in alliances between multiple firms, whereas networks might relate to every stage of the value chain (production, developing, marketing etc.) and exist in all sectors (De Man 2004).

2.1.1 The definition of networks

The following section defines network as it has changed over time. Starting with an early sociological perspective network may be defined “as social structures that arise from relationships embedded in affiliations and inter-subjective movements, inter-subjective dynamics which bond people together”

(Simmel 1950 in Todeva 2006). In addition, it is argued that social networks and relational aspects are intrinsic to business relationships, transactions and networks (Mattelart & Mattelart 1998 in Todeva 2006).

Another early definition on network is Mitchell’s from 1969, who suggests that “a network is a specific type of relation, linking a defined set of persons, objects or events”, assuming that networks are developed based on actors prior knowledge and mutual recognition (Mitchell 1969 in Todeva 2006). Wellman and Berkowitz (1988) argue for another definition of networks as social structures that might facilitate business network as well. They describe networks; “as an ordered arrangement

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16 of relationships that is contingent upon exchange among members of social systems”. This definition might as well apply on business network as socio-economic structures of transacting economic agents. The referred exchange in social systems could be interpreted both as input-output relations between agents and transformation of resources, information or value thus looks similar as a business network (Wellman and Berkowitz 1988).

In addition, Podolny and Page from 1998 interpreted business relationships in a more organizational context, arguing that “inter-organizational networks are a specific organizational form where two or more actors repeatedly exchange relationship with one another and at the same time lack legitimate organizational authority to arbitrate and resolve disputes that may arise during the exchange”. This definition relates network with superior learning, enhanced legitimation and status, and a range of economic benefits (Podolny and Page 1998).

Recently, business networks are characterized as: (I) sets of connected exchange relationships between actors controlling business activities (Forsgren and Johanson 1992), (II) resource-flows between different organizational units based on intra – and inter-organizational linkages (Schmid et al. 2002), (III) integrated and coordinated set of ongoing economic and non-economic relationship embedded within and outside business firms (Yeung 1994), (IV) selected sets of multiple autonomous organizations, which interact directly or indirectly, based on one or more alliance agreements between them (Anderson et al 1994) and (V) a system of small or mid-size firms or strategic business units, functional regional units, suppliers, controlled firms and other partners that are linked together in order to satisfy key stakeholders by optimizing specific core competences and improving critical business processes (Hinterhuber and Levin 1997).

The common notions for all the definition of business network are the referral to structural formation which facilitates interactions between actors and exchange of some kind and the aim to gain competitive advantage for the individual organizations involved and occasionally for the network as a whole as well (Todeva 2006).

The approach to characterize and analyze networks are the nodes, (identify network actors, agents, members) the ties/relations (identify links that facilitate transitivity, reciprocity, directionality and multiplicity of content) and the overall network configuration (identify structure). This approach

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17 leads to the types and effects of networks, and will be further explained and analyzed in chapter 5 and 6.

2.2 Drivers behind the development of the network economy

Studies argue for several various drivers behind the development of the network economy. This part of the conceptual framework examines literature on these reasons for the network economy and is divided into two subparts. The first one takes a firm centric view, reviewing how the literature explains firms’ ability to create value or obtaining assets through networks. The latter one reviews the broader forces behind the network economy.

2.2.1 Firm centric forces behind the network economy

From a transaction cost economics perspective (TCE), networks and alliances provide an alternative to internal integration, where two or more firms collaborate to reduce the associated risks and share costs (Williamson 1981, 1986, 2012).

TCE’s study how trading partners protect themselves from the hazard associated with exchange relationships. Thus, TCE’s consider the appropriateness of contracting across boundaries of the firm and the hazard associated with collaboration.⁷ Contracting must outweigh working autonomous (Williamson, 1981, 1986). TCE’s maintain that in a complex world, contracts are typically incomplete, and because of this incompleteness, parties who invest in relationship-specific assets expose themselves to a hazard. One way to safeguard those rents is through integration. (Mayer and Salomon 2006; Williamson 1981).

The resource-based view (Barney 1991; Wernerfelt 1984; Teece 1980) suggests that firms achieve sustainable competitive advantage through accumulation of strategic assets that are hard to imitate, substitute or trade (Amit and Schoemaker 1993). In the resources-based perspective, networks are driven by firm’s strategic resource needs or search for complementary assets (Teece et al. 1997. 1986). Hence, it is suggested that firms conducting expensive, risky or complex research projects seek R&D co-operation. In addition, firms may use alliances to enter new startups, project areas or technology fields as they allow themselves to expand their knowledge sources with limited

7 Transactional hazard refer to negotiation contract costs, the risk of imitation and lack of learning

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18 investment exposure. However, not all complementary assets have the same level of specialization, which differentiate the dependency from actors in the network (Teece 1986; Teece et al. 1997).

The fact that resources are the main driver for networking are complemented by Miotti and Sachwald (2003) who argue that firms use R&D partnerships to access knowledge and build R&D networks. The authors adding that the complementary assets that the partners bring are the main reason for choice. They address the role of innovation as a factor for competitiveness, and the accelerating pace of technological progress a reason for firms to allocate increasing resources to R&D and broaden their innovative capabilities. At the same time, firms have designed new R&D practices including internal organizational change and building complex technological partnerships.

Since transactions involve exchange of knowledge, firms tend to be embedded in many different types of alliances. Studies have further shown that the choice of co-operative R&D depends on the characteristics of the technology involved and on the characteristics of the firm’s capabilities (Miotti and Sachwald 2002, Teece 1986). Gulati and Gargiulo (1999) contribute to this view arguing that network formation is driven by exogenous factors, including distribution of technological resources, flow of information and resources dependencies among network actors (Gulati and Gargiulo 1999).

Teece et al. (1997) identified the concept of dynamic capabilities, which refers to the firm’s ability to adopt a corporate strategy and constantly adjust and renew its capabilities in response to rapid technological change. Teece et al (1997). state that “winner in the marketplace are firms that can demonstrate timely responsiveness and rapid and flexible product innovation, coupled with the management capacity to effectively coordinate and redeploy internal and external competences”

(Teece et al. 1997). Moreover, combinative capabilities refer to the firm’s ability to synthesize and apply current and acquired knowledge (Kogut and Zander 1992). In the same context firm’s ability to acquire and protect tacit knowledge in-house as well as the ability to transfer cognitive knowledge external has become important parameters (Doz et al. 2000).

Powell (1998) add to this view and argues that inter firm collaboration can be viewed as a means of organizational learning, through which core competencies can be enhanced. Powell argues that “in innovation driven fields, firms are engaged in learning races and are required to continuously seek more productive ways of using their resources leading to specialization in core competences” (Powell

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19 1998). Moreover, firms do not only learn from collaborations but they need to learn how to collaborate (Powell 1998; Prahalad and Hamel 1990).

Related to combinative capability, Cohen and Levinthal (1990) defined the concept of absorptive capacity, as the capacity of the firms to take advantage of new technology, thus the firm’s ability to adopt new knowledge or technology into their existing business model. Typically, this force firms to invest in basic science to better understands and identify new technologies and opportunities. Thus, scholars have observed that knowledge and learning are also accessed externally and absorptive capacity is acknowledge being a necessary complement (Cohen and Levinthal 1990). Hence, on the one hand co-operating has become necessary because internal resources are insufficient, and on the other hand adequate absorptive capabilities increases the return firms gain from access external sources (Cohen and Levinthal 1990; Arora and Gambardella 1990).

Moreover, scholars argue that business success depends on competencies such as knowledge transformation, learning, knowing and interpreting. Thus, business network become the main source of knowledge acquisition, knowledge development and sharing (Cohen & Levinthal 1990;

Kogut & Zander 1992). In addition, more attention arise on development of new strategic and managerial techniques and organizational innovations (Cohen & Levinthal 1990; Lester 1992; Kogut

& Zander 1992).

The perception that the innovation process has evolved from the autonomous firm to a network environment is also addressed by Chesbrough (2003). He defined the concept of open innovation, which suggests that firms adopt a networked approach to innovation, where companies exchange ideas and technologies and bring products to market through licensing and other alliance agreements. There are two key aspects of the open innovation paradigm. One is the networked nature of the innovation process and the other is the concept of the business model, which helps firms identify projects that fit (Chesbrough 2003, 2006).

This overview of known literature on firm centric drivers behind the network economy provided theoretical reasons for network formation. The next section addresses a more global perspective to network.

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2.2.2 Global forces behind the network economy

One of the most significant forces behind the network economy is liberalization and deregulation polices that stimulates internationalization of firms activity, making it possible to access knowledge, resources, markets and business systems in other countries (Todeva 2006). Thus, it is argued that markets and sources in foreign countries can be accessed more reliable and knowledge is transferred between firms without necessarily local presence (De Man 2004). Hence internationalization has opened up new opportunities and eased exploitation in foreign countries (Prahalad & Hamel 1990).

In addition, the impact from global competition on business relationships arouses interest in business networks, because different economic systems have different comparative strength and weaknesses (Forsgren and Johanson 1992; Porter 1990). Studies acknowledge the notion of strategic alliances where the focal point of analysis has shifted from individual firms and transaction cost to business networks, clusters and collaborative business relationships. Thus, the unit of production is no longer the firm but the project (Todeva 2006; Forsgren and Johanson 1992; Porter 1990; Castell 2000). Moreover, competition is no longer only based on cost calculations and expectations of return on investment, but rather driven by motives for uncertainty avoidance and strategically important alliances. (Todeva 2006)

Tom Lester (1992) complements this view, adding that networking gives a strategic advantage and argues that business networks are designed by managers to increase the competitiveness of the firm (Tom Lester 1992). Studies by Ibbott and O´Keefe (2004) adds that competitive advantage arises from the balance between control and trust, between commitment, learning and knowledge protection (Ibbott and O´Keefe 2004).

The liberalization and internalization together with the wealth in the modern economics has generated demands for specified solutions and individualized products, and forces firm in network to respond to the requested individual demands. The modern economics has also insured high level of trust in institutions and legal framework because law is well established and contract law is well developed. This simplifies collaboration between firms in developed countries and drives network (Jones et al. 1997; De Man 2004).

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21 The change in liberalization and deregulation policies also increase the risk and uncertainty of the environment. Thus, firms built intra and inter-organizational relationships in order to facilitate risk management. To reduce risk of decisions, managers are increasingly seeking support through networks, partnerships and projects across borders (Williamson 1987).

A final aspect of the internationalization and globalization is the emergence of multiple intermediaries that connects various actors and adds value by facilitating interactions and networks.

Thus, connect and expand business networks, becoming an essential factor that determines the dynamics of transactions within the business network (Todeva 2006).

Another major force behind the network economy is the pace of technological progress which drives networks, as the speed of advanced technology makes it impossible for firms to operate alone.

Alternatively firms need to develop a portfolio of alliances to protect themselves against the risk of missing out on new technologies (Miotti and Sachwald 2003; De Man 2004). At the same time, the risk for firms to decide by themselves on one technology is too high, thus R&D networks lower the risk of choosing the wrong technology (Gulati et al. 2000). Additionally, the effect of the internet and the speed of transferring information have affected network economy. Hence, specialization of firms and increased advanced technologies drives convergence of industries. Previously separated industries are now converging in new technologies through networks and network are empowered by information and communication technologies (De Man 2004).

2.2.3 Research understanding

The understanding of the network literature brings research questions that can be addressed simultaneously by several disciplines resulting in different outcomes. Thus, the diversity of meaning attached to the concept of networks can be interpreted differently. No one academic discipline is sufficient by itself to reflect upon the wide variety of characteristics and dimensions encapsulated in the term network or network economy (Cooper 1984; Marshall and Rossman 2006; Todeva 2006).

Hence, beside a comprehensive literature review, a specific network analysis requires specifications and limitations. These are described in the methodology chapter.

The previously examined literature review is primarily studies and research in advanced technology industries. The coming part reviews literature related to the maritime industry and the development

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22 in organizational design. It is recognized that the industry evolvement is a result of some of the above stated drivers and forces behind the development of the network economy.

It is relevant to review known literature about the maritime industry and the organizational development, because it facilitate the backbone for further analysis. Understanding the design of the industry is fundamental to make analysis of - and suggestion for network types.

2.3 The development of the organizational design in the maritime industry

The Danish maritime industry is characterized as a complex system composed of companies, agencies, brokers, port authorities, commodity producers and many more specialist actors. These actors are dependent on worldwide networks and are both interdependent with each other, but are also competitors in the same sector (Iversen and Sornn-Friese 2007; Caschili and Medda 2011).

The development of these complex interactions among independent actors was prompted by growth in freight handled, technical improvements and logistic reorganization (Caschili and Medda 2011). In addition, the actors constantly evolve by searching, learning and adapting to the changing environment. (Caschili and Medda 2011)

Traditional, the designs of the shipping companies were dominated by a generalist integrated approach. Thus, the integrated shipping companies were involved in many aspects of maritime activities under a single organizational umbrella. However, as a responds to this traditional bureaucratic approach, new types of shipping companies emerged, where the organization was characterized by networking of highly specialized entities focusing respectively on ship-owning, ship-trading, ship operation and innovation (Lorange & Fjeldstad 2010). This change in the organizational design was a result of (I) the revolution in world manufacturing and trade due to the economic growth in Southeast Asia, (II) the highly volatile environment that surrounds the industry and (III) the pressure on – and demand for speed, low prices/costs, services, quality and reliability (Lorange & Fjeldstad 2010; Sornn-Friese and Iversen 2007).

In addition, Caschili and Medda (2011) add that the shipping industry has evolved since the 1980’s, in response to external stimuli such as market competition, formal intuitional changes, entrance of superior competitors and path breaking new technologies. Some examples are the increase in joint

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23 ventures and pooling vessels⁸; techniques used to decrease or share cost by economics of scale (Caschili and Medda 2011). These impetuses may be met by strategic innovative responses either by differentiation or by adaption (; Sornn-Friese and Iversen 2007).

Moreover, the authors refer to the containerization revolution⁹ and the technical improvement¹⁰ as reasons for the maritime success (Caschili and Medda 2011). Sornn-Friese and Iversen (2007) compliment this view, on the success in the Danish maritime industry, by adding several reasons.

They address the national institution Denmark and the ability in Danes to negotiate and reach compromises between various economic interests, the flexibility and highly skilled Danish labor market and the culturally and linguistically homogenous population. In addition, organizational capabilities and internal dynamics in the Danish shipping companies may also explain the development of the Danish shipping fleet. Furthermore, the industrial champion A.P Moeller Maersk might also have played a vital role for the success in the Danish maritime industry (Sornn- Friese and Iversen 2007).

Adeltoft et al. (2010) identify four major trends that define the external context for strategic maneuverability among shipping companies, which are (I) continued volatility, (II) financial market conservatism, (III) shift towards new geographical markets and (IV) stronger and more concentrated customer base (Adeltoft et al. 2010). These trends and the undergoing transformation of the global shipping industry have resulted in several strategic alliances and acquisitions between shipping companies (Alix et al. 1999).

Stopford (2009) together with Iversen and Sornn-Friese (2007) address the impact of flag of convenience on the industry. Flag of convenience made it possible for independent companies to choose their flag country, which meant that companies were no longer high profile pillars but private businesses run by entrepreneurs. Flag of convenience have raised debates throughout the evolvement of the maritime industry but will not be further discussed in this thesis, but only recognized as a parameter for the development (Alderton & Winchester 2002; Stopford 2009).

8 Sharing freight cost and income

9 Concentration on fewer and larger container ships

10 In addition, the organization of the individual ports has changed accordingly to the industry. Highly specialized terminals have been developed in response to meet the development challenges. The same goes for port authorities.

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24 These changes in organizational design and increase in competition has changes the transportation system and ship-owners rely heavily on collaboration. Thus, the logistics in maritime industry is efficient through market specialization, networking and broker/agency organizations (Sornn-Friese

& Iversen 2007).

As this thesis addresses how network can facilitate ship-owners comply with the upcoming SOx regulations, it is relevant to understand the innovation processes in the industry. Both, the scrubber solution and LNG solution rely on further development, why a study of innovation activity is important. Hence, the thesis explores the innovation processes in the maritime industry (Lorange &

Fjeldstad 2010)

2.3.1 Innovation in the maritime industry

The previously literature review argued that networks is a mean that drives growth and innovation, and scholars argue that network are systems for innovation (Maskell 2001; Freeman 1995; Porter 1998). As network enforce innovation, it may facilitate ship-owners comply with the upcoming SOx regulations. Hence, it is relevant to understand the traditional drivers for innovation in the maritime industry. Thus, this part of the conceptual framework reviews the innovation processes in the industry.

Traditionally the competitive parameters for a single participant in an industry were cost management, quality, delivery and flexibility. Thus, the innovative activity in the maritime industry was associated with these traditional parameters, although perceived to be less permeable compared to other industries. Moreover, only clear defined strategies with centralized and guided managerial leadership would stimulate innovation in the industry (Boyer & Lewis 2002; Jenssen &

Randøy 2002).

Beside these traditionally parameters, the high cost of products and equipment together with industry regulations tended to stimulate some innovative activity in the maritime industry (Doloreux and Melancon 2008).

Nowadays more factors such as the demand for efficiency, safety and protection of the environment are believed to encourage innovation. Additionally, it is recognized that innovation may be enhanced and boosted through opening up and collaborate with both other maritime organizations

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25 and organizations from outside the industry (Chesbrough 2003; Jenssen 2003). Moreover, the cluster effect is believed to foster innovation and represent a critical mass of the maritime competence, thus providing an attractive setting for conducting maritime business (Maskell 2001;

Iversen & Sornn-Friese 2007).

Previously, innovation in the maritime industry was primarily based on experiential learning and previous models and designs, thus perceived incremental and slow. The recent emergence of new competitive parameters is expected to change the innovation processes in the maritime industry and factors such as safety and protection of environment may improve the innovative activity.

(Jenssen 2003; Jensen and Randoey 2002)

The increased demand for innovation in the maritime industry puts the ship-owners under pressure.

Research and studies that stimulate the innovation processes are for that reason both important and relevant (Lorange & Fjeldstad 2010).

2.4 SOx regulations

The former part of the conceptual framework reviewed network theories and the development of the network economy both in general and in the maritime industry. The upcoming part of the framework reviews studies conducted around the specific challenge of the SOx legislation.

Given the increased International and European focus on reduction of exhaust emissions several studies have been conducted to clarify the impact from emissions on the economy, the competitiveness, the society, externalities and more. In addition, studies and projects on external costs associated with the SOx regulations have been generated (Tzannatos 2010; Eyring et al. 2010;

Kalli & Karvonen 2009).

Most reports concerns the four primary pollutants, carbon dioxide, particulate matter, nitrogen oxides and sulfur oxides and the negative externalities associated. Other reports analyze energy efficiency and consumption from the various types of fuel (Kalli & Karvonen 2009).

Various studies around Northern Europe and SECA explore the impact on the competitiveness of shipping due to the SOx regulations and conclude that the requirement is going to increase the freight rates consequentially the transportation cost (Notteboom 2011; Kalli & Karvonen 2009).

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26 Furthermore, studies on alternative sources of energy in shipping has been conducted, especially the use of natural gas and biofuel (Bengtsson et al. 2012; Soto et al. 2010; Schroeder 2011).

Continuing, reports and pilot projects have been conducted on the Northern European LNG infrastructure, the availability of LNG in Northern Europe and recommendations on future process for LNG (Schroeder 2011). Likewise, studies on abatement technologies to calculate costs have been conducted (Green Ship of the Future 2012). These studies are examined in the analysis.

2.5 The research gap

Most studies about the specific case of the SOx challenge are practical analysis and reports especially on cost calculations and impacts on various factors such as competition, environment and society. In addition, several studies explore the various compliance options. Simultaneously, the emerging International and European policy framework for reduction of ship exhaust emissions address the need an interests for research and studies around the topic. This is both in order to monitor emission trends, consequences on the society and environment and to facilitate cost- benefit analysis of proposed emission abatement technologies, alternative fuel, operational measures and infrastructure development (Tzannatos 2010; Bengtsson et al. 2012).

This thesis combines the previously described literature review of the network economy, the development for the network economy, the maritime organizational development and the innovation processes in the industry, with the more practical studies around the upcoming SOx regulations and challenges for short sea ship-owners in the SECA. Such a study has not previously been conducted and serves the purposes of extending the knowledge on both network literature and compliance options for short sea ship-owners, by drawing connections between network theories and practical studies.

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3. Methodology

This chapter outlines the research methods, including the theoretical - and practical assumptions for the methods chosen, and the implications of these. Firstly, the research objective, approach and strategy is specified. Secondly, the empirical approach is clarified, including the method for data collection, reliability and validation. Finally, implications for the research approach are discussed.

Thus, these three parts outline the groundwork for the conceptual framework, the analysis and the discussion.

3.1 Research objective

The objective of the thesis is to analyze how networks are able to facilitate short sea ship-owners in the SECA comply with the upcoming SOx regulations. In order to answer this research objective, the thesis uses the network literature reviewed in the conceptual framework. Accordingly, the thesis explores the different types of networks based on the literature reviewed. These types are characterized and examined in the analysis, before connected with the present activities and different compliance options. Finally, these options are discussed in relation to the types of networks in order to make suggestions for short sea ship-owners comply with the SOx regulations.

An extended description of the compliance options is given in chapter 4.

3.2 The research approach

The research approach to the thesis includes an empirical study of network theory and the development of the network economy. The first part of the project was gathering data and information to construct an overview of the network theories, the Danish maritime industry and the elements surrounding the SOx legislation. This approach was descriptive and enabled an understanding of the literature, the maritime industry and the specific case of the SOx challenge.

The second part of the data collection was a more exploratory approach, by analyzing the different types of networks and the compliance options.

3.3 Research strategy

The strategy for the research is an in depth analysis and discussion of the specific challenge that short sea ship-owners faces in compliance with the forthcoming SOx regulations. Hence, the

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28 literature applied for the thesis is chosen for this specific research objective. The specific case was selected, because it addresses several strategic solutions and thereby angles on the network theory.

Furthermore, the study was selected because it constitutes a research objective that is not sufficient evident. Hence, the combination of the single phenomenon of the SOx regulations and the context of the network literature is a study that has not been conducted before, thus the research contributes to extension of knowledge on network theories in the maritime industry (Creswell 2009).

3.4 Empirical approach

The data collected consists of both primary data and secondary data, where primary data are those collected by the author and secondary data originate from elsewhere. The primary data is based on company publications, interviews with key persons and information’s from attending several seminars. The secondary data is based on relevant network literature and other second hand publications.

3.4.1 Primary data

Most of the primary data used is from companies and organizations publications, but also from interviews with key persons and participation in various seminars and conferences. The primary data collected was used both descriptive to gain an overview of the maritime industry and activities associated with the SOx challenge, but also for the analysis and discussion.

The interviews made were semi-structured interviews, because these were found most appropriated for an understanding of the challenge the ship-owners faces, and their use of networks as a strategy to find solutions. Semi-structured interviews provide a more dynamic nature to the interviews. It allows the interviewee to deviate from the specific question and go into depth (Flick 2007; Creswell 2009). Thus, the three interviews made varied from each other and from the interview guide.

The interviews were conducted in Danish, as this is the mother language of all the interviewees.

Hence, by doing the interviews in Danish, misunderstandings were avoided. Two of the three interviews were recorded and transcribed afterwards in order to focus solely on the interviews and the dynamics. The transcription was send to the interviewees afterwards in order to avoid mistakes

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29 and misunderstandings. The third interview was not permitted to be recorded. In addition, a fourth very short email correspondence was made providing data on other alternative compliance options than the three analyzed in this thesis.

Several seminars and conferences were attended in order to develop an overview and understanding of the actors in the maritime industry, the present networks and activities in relation to the upcoming SOx regulations and in relation to the maritime industry as a whole.

Following is a list of interviews conducted and seminars attended.

Interviews:

 Troels Joergensen, Senior Manager, Environmental & Fleet Support in TORM A/S o Monday the 24^th of September 2012

 Satnam Kaur Nanda-Joergensen, CSR & Compliance Manager in DS NORDEN A/S¹¹ o Monday the 1^st of October 2012

 Maria Bruun Skipper, Senior Advisor in Danish Shipowners’ Association, Partnership for cleaner shipping

o Monday the 8^th of October 2012

 Michael Vihlmann Jensen, Project Manager in Danish Maritime on retrofitting o Friday the 12^th of October 2012

Seminars:

 Open Smart City 2012, Copenhagen Cleantech Cluster, Knowledge exchange and networking event

o Tuesday the 20^th of March 2012 at the Crown Place Copenhagen

 Reduction of ship and port emissions through knowledge and innovation based competitiveness in the Baltic Sea Region Conference

o Wednesday the 18^th of April 2012 at Custom House Copenhagen

11 The interview was neither recorded nor transcribed.

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 Flights, ships and trucks on biofuels Seminar

o Wednesday the 25^th of April 2012 at A. P. Moeller Maersk – Esplanaden, Copenhagen

 Retrofitting Seminar

o Monday the 8^th of October 2012 at Ingenioerhuset, Kalvebod Brygge, Copenhagen The informants chosen were decided based on their degree of knowledge around the aspect of the thesis. TORM and NORDEN were chosen because of their knowledge around the Danish shipping industry, the SOx challenge and the compliance strategies. Partnership for cleaner shipping was chosen because of their knowledge on networks, collaboration and focus on greener shipping. The short email correspondence with the Danish Maritime was chosen because of their knowledge on the area of retrofitting and compliance strategies. These informants are the base for understanding the Danish maritime industry and the ongoing activities.

The several seminars attended were chosen based on their relevance on the subject of compliance strategies, fuel technologies and general solutions to the SOx challenge. The interview guide and transcript is found in the appendix.

The thesis includes aspects from many different channels, angels and networks in the Danish maritime industry. Unfortunately, it was not possible to gather data from a significant ship-owner only operating in the SECA. Both TORM and NORDEN operate outside as well as inside the SECA and are not affected by the SOx regulations in the same extent.

3.4.2 Secondary data

In addition to the primary data, the thesis also consists of secondary data of both quantitative and qualitative content. The secondary data was mainly used to gain an overview and understanding of the network literature and maritime industry. The secondary data used for this thesis consist of data from academic scholars, statistics and data from various maritime organizations and reports from governmental institutions.

Even though the information gathered as secondary data originally was collected for a different purpose than this thesis, the secondary data still has significant value and quality for investigating the research objective.

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3.5 Reliability and validity

Reliability is considered the degree to which the research study and the collection of data methods will yield similar observations and findings by other researchers. Thus, that the approach is consistent across different researchers and different projects (Gibbs 2007). Accordingly, reliability reflects the degree of transparency made from the raw data. Validity refers to the findings of the study to be accurate and reliable, in the sense that the findings of the research are supported by evidence or by employing certain procedures (Gibbs 2007).

Yin (2003) suggests that qualitative researchers need to document the procedures of their studies and to document as many of the steps of the procedures as possible (Yin 2003). Hence, in insuring the reliability of this thesis, the interviews, emails and other correspondence with the interviewees was transcribed in the extent that was possible¹² and can be found in the appendix. In addition, quotes and comments from the interviewees and the companies and organizations publications are used as written, to ensure that the interpretations of data are understood correctly.

The lack of standardization from the semi structured interviews might facilitate a problem for the reliability of the data, because it reflects a specific time and situation when the research was conducted. Hence, the findings from these interviews may not necessarily be possible to reproduce.

The same problem occurs from the data collected from the various seminars and conferences.

Otherwise, making several semi-structural interviews and using different sources increases the validation of the research conducted (Creswell 2009).

Additionally, the research attempts to ensure the reliability and validity of data through data- triangulation, which involves using multiple - and different sources of information and contexts on the same research objective. It is argued that this research method combined with statistical data and theories verify the reliability of the thesis (Patton 2002).

3.6 Implications

The chosen research strategy addresses some implications. Firstly, the findings count only primarily data from a couple of Danish maritime companies/organizations and does not reflect a general

12 The interview with DS NORDEN was not permitted to be either recorded or transcribed

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32 opinion. Moreover, the ship-owners interviewed only represent shipping companies that operate both inside and outside the SECA, thus do not face the same challenge in regards to the SOx regulations as ship-owner only sailing inside the SECA.

Secondly, the applied types of networks are only used for the single phenomenon of the SOx challenge, why drawing universal generalization of the findings is challenging. As the study develops over time, factors will emerge that may influence this single phenomenon (Creswell 2009).

Thus, the relation between the types of networks and the compliance solutions are highly context- dependent. Even though, the study serves the purpose of supplement for further scientific research, or alternative to other methods for similar research objectives.

3.7 Analytical Framework

This chapter outlined the methodology of the thesis. The research approach and strategy is argued suitable to analyze and draw conclusions on the research objective. The combination of the conceptual framework and the research objective addresses a study that has not been conducted before. Thus, serves as a starting point for further and additional research on how network can facilitate short sea ship-owners comply with the upcoming SOx regulations in the SECA using certain types of networks.

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4. Industry description

According to the Danish Shipowners’ Association, Danish shipping has grown significantly the past years. The Association states: “shipping remains a backbone of growth and boosts the continued expansion of maritime business cluster “Blue Denmark”” (the Danish Shipowners’ Association 2012).

This chapter examines the Blue Denmark and the ongoing activities in the cluster around the SOx legislations. In addition, the chapter provides an overview of the shipping industry in the SECA, and describes the three compliance solutions. Thus, this chapter serves as a necessary pre-exposition for the analysis and discussion.

4.1 The Blue Denmark

Denmark is one of today’s leading maritime countries in Europe, with Danish ships carrying estimated 10% of global trade and Danish shipping companies controlling estimated 7% of the global merchant fleet (Iversen and Sornn-Friese 2007, the Danish Shipowners’ Association 2012). Thus, Denmark and in particular Copenhagen has become a cluster for maritime shipping (the Danish Shipowners’ Association 2012).

The Danish Shipowners’ Association states that in 2011, the ship-owners contributed approximately DKK 183bn to the Danish balance of payments, and the shipping industry ensured a net contribution to the Danish balance of payments of around DKK 30bn. Thus, the Blue Denmark plays a significant role in Danish economy with an overall of 25% of the country's total export income (the Danish Shipowners’ Association 2012).

The Danish merchant fleet consisted of 608 ships, 13.8 million DWT (deadweight tonnage) and 11.5 million GT (gross ton)¹³. At the same time, the Danish merchant fleet is among the youngest in the world with an average age of 8.2 years old. The average age of the world merchant fleet is, as 1^st of January 2012, almost 9.6 years old. The Danish Shipowners’ Association argues that as the Danish merchant fleet is among the youngest, means that the Danish ship-owners operate a modern and energy-efficient fleet (the Danish Shipowners’ Association 2012).

13 As at 1^st of October 2012

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34 Figure 4.1 illustrates the distribution of employment in the Danish maritime industry. It is estimated, that around 115.000 people work either directly or indirectly in the Blue Denmark (the Danish Shipowners’ Association 2013).

Figure 4.1: Employment in the Danish Maritime Industry.

Source: The Danish Shipowners’ Association 2012.

As figure 4.1 illustrates, the Danish maritime industry already consists of several actors and networks among these actors. Figure 4.2 below illustrates the complexity of the maritime industry from a ship-owners perspective, with its many various actors and vast of networks between them.

Figure 4.2: Actors in the maritime industry.

Source: The Maritime Industry Foundation 2012.

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35 The two figures clarify the dependency ship-owners are on networks, thus also why research in the field of network creation and optimization is relevant. According to figure 4.2, this research only focuses on network relations, which are relevant in context of the SOx legislations.

The variety of actors and need for collaboration is also recognized and acknowledged by the current government. Thus, the current government has put the maritime area in focus and established a growth team, which is to contribute with specific suggestions to how growth and development in the Blue Denmark is maintained and increased (the Danish Shipowners’ Association 2012;

Partnership for Cleaner Shipping 2012).

The Danish Shipowners' Association considers this growth team of the government to be an important message of continued support to the industry and is pleased to have a new political forum that contributes to developing shipping. Moreover, the Danish Shipowners' Association identifies the growth team as an opportunity to create consensus between the many interested parties in the industry, in order to achieve the long-term goals in the focus-areas; environment, education and innovation (The Danish Shipowners’ Association 2012). Hence, both the government and the ship- owners have significant ambitions on the climate - and environmental area, and have already accomplished some reduction in emissions and increase in energy efficiencies (the Danish Shipowners’ Association 2012).

As figure 4.1 and 4.2 illustrated, there are numerous actors and networks already in the maritime industry. The following section explores the most significant organizations in the industry relating to the research objective.

4.1.1 Organizations overview

Already mentioned the Danish Shipowners’ Association is a trade and employees’ organization that accommodates the Danish merchant fleet. The organization includes 39 ship-owners and 2 owners of offshore facility (Mærsk Oil and HESS). The members of the Association counts for 96% of the total merchant fleet registered in the Danish International Ship register. Eighteen of the associated members sail under Danish flag.

The purpose of the network is to safeguard the interests of the industry and act as employers’

organization for their members. The Danish Shipowners’ Association is also a member and service

Network Types and Structures in the Danish Maritime Industry