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An explorative study on Temporary Skills Transfer:

Evidence from Mechatronics Cluster Denmark

Copenhagen Business School Supervisor: Finn Valentin

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Abstract

This thesis explores two cases of temporary skills transfer (TST), a new phenomenon that involves the temporary transfer of a skill between a group of companies. The skill compensates for a shortage of human resources and solves capacity issues in the development process. We find that TST effectively solves short term problems, and due to a competitive price and speed it contributes with a competitive advantage. In the long run, however, TST becomes less valuable for a number of reasons, including that it fails to build internal competences and avoid uncertainty.

The governance structure is characterised as a mean between that of a strategic alliance and an arm’s length relation, and as a result managerial challenges of TST differ, but takes characteristics from both. Trust reduces transaction costs, but due to minimal commitment and investment in relation specific assets, the companies do not succeed in generating relational rents. The design of the alliance and non firm specific character of the exchange, in turn, makes the risk of

opportunism obsolete.

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List of contents

1.0 Introduction ... 5

1.1 Case descriptions ... 6

1.2 Focus ... 8

1.3 Innovation in Mechatronics Cluster Denmark ... 8

1.4 The concept of temporary skills transfer... 9

1.5 Research Question ... 10

1.6 Limitations ... 12

1.7 Outline ... 13

PART I ... 14

2.0 Theoretical Background ... 15

2.1 Approach to literature review ... 15

2.2 Skills shortage theory ... 17

2.2.1 Summary of core issues - skills shortage ... 20

2.3 Sustained competitive advantage theory ... 21

2.3.1 Summary of core issues – sustained competitive advantage ... 29

2.4 Governance theory ... 30

2.4.1 An overview of the TCE and social capital approaches ... 30

2.4.1.1 Transaction Cost Economics... 30

2.4.1.2 Social capital theory ... 32

2.4.2 The openness – appropriability paradox ... 34

2.4.2.1 Determining the degree of appropriability hazard ... 36

2.4.3 Summary of core issues - governance ... 37

2.5 Discussion ... 39

2.5.1 Skills shortage ... 40

2.5.2 Sustained competitive advantage ... 42

2.5.3 Governance... 45

2.5.4 Summary of discussion topics ... 48

PART II ... 49

3.0 Method ... 50

3.1 Research Strategy and approach ... 50

3.1.1 Methodological fit ... 51

3.2 Research design ... 52

3.2.1 Collection of empirical data ... 52

3.2.2 Case study research approach ... 55

3.3 Critique of method ... 57

4.0 Empirical Investigation ... 58

4.1 Case description: MCS ... 58

4.1.1 Skills shortage ... 63

4.1.1.1 Summary of key findings – skills shortage ... 69

4.1.2 Sustained competitive Advantage ... 70

4.1.2.1 Summary of key findings – sustained competitive advantage ... 72

4.1.3 Governance... 74

4.1.3.1 Summary of key findings - governance ... 79

4.2 Case description: Post Graduate Rotation Program ... 81

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4.2.1 Skills shortage ... 82

4.2.1.1 Summary of key findings – skills shortage ... 85

4.2.2 Sustained competitive advantage ... 86

4.2.3 Governance... 86

4.2.3.1 Summary of key findings - appropriability ... 89

4.3 Key similarities and key differences between MCS and PGRP ... 89

5.0 Analysis ... 91

5.1 Skills shortage ... 91

5.1.1 Summary of key conclusions – skills shortage ... 97

5.2 Sustained competitive advantage ... 98

5.2.1 Summary of key conclusions – sustained competitive advantage ... 103

5.3 Governance... 104

5.3.1 Summary of key conclusions – governance ... 114

6.0 Conclusion ... 116

6.1 Critical success factors ... 118

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1.0 Introduction

Various types of interfirm collaborations have been subject to much research. This paper explores a new type of interfirm collaboration that, to our knowledge, has not yet been observed, nor considered, by previous researchers. We term it ”temporary skills transfer” (TST). TST involves pooling of employees and a temporary transfer of skills between a group of collaborating companies. This type of collaboration has been detected within the Mechatronics Cluster Denmark (MCD – see appendix 8.1) in Sønderborg. MCD currently consists of 70 mechatronics companies – predominantly global market leaders within their fields. Mechatronics is a relatively new discipline and is an amalgamation of “mecha” from mechanics and “tronics” from electronics.

It means “the synergistic integration of mechanical engineering with electronics and intelligent computer control in the design and manufacture of products and processes” (MCD web page, 2009). Accumulatively, the companies in the area have a fiscal turnover of more than 10 billion DKK and employ more than 12,000 people. Mechatronics companies are responsible for 55 percent of private employment in Sønderborg (MCD web page, 2009).

The region claims to experience a shortage of technical skills and maintains problems attracting a qualified workforce. Mechanical engineers are especially difficult to recruit, in particular during economic booms. This paper seeks to address what role such competence bottleneck problems may play for the clustered companies, and what effect it may have on innovative output. In essence, we will explore how eight local firms endeavour to mitigate the negative effects of skills shortage by use of TST, and whether TST earns them a sustained competitive advantage.

This paper is a case study which is based on the exploration of two different TST initiatives implemented within the region, and it will illustrate a newly evolved trend and governance structure within interfirm collaboration.

A list of definitions is found in appendix 8.7.

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1.1 Case descriptions

The research is built on two cases:

Founded in 2005 by the MCD steering committee, Mechanic Centre South (MCS) is an initiative where four companies in the Sønderborg region have engaged in collaboration with the objective of sharing mechanical engineering resources and competences (Ingeniøren, 2007). The participating companies are Danfoss Solar Inverters (DSI - previously PowerLynx) that produces grid-connected inverters for solar energy, Focon Electronics Systems (Focon) that produces passenger information system solutions for trains, Servodan that produces a range of products within lighting control, dynamic daylight technology and door bell systems and Saab Danmark (Saab – previously Maersk Data Defence) that produces communication and control systems for military defence and civil security. General information on the companies is gathered in appendix 8.3.

The four companies are not in direct competition. They make different products and cater to different markets, but make use of some of the same engineering processes and techniques such as mechanical engineering; which is a basic, but nevertheless important element of the product development process. In other words, it is not considered a firm specific competence. However, the companies lack critical mass in the sense that in peak periods there is a deficiency in capacity and in slow periods there is excess capacity when it comes to mechanical engineering resources.

The companies in question each employ only one or two mechanical engineers. The arrangement is intended to “improve problem solving and allow faster development and growth” (CfE Annual report, 2005).

Physically, the mechanical engineers are stationed in the host company during the length of the given project, which means that they are granted access to information about ongoing projects etc. Consequently, this may bring about concerns regarding appropriability and expropriation of

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knowledge. The MCS steering committee have tackled this issue by ensuring that participating companies are not in direct competition with each other in their product markets and also by focusing on competences that are not firm specific (Ingeniøren, 2007). It is a pre-requisite that the participating companies are located in Sønderborg in order to avoid long transportation times.

Ideally, the host company has to treat the engineer on loan as its own employee. All assignments are invoiced at internal cost price; the average of the companies’ consultancy prices, approximately 300 - 400 DKK per hour. The steering committee has agreed that the collaboration is non-profit (Ingeniøren, 2007).

Inspired by MCS and graduate programs within large local companies such as Danfoss and Sauer- Danfoss, Sønderborg’s Centre for Economic Development (CfE – see appendix 8.2) has spent one and a half years working on building a Post Graduate Rotation Program (PGRP) where primarily newly educated engineers have the opportunity to become stationed in three different companies over a period of two years. The graduates will be stationed in three companies for a period of eight months in each company. The idea is that the candidates become a regular part of the team, but none of the companies are guaranteed that the graduate will work for their company after the two-year period.

The initiative is run by CfE and is a collaboration between Linak, Siemens Flow Instruments (Siemens), OJ Electronics (OJ), Focon (also part of MCS) and Rose Technology (MCD website, 2009). Linak produces electric linear actuator systems, Siemens produces high-tech flowmeters, OJ produces, amongst other things, electrical and hydronic floor heating, air handling solutions, thermostats and sensors, and Rose Technology is a consultancy agency within information technology solutions. General information on the companies is gathered in appendix 8.3. Initially seven companies agreed to collaborate on the initiative, but two had to cancel their participation early on due to the financial crisis, leaving CfE with five companies (CfE, 2009). All companies share a similar need for competences within the field of mechatronics. In opposition to MCS, participation this arrangement does not necessitate that the companies operate in different

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product markets. In fact, OJ and one of the companies that was initially part of PGRP (Lodam) are in direct competition. The primary motive behind the initiative, both from the perspective of CfE, is “attracting qualified employees to the region and companies” (CfE, 2009).

The status is that due to the financial crisis, the pilot phase has been postponed (the companies could not argue for hiring during a period of layoffs). CfE has received a large number of qualified applications from graduates from around the country, but the program will not commence until 2010 (CfE, 2009).

1.2 Focus

In order to explore the concept of TST the paper will hold MCS as the centre of analysis. MCS is empirically richer in information compared to the limited evidence available from PGRP. However, ex ante activities related to the PGRP will be used primarily as comparison to MCS (which will function as the benchmark) and as evidence to support the wider acceptance of TST among the eight companies in the mechatronics cluster.

1.3 Innovation in Mechatronics Cluster Denmark

Mechanical engineering takes its role in the product development process as “one piece of a bigger puzzle” (DSI manager), so the MCS initiative does not seem to be intended for conducting basic research, but rather on applied research. MCS thus seems to be an initiative that solves competence bottleneck problems by making the best use of the available resources in a combined effort. In general, according to a recent MBA dissertation addressing front-end innovation in mechatronics firms in Sønderborg, the mechatronics industry is mainly dominated by incremental innovations (Haugaard, 2008: p. 41), i.e. it comes down to identifying customer problems that need to be solved or existing solutions that need to be improved (p. 19). Although innovations are mainly low-risk and incremental of nature, innovation is regarded as important to the local companies (p. 51). However, Haugaard (2008) suggests that the focus on incremental innovations limits the companies’ abilities to leverage external sources of ideas (p. 54). In 69 percent of the cases studied, the respondents stated the importance of internal R&D employees as the source of ideas (p. 41).

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1.4 The concept of temporary skills transfer

Existing literature on interfirm collaborations does not embody phenomena directly comparable to TST, however, inspiration and insights can be accumulated from adjacent literature based on related phenomena such as joint ventures, R&D consortia, strategic alliances and arm’s length market transactions (such as fee-based services acquired from consultancy agencies).

Traditionally, scholars have focused their attention of comparing trade-offs between full integration with arm’s length market transactions (the so-called make or buy decision), and progressively, scholars have explored advantages of R&D consortia and strategic alliances across company borders. TST is best characterised as an alliance that to some extent is dominated by the similar close relationships as seen in strategic alliances, but where the collaboration does not embrace the complete R&D bundle, but only certain specialised knowledge assets and skills. In that sense, it is argued to require less commitment. Resources are acquired on a need basis and the companies are billed for the service accordingly, which in turn is very similar to an arm’s length market transaction. We thus argue that TST is best placed between strategic alliances and arm’s length market transactions on the spectrum of alliance types (see Figure 1 Spectrum of alliance types).

Figure 1 Spectrum of alliance types

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1.5 Research Question

Our research is conducted in order to gain a better understanding of TST and its implications for mitigating opportunity barriers caused by skills shortage, as well as other possible advantages or disadvantages. It initially caught our interest because, amongst other things, it seemed to challenge some common theoretical notions with regards to appropriability concerns and the threat of expropriation of knowledge. In addition, we found the subject to be relevant because many companies experience skill shortage problems, and we find it interesting to explore whether the lack of core technical skills has an influence on innovative capability and if so, if negative effects can be avoided by TST. We also wonder whether the TST can exceed functioning as a means to solving capacity issues and contribute with a sustained competitive advantage. Given the novelty of TST, we find this research area important. We illustrate the link between the two literature bodies by drawing a pyramid (Figure 2 Pyramid of TST potential), where skills shortage mitigation is in the bottom of the pyramid, as a basic objective, and can be seen as a short term competitive advantage earning modest rents. Sustained competitive advantage is then at the top of the pyramid as potential that solves long term needs and earns above normal rents.

Figure 2 Pyramid of TST potential

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While the external acquisition of skills can take many governance structures, ranging from joint ventures, strategic alliances to arm’s length market transactions; little attention has been given to collaborations falling outside these categories. Phenomena equivalent to TST has, to our

knowledge, not previously been explored. Nor have we observed similar arrangements in industry.

Thus, by exploring and analysing this phenomenon observed in Sønderborg, this paper presents a new governance structure that in this case also seems to function as a new possible solution to the skills shortage problem. Comprehensive research on the matter is useful because other companies experiencing skills shortage problems and, as a result, possibly reduced innovative capacity may find inspiration in TST. The phenomenon and its position on the interfirm collaboration continuum (Figure 1 Spectrum of alliance types) may represent a viable and perhaps value optimising

alternative. Theoretically, the study presents a new unit of analysis (the temporary exchange of skills), which may urge future scholars to incorporate the concept when talking about interfirm collaborations.

The paper is motivated by following research questions:

1. How is innovative performance affected by shortage of technical skills and can the effects be mitigated by TST?

2. Can TST contribute to a sustained competitive advantage?

3. How do the governance and managerial challenges of TST differ from those of strategic alliances and arm’s length market transactions?

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1.6 Limitations

The unit of analysis in this example is the exchange of mechanical engineering skills in the research and development process. Whether the results can be directly transferred to other competence areas in the research and development process remains unknown but could be subject for further studies. The paper focuses on R&D collaborations only and thus omits any discussion on whether results are applicable to other value chain activities such as marketing.

A major limitation to our analysis of competitive advantage is that we have not conducted field research with regards to competition. We therefore know little about how the case companies are positioned relative to their competitors and whether competing companies are bound by similar constraints or have other advantages that influence their relative competitiveness. Instead we rely on theoretical assumptions with regards to firm ability to obtain competitive advantage, and determine progress based on the companies’ performance before and after engaging in TST, and disregard whether or not this performance raises the companies over the competition.

The explorative nature of our research means that we provide insight and deepen understanding of TST, but we do not provide strategic or operational advice for companies to follow as such. We do, however, treat certain managerial challenges and critical success factors that can be taken into consideration by managers wishing to engage in TST, but with vast deliberation.

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1.7 Outline

As Figure 3 Outline) depicts, the research question motivates the outline of the thesis. It is divided into three parts. In Part I, the research question links to three literature bodies from which core issues are deducted. Key theoretical gaps are identified and formulated into questions. The questions and possible scenarios are subsequently discussed. Part II involves building the case study. We use the case study method to explore the key theoretical gaps identified in the literature review and qualitatively provide key findings. Based on the empirical evidence in Part II, Part III analyses the key findings in relation to existing literature and provides key conclusions about TST. We examine generalisation and transfer potential of the Sønderborg experience and, as a result induct a new theory on the phenomenon of TST and its critical success factors.

Part I Part II Part III

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PART I

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2.0 Theoretical Background

Extensive research exists on interfirm collaborations. The topic has been discussed by many reputable scholars for the past decades and continues to receive much attention. Due to the overwhelming amount of information available we carefully screened the domain in search of issues related to strategic alliances and arm’s length transactions as well as other governance structures and phenomena which we regard as adjacent to TST; thus adjacent literature and what comes closest to viably suggesting the managerial challenges connected to the TST. Because the phenomenon has not previously been described, we make sure to remain objective and critical and keep in mind that adjacent literature may not be directly applicable to the TST context.

Nevertheless, we seek to understand implications of closely related phenomena.

2.1 Approach to literature review

Secondary data is necessary when doing explorative research (Saunders et al, 2007: p. 248) because it offers the possibility of reanalysing data that has already been collected for other purposes (ibid: p. 246). An advantage of secondary data is that it allows us to compare our findings with existing literature (ibid: p. 259). On the flip side, secondary data is collected for different purposes that may not always be equivalent to the content of new research (ibid: p. 260). The challenge is to select evidence that is relevant and that adds value and insight to our research (ibid: p. 87). We vetted and evaluated the evidence in order to determine whether the data was useful as evidence to support the claim (ibid: p. 270). We kept in mind and tried to regulate for validity by choosing only to rely on evidence tested in related sectors, or sectors dominated by the same level of technology intensiveness. We also chose to focus on literature of alliances within the research and development part of the value chain in order to be able to make more precise comparisons, and where possible, relied on research conducted with special attention to small firms.

In general, we were careful to screen sources for reliability and chose to place our emphasis on reputable scholars and literature published by reputable journals. We also tried to maintain a preference and dependence on current sources of knowledge; however, we noted that much of

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the founding research traces back to the 1980s and continues to be influential, so it was studied with vast deliberation.

Based on a preliminary investigation of the two cases three relevant research questions were formulated, and as a result, three theoretical strands within interfirm collaboration literature were deemed relevant to explore:

1. Skills shortage theory

2. Sustained competitive advantage theory

3. Governance theory (broad definition including managerial challenges arising from openness and appropriability concerns)

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2.2 Skills shortage theory

Concentrating on the first research question, “how is innovative performance affected by shortage of technical skills” and “can the effects be mitigated by TST”, this section reviews skills shortage literature in order to learn more about the nature of skills shortage problems, and how they can be tackled. It furthermore reviews literature that is especially targeted to small firms and to firms in unfavourable peripheral regions. We temporarily disregard cluster theory related mitigation efforts (as it is a condition the companies find themselves in regardless) but touch upon it in the next section when we look at how firms obtain a competitive advantage.

We know from theory that skills shortage problems may be further deepened by a regional disadvantage (Vaessen and Keeble, 1995: p. 490), and that it may occur more frequently in small firms (Westhead, 1997 p. 61; Bosworth, 1989 p. 66). It is also proposed by many that a considerable attractiveness barrier exists between small firms and graduates (Freel, 1999: p. 148).

Although conventional regional development theory claims that unfavourable peripheral regions place constraints on business growth (Vaessen and Keeble, 1995: p. 490), Vaessen and Keeble show that small firms can overcome external barriers because, amongst other reasons, they “do not remain passive towards external pressures and constraints imposed by their regional environment. Instead enterprises in peripheral regions may actively and even successfully work to develop strategies to overcome these constraints” (p. 503). Those firms that succeed may acquire so much business expertise and market intelligence that they can even outstrip their counterparts in more favourable, resource rich environments (p.503).

According to Bosworth (1989: p. 66) small firms are generally disadvantaged in the market for skilled labour as they are rarely able to match wage rates, career development opportunities or job security as available in larger firms (supported by Westhead, 1998: p. 61). On the contrary, Vinten (1998), who studied human resource management and recruitment habits as well as possible effects of skills shortage in small firms, found that, although the majority of the respondents did not directly claim to experience a skills shortage problem, small firms may have advantages when it comes to flexibility in work patterns. i.e. small firms can make use of part time workers, job-sharing and contracting out to a greater extent than large firms.

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Small firms are more dependent on external rather than internal labour markets in opposition to larger firms that have greater possibility of relying on and training internal labour (Vinten, 1998: p.

238; Scott et al, 1996: p. 88). However, we know that due to resource constraints, small firms rarely participate in formal training (Marlow, 1998: p. 46; Bosworth, 1989: p. 72). Freel (1999: p.

151) found that although a general skills shortage was claimed by his sample population of small firms to exist, the firms seemed to favour improving in-house competencies over accessing external knowledge; in other words, he observed a reluctance to hire new personnel. As such, constraints on access to sources of knowledge and skills are not necessarily imposed by external labour markets or inadequate linkages with external expertise, but by an internal skills gap (i.e.

training capabilities).

According to Vinten (1998: p. 238), the small firm approach to recruitment is generally more relaxed than the large firm approach, and often dominated by little, or only local, advertisement, little advice from personnel specialists, and in some cases (11 percent) the small companies do not use application forms. Instead personal references are deemed important. Vinten (1998) proposes that small firm dependency on outside factors for human resource supply can be moderated by the effect of local influences, e.g. an interfirm collaboration such as subcontracting in a region (p.

238). The few companies in specialist areas in Vinten’s study (1998: p. 239) that did suffer from a severe skills shortage problem attempted to mitigate it by retaining and retraining existing staff and recruiting from wider areas – and also by employing more creative job design methods, i.e.

removing unskilled tasks from skilled workers allowing them to concentrate on skilled tasks. Also, a tendency towards fitting the job to the available skills (rather than vice versa) was observed. As such, human resource systems, i.e. “a set of distinct but interrelated activities, functions and processes that are directed at attracting, developing and maintaining (or disposing of) a firm’s human resources” (Lado and Wilson, 1994: p. 701) can be used to counter the skills shortage problem.

When it comes to exploitation, Freel (1999: p. 148) expresses concern that the employment of graduates (with the focus on scientists and engineers) and the immediacy of their impact is unlikely to be sufficient (possibly due to managerial competency barriers encountered by small firms). Nonetheless, it is anticipated that the employment of graduates will raise competence

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levels, introduce new skills and be indicative of an attitude or willingness conducive to growth and innovation (Freel, 1999: p. 149; Westhead, 1998: p. 76) and additionally it may strengthen and sustain exchanges of information with the university (Wood, 1997: p. 22).

Nearly all firms regard enhanced technical skills as the primary means to achieve improvements in innovative output (Freel, 1999: p. 144). In other words, firms with substantial innovative output typically have a higher proportion of staff that is technically skilled (Wood, 1997: p. 21). Scott et al (1996) argue that in the absence of higher skills levels and when faced with a competitive labour market, small firms risk becoming tied to levels of existing technology, which further undermines competitiveness (p. 94). When aware of skills shortages small firms tend to focus on immediate needs and rarely raise themselves higher than the intermediate skill levels with which they are familiar (ibid: p. 87).

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2.2.1 Summary of core issues - skills shortage

Skills shortage:

o May be caused by regional disadvantage.

o May occur more frequently in small firms.

Small firms are more dependent on external labour.

Small firms may have an internal skills gap (i.e. training capabilities).

Small firms are rarely able to match wage rates.

An attractiveness barrier exists between small firms and graduates.

But small firms can employ more flexibility in work patterns.

Mitigation efforts:

o Negative effects can be moderated by local influences (e.g. regional initiatives) o Retaining and retraining existing staff.

o Recruiting from wider areas.

o Employing more creative job design methods.

Removing unskilled tasks from skilled workers allowing them to concentrate on skilled tasks.

Tendency towards fitting the job to the available skills (rather than vice versa).

Risks:

o Firms with substantial innovative output typically have a higher proportion of staff that is technically skilled.

o In the absence of higher skills levels and faced with a competitive labour market, small firms risk becoming tied into levels of existing technology.

Regional efforts by the municipality or a cluster organisation to attract labour are said to help solve skills shortage problems, but can similar effects be accumulated by an independent group of companies, to what extent does it solve the problem?

Small firms have the advantage that they can employ more flexibility in work patterns – does TST qualify as such flexible work pattern or a viable alternative?

Firms may prefer retaining and training internal staff, but are there additional benefits associated with TST that make it more preferable?

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2.3 Sustained competitive advantage theory

We just learned that technical skills are the “primary means to achieving improvements in innovative output”. In order to determine whether the TST, apart from solving capacity issues is capable of earning the companies a sustained competitive advantage (the second research question), this section examines the competitive disadvantage by looking at the flip side – what does it take for a company to obtain a sustained competitive advantage?

Many scholars have sought to find out what it takes a company to obtain a [sustained] competitive advantage (Porter, 1980; Metcalfe and Gibbons, 1989; Barney, 1991; Dyer and Singh, 1998).

Where Porter’s (1980) classical view of competitive advantage is focused around industry based competitive circumstances (i.e. opportunities and threats), Metcalfe and Gibbons (1989) studied in greater detail the relation between technology and long run competitive performance and found that in the short run, it depends on the position of the technology within a relevant technological distribution and in the long run, the ability of a firm to maintain a momentum of technological improvement within the constraints of the relevant agenda (p. 160). Because we do not explore market position and technological momentum in relation to the competition (see limitations in section 1.6), we focus primarily on literature attesting to other sources of competitive advantage.

Resource Based view

Where prior research centred on market position, Barney (1991) increased emphasis on internal resource endowments, and the valuable, rare, non-imitable and non-substitutable attributes of these (p. 211), as the determinant of a firm’s ability to achieve above normal returns.

Competences must be relatively immobile so that they cannot easily be transferred from one firm to another (Barney, 1991: p. 209).

Adding to the resource-based view (RBV), Lado and Wilson (1994: p. 699) contend that firms can attain to sustained competitive advantage by facilitating competences that are firm specific, by producing “complex social relationships that are embedded in a firm’s culture” and by “generating tacit organisational knowledge”. Lado and Wilson (1994) simplify the meaning of competencies by breaking it into input-based (p. 704), transformational (p. 705) and output-based (p. 708)

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resources such as human resources, knowledge, skills and capabilities which enable the transformational processes (facilitated by e.g. innovation, entrepreneurship, organisational culture and organisational learning) to create and deliver products. The competency based perspective encourages investment in firm specific human (and non human) capital by, for example, building an internal labour market (ibid: p. 705).

When this investment is restricted by a skills shortage problem, according to this view, a firm may not be able to obtain a sustained competitive advantage.

Transaction Cost Economics

Foss and Foss (2005) build on and identify the shortcomings of the RBV by adding the notion of transaction cost economics (TCE) and exploring the relationship between TCE, value creation and appropriation (p. 542). Accordingly, value creation and appropriation in the RBV depend on the scarcity and heterogeneity of resources but value creation and appropriation also depend on the transaction costs of trading and protecting IPR to the attributes that make up the resource.

According to Foss and Foss (2005) sustained competitive advantage therefore stems from how successful a company is at controlling and protecting resources compared to the competition (p.

549). The RBV adds to this that competition is reduced when imitation and substitution become more difficult, but here Foss and Foss (2005) add that companies must therefore also protect resources against moral hazard, adverse selection, hold-up and other elements of competition in order to sustain their competitive advantage (Foss and Foss, 2005: p. 550). Lastly, adding transaction costs to the RBV helps elaborate on the notion of heterogeneity because, as will be investigated further in the next section, a resource is, in the TCE perspective, seen as “a bundle of property rights to various resource attributes, such as uses and functionalities” (Foss and Foss 2005: p. 549). So while a resource may be the same for two companies, it may then economically differ because the companies protect and appropriate the value of the resource attribute differently (ibid).

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Thus, according to this view, constraints to achieving a sustained competitive advantage can be caused by, not only reduced by innovative capability but also by failure to appropriate value from innovations.

Relational view

Although the RBV does acknowledge that firm resources can become imperfectly imitable due to social complexity (stemming from interpersonal relations internally or externally), Dyer and Singh (1998) build on Barney’s (1991) framework and suggest that interfirm relations are an increasingly important unit of analysis for understanding competitive advantage. Dyer and Singh’s (1998) relational view rests on a vast devotion of previous scholars to the fact that when knowledge is broadly distributed and brings a competitive advantage, the locus of innovation is found in a network of interorganisational relationships (Powell et al, 1996: p. 119). In other words, when know-how is critical, it is recognised that companies must be expert at both in-house and cooperative research with partners ranging from universities to skilled competitors (ibid: p. 119).

The unprecedented growth in corporate partnering and reliance on various forms of external collaborations (Powell et al, 1996: p. 116) has led many scholars to view relational capital and the formation of interorganisational networks as a mere necessity for remaining competitive (Granovetter, 1985 amongst many). With the relational view, Dyer and Singh (1998) suggest that companies that move away from arm’s length market relationships, where inter-firm interaction is limited (“on-offs” in the terminology of Powell et al, 1996: p. 119), and instead develop close relationships with alliance partners, can yield relational rents and above normal returns, and thus obtain a sustained competitive advantage (1998: p. 660). Arm’s-length relationships are characterised by 1) non-specific asset investments, 2) minimal information exchange, 3) separable technological and functional systems within each firm, and 4) low transaction costs and minimal investment in governance mechanisms (p. 661). In arm’s length relationships it is easy to switch partners and it is not possible to achieve relational rents as the relationships are neither rare nor difficult to imitate. Relational rents are only possible when alliance partners combine, exchange, or invest in distinctive assets, knowledge and resources and employ effective governance mechanisms (Dyer and Singh, 1998: p. 662). They propose that there are four potential sources of

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interorganisational competitive advantage: Relation-specific assets, knowledge-sharing routines, complementary resource endowment and effective governance.

Powell et al (1996) argue that collaborations are not simply a means to compensate for the lack of internal skills (p. 119) but that informal relations may carry benefits beyond the particular agreement (p. 120). Formal agreements are just “the tip of the iceberg” (p. 120). Many scholars argue that active participation in networks and prior alliance experience creates trust and breeds access to knowledge (Granovetter, 1985; Larson, 1992; Powell et al, 1996: p. 120; Dyer and Singh, 1998), shapes the firm’s reputation, and gives timely information about, for example, new collaboration opportunities or obstacles (Larson, 1992: p. 84; Powell et al, 1996: p. 121; Powell, 1998: p. 77). Along the same lines, Eisenhardt and Schoonhoven (1996: p. 137) suggest that the transaction cost economising logic, while helpful, does not capture many of the strategic advantages of alliances such as learning, creation of legitimacy and fast market entry. Ultimately, they argue that failure to include social and strategic explanations creates an impoverished view of alliance formation.

According to this view, sufficient investment in relations brings relational rents that can contribute to a sustained competitive advantage.

Cluster advantages (and disadvantages)

When looking at cluster theory, it becomes apparent that the external environment in which the firm operates may explain competitive advantage. Porter (1990) focuses on how the cluster contributes to the development of internationally competitive nations, industries and companies.

He uses the diamond to explain the factors contributing to the value-creation of geographically concentrated economic activity; and conveys the continuous upgrading and innovation of the cluster as the source of sustainable competitiveness (Porter, 1990: p. 132). In short, rivalry between co-located firms increases competition and productivity, paces innovation and leads to increased specialisation of suppliers (Porter, 1990: p. 131). New entrants and spin-offs from existing firms ensure that only the best survive. Proximity to demanding customers and linkages to cutting edge technologies, industries and environments boost knowledge-sharing, spillovers and innovation, and all other things being equal, lead to higher quality new products, services and

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businesses (ibid: p. 140). Access to financial and human capital and an attractive infrastructure are also important parameters and these involve a proactive government. The government should act as a catalyst and challenger to pace firms’ performance and aspirations; to stimulate early demand for advanced products; to focus on specialised factor conditions like universities; and to enforce legislation like anti-trust laws to ensure competition (ibid: p. 127). Finally, even with all these parameters Porter (1990) recognises that a certain element of chance cannot be avoided e.g. war, revolution etc (ibid: p. 124). From Porter’s (1990) paradigm it can be deduced that geographical concentration of specialised firms, advanced skills and competencies among the labour force, universities and supporting institutions, will potentially increase knowledge flows and spillovers as a result of their proximity.

Maskell (2001) extends on the cluster theory by stating that firms “co-locate” next to one another because of the benefits that arise in the wake of common understanding and trust. Examples are:

Reduction of malfeasance, inducing the volunteering of reliable information, negotiators are placed on the same wave length, sharing of tacit knowledge (p. 926) and improved learning along the vertical and horizontal dimensions of the cluster (Maskell, 2001: p. 928-932). Essentially, this leads to reduced transaction costs of identifying, assessing and exchanging information, products, services and more importantly tacit knowledge (ibid).

Others argue that increased relational capital may not be associated with parallel increases in innovative output, and that core competences can be turned into core rigidities (Leonard-Barton, 1992). A recent argument by Molina-Morales and Martínez-Fernández (2009) attests to trust and network embeddedness, despite its positive spillovers, having diminishing returns when it comes to innovative output. With cluster embeddedness as the unit of analysis (p. 1013), they contribute to the understanding of accumulated benefits taking a curvilinear shape (inverted U shape). In other words, they argue that the impact of social capital, beyond a certain point of development, ceases to produce benefits or even decreases returns, resulting in an over-embeddedness effect (p. 1014). The explanation being that the accumulation of social capital incurs costs related to maintaining the relations and maintaining slack resources. This means that firms can rarely afford to maintain relations with many other firms and thus miss out on other lucrative opportunities.

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Molina-Morales and Martínez-Fernández (2009: p. 1016) argue that particularly in industrial clusters trust makes people less likely to be willing to experiment with new ways of playing as they rely more and more on their customary routines. Coró and Grandinetti (2001) propose that clustered firms need to combine close and intense relationships with distant or arm’s length relations to be able to access international sources of resources (Molina-Morales and Martínez- Fernández, 2009: p. 1014).

Based on his study to develop a systematic understanding of embeddedness, Uzzi (1997: p. 35) describes embeddedness as “a logic of exchange”. Similarly to Molina-Morales and Martínez- Fernández (2009), he declares that positive effects of embeddedness include economies of time, integrative agreements, Pareto improvements in allocative efficiency and complex adaptation (p.

64) but he finds that embedded forms also become vulnerable to endogenous shocks and insulates them from information that exists beyond their network. He notes three conditions under which embeddedness becomes a liability: 1) there is an unforeseeable exit of a core network player (p. 57), 2) institutional forces rationalise markets (p. 58) or 3) overembeddedness characterises the network (p. 59). Uzzi (1997: p. 63) studied the difference between arm’s length and embedded ties and suggested that future studies, to invert the logic of TCE, could examine how different interfirm relationships affect the development of different types of transactions.

More specifically it could examine when embeddedness can solve coordination problems without the need to integrate vertically or erect costly monitoring systems, as this paper to some extent explores.

Coopetition

The cluster function serves a specific industry by providing a range of specialised and customised resources and services including e.g. education, research and test-centres, consultancy, capital, regulation, standards etc. (Dagnino and Padula, 2002: p. 19). Dagnino and Padula (2002) add a more strategic management oriented conception of interfirm interdependencies by combining the notion of competition and cooperation i.e. “coopetition” (ibid: p. 3). Hence, coopetition gives rise to partially convergent interest (and goal) structure where both competitive and cooperative issues are simultaneously present and strictly interconnected (ibid, s.2). Accordingly there are

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three levels of coopetition: 1) Macro, 2) meso and 3) micro, where the latter dictates that firms within an industry coopete in the sense that they traditionally compete on product and factor markets, but they cooperate in product design, manufacturing or distribution and the definition of new standards (ibid: p. 19). Value creation under coopetition comes from two flows: economic value characterised by reduced transaction and transformation costs as well as increased revenue, and knowledge value which is characterised by access to knowledge and information as well as the generation, transformation and application of new knowledge stock (Dagnino and Padula, 2002: p.

20).

In their article on strategic collaboration among rivals, Slywotzky and Hoban (2007) argue that firms should collaborate on, rather than fight over, especially, things that hold little value to customers or offer little potential for competitive differentiation (p. 45). Although vigorous competition is the lifeblood of modern economies, they call this type of competition destructive rather than constructive (p. 45). They propose that strategic collaboration can take place at any stage of the value chain (with the exception of activities related to price which may bring about concerns about unfair competition) but hold that collaborations are rare – most compete/collaborate ratios are estimated to be 90:10 or 100:0 (p. 46). They call it a “managerial blindness” (p. 51) and highlight three alternate and more rapidly pursued attempts to temper ill effects of undisciplined competition: M&As, outsourcing and standards-setting (p. 47). Opposed to M&A however, strategic collaboration allows the companies to join forces only in well defined activities that will benefit from consolidation and unlike outsourcing it does not entail a loss of control (p. 47).

According to Powell et al (1996: p. 143) competition is no longer seen as a game with zero sum outcome, but rather as a positive sum relationship in which new mechanisms for providing resources are developed in tandem with advances in knowledge. Sakakibara (2002) finds that a firm in an industry with weak competition and appropriability conditions has higher rate of R&D consortia participation (p. 1034). Motives for engaging in R&D collaboration include enhanced productivity (i.e. cost sharing, economies of scale and avoiding wasteful duplication) through cooperation on R&D inputs and changing appropriability conditions on R&D outputs.

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As such, it is suggested competitive advantage (stemming from cost savings and synergy effects) can be accumulated from strategic collaboration in well defined activities as long as the attitude towards appropriability is altered.

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2.3.1 Summary of core issues – sustained competitive advantage

Traditional view: Competitive advantage is determined based on market position (dictated by competitive situation and technological momentum).

RBV: SCA depends on internal resource endowments and the valuable, rare, non-imitable and non- substitutable (VRIN) attributes of these

o If investment in input based competences is restricted by a skills shortage problem, a firm may not be able to obtain SCA

TCE: SCA determined not by what resources the company controls but how efficiently the resources are organised. Resource optimising view and clarify how transaction costs create opportunities for value creation and appropriation (i.e. controlling property rights).

o Constraints to achieving SCA can be caused by, not only reduced innovative capability but also by failure to appropriate value from innovations.

o Takes investment in transactions and governance mechanisms

RV: Relational rents can lead to SCA (if close relations rather than arm’s length)

o Must invest in relation-specific assets, knowledge-sharing routines, complementary resource endowment and effective governance

Cluster advantages and disadvantages: Clustered firms can obtain competitive advantage because the proximity and rivalry between co-located firms enhances innovation.

o Benefits arise in the wake of common understanding and trust

o BUT risk of over-embeddedness and vulnerability to endogenous shocks - need to combine close relations with distant or arm’s length

Coopetition: Cluster proximity and “coopetition” brings economic value by reducing transaction costs and increasing revenue

o Firms should collaborate on rather than fight over things that hold little value to customers or offer little potential for competitive differentiation (at any stage of the value chain) o Possible when appropriability conditions are weak

How does TST differ from other governance structures when it comes to ability to obtain a sustained competitive advantage?

Can relational rents be generated from TST?

Can TST alter the risk of over-embeddedness and vulnerability to endogenous shocks?

To what extent can clustered firms “coopete” and how and when does competition over human resources alter willingness to cooperate?

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2.4 Governance theory

This section targets the third research question, “how do managerial challenges and governance of TST differ from those of strategic alliances and arm’s length market transactions?” by gaining a better understanding of managerial challenges in strategic alliances and arm’s length market transactions. We consider approaches to collaboration through the lens of transaction cost economics and social capital theory. This distinction is important in that the motivation for and attitude towards engaging into an alliance may influence how it is practiced. The two approaches raise different concerns regarding human behaviour and contain different ideas about how alliances should (or should not) be governed. We also investigate the openness – appropriability paradox and add an overview of parameters that can help determine the degree of appropriability hazard. We will extract main lessons from the literature (again, theories empirically derived from closely related governance structures, thus adjacent literature) and later explore whether they are also applicable to TST.

2.4.1 An overview of the TCE and social capital approaches 2.4.1.1 Transaction Cost Economics

The TCE perspective views interfirm collaborations as products of strategic decisions (e.g. make or buy). The market is viewed as atomistic, where exchange partners are linked by arm’s length ties, i.e. sufficient in themselves to handle most transactions through autonomous contracting (Lado et al: p. 404). Transaction cost economists hold the perspective that alliances occur when the transaction costs associated with the exchange are too high for an arm’s length market exchange but not high enough to mandate formal integration, that is when the payoff exceeds that of proceeding alone.

Williamson is an important contributor to the TCE discussion and he argues that because of

“opportunism” and “bounded rationality” transaction costs arise (Williamson, 1981: p. 553).

Opportunism and bounded rationality are two behavioural assumptions that Williamson (1975, 1981) assigns to “human nature as we know it” (p. 553) and he addresses them because companies should economise on them. Opportunism is “the calculated efforts to mislead, distort, disguise, obfuscate or otherwise confuse” (Williamson, 1985: p. 47) and “a troublesome source of

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behavioural uncertainty in economic transactions” (ibid: p. 49). The lessons from bounded rationality for transaction costs purposes is (a) that contracts are complex and incomplete and (b) that economising on bounded rationality is the leading purpose of economic activity (Williamson, 1986: p. 42). According to Williamson (1981) opportunism makes contracting difficult as he explains: “Principals would simply extract promises from agents that they would behave in the manner of steward when unanticipated events occurred, while agents would reciprocally ask principles to behave in good faith. Such devices will not work, however, if some economic actors are dishonest…” (p. 554). Secondly, assuming that people have bounded rationality means that agents are limited in creating complete contracts and at the same time some people act opportunistically and together this human behaviour increases the likelihood of hold-up situations to arise (Williamson 1985: p. 95). Hold-ups are thus market failure and according to Williamson (1985) it causes firms to vertically integrate i.e. a market solution and reducing the impact of inefficient contracts (p. 99).

Williamson’s main argument is that firms must choose a transaction economising governance structure in alliances. To minimise transaction costs companies must describe the transactions by using three dimensions: 1) the level of uncertainty 2) the frequency of the transactions and 3) the degree of asset specificity (Williamson, 1981: p. 95). The three characteristics are the explanatory power of the theory and they determine whether transaction costs are highest/lowest in a market or in a hierarchy setting and accordingly what structure is optimal (Williamson, 1979; 1981).

In this regard we can also draw on Oxley (1997) to link interfirm alliances and their respective governance properties to the TCE perspective (p. 388). Oxley (1997: p. 392) notes that interfirm alliance is a hybrid governance structure and depending on the alliance type companies will select different contractual agreements to minimise moral hazard events. Oxley argues that the means with which firms establish hierarchical alliances is determined by the degree of appropriability hazard (p. 406). Additionally, the form of alliance depends on the attributes of the transaction itself rather than the characteristics of the partner firms (Oxley, 1997: p. 406). The market- hierarchy continuum includes:

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Figure 4 Market-hierarchy continuum (Oxley, 1997)

Appropriability hazards are created from three transaction attributes: Incentive intensity, administrative controls, and contract support, and depending on the degree, companies can decide on different governance categories: Unilateral contracting, bilateral contracting and equity based alliances (Oxley, 1997: p. 392). Appropriability develops for two reasons: Due to information features and failures in the market for tacit know-how (Oxley, 1997: p. 393). These two traits make it difficult for companies to acquire technology via arm’s length contracts because tacit know-how is difficult to transfer without “intimate personal contact, involving learning, demonstration and participation” (ibid: p. 393). The costs incurred from market transactions arise from specifying the tacit know-how (asset) and controlling usage and property rights. On the other hand, in hierarchy type alliances transaction costs hinge on e.g. communication and organisational routines (Oxley, 1997: p. 394). Thus, the difficulty in specifying and monitoring contracts determines appropriability hazards and consequently hierarchy type alliances are the more favourable governance structure (Oxley, 1997: p. 406).

2.4.1.2 Social capital theory

The social capital perspective pays less attention to market and hierarchy type alliances as a solution and instead calls attention to close alliances as the optimal approach to problem solving.

Social capital theorists view the firm as “a set of distinct resources and capabilities that are not freely bought and sold in the spot market” (Barney, 1991). Granovetter (1985), amongst many, suggests that embeddedness and social ties between people, as opposed to mere institutional arrangements, are means to trust in economic life. He accuses Williamson (1975 and 1985) and other transaction cost economists for taking on an undersocialised “market and hierarchies”

approach, instead of recognising that social atomisation is prerequisite to perfect competition.

Social capital theory claims that embeddedness creates economic opportunities that are difficult to replicate via markets, contracts or vertical integration as TCE contends (Uzzi, 1997: p. 37).

Granovetter (1985) holds that trust discourages malfeasance and opportunism, which should

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minimise the transaction costs associated with an exchange (supported by Maskell, 2001). The arguments include that access to information about a person’s morality and general reputation, when embedded in a network, is 1) cheap, and 2) more trustworthy due to first or second hand experience, 3) there is reason to believe that there is an economic incentive in play with implications for future trade while 4) economic motives tend to develop into social ties which entail trust and strong expectations (p. 490). Granovetter built his theory on sociological studies of business, in which he claims it is well documented that business relations spill over into sociability and vice versa (p. 495-496). Attesting to Granovetter’s fourth point, Larson (1992: p. 84) proposes that strong social positions [of management teams] lead to high status and reputation and that such signals mitigate risks such as opportunism and expropriation of knowledge. According to Eisenhardt and Schoonhoven (1996: p. 144) such social positions can be created if members of the top management team have been employed in more firms within the industry. Kreiner and Schultz (1993) also argue that illegitimate use of shared information (in a network embeddedness context) is considered “the deadly sin of networking” and will be sanctioned (p. 203). As such, one can say that there is a social penalty to cheating.

2.4.1.3 A combined perspective of TCE and social capital

In a recent study, Lado et al (2008) combine the two perspectives (although in a principle-agent context) and examine the relation between TCE and social capital theory (in their terminology relational exchange theory) and their respective perceptions of the “economic man” and “heroic man” principles (p. 402). Where the conventional view holds that in exchange relationships trust and opportunism counteracts each other in the way that positive effects of trust tend to neutralise or diminish negative effects of opportunism (p. 405), i.e. contending that trust and opportunism are substitutes, Lado et al (2008) argue that they may function as complements in the governance of value enhancing principal-agent relationships (p. 405).

Lado et al (2008: p. 404) describe “relationalism” as the behavioural underpinnings of an interfirm exchange and regard it necessary to study for understanding how economic value is created and distributed through alliances. Contentiously, their findings included that value-enhancing relationalism can be fostered in exchange contexts characterised by low trust and low

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opportunism. In other words, only a minimal level of trust is sufficient to induce obligatory cooperation as long as the perceived risk of opportunism is also low (p. 417).

2.4.2 The openness – appropriability paradox

The dilemma facing companies today is that of securing appropriation for ones innovative efforts while remaining open towards external knowledge and competencies. As a result the term appropriation has gained a lot of momentum. Companies must protect their sources of value generation so that competing firms do not expropriate this value (Naranyan, 2001). While companies have to consider strategies against appropriation, they have to balance that with openness because utilising external sources of knowledge and competences for e.g. R&D is essential to the innovation process (Laursen and Salter, 2005; Chesbrough, 2003).

Laursen and Salter (2005) explain that “the creation of innovations often requires openness and commercialisation of innovations requires appropriability” (p. 2). This paradox shapes why some firms are more open than others with regards to using external sources of knowledge in the innovation process (p. 1). Appropriation is one amongst four1

When companies deal with potential partners they have to share and disclose sensitive information, which may put the owner of the information at risk, but they are required to surrender some of their knowledge in order get something in return (Laursen and Salter, 2005: p.

7). The degree of interaction between firms (i.e. how open they are) can be explained by how relaxed or strict the appropriability strategy they choose to follow is (Laursen and Salter, 2005: p.

9). To reduce the likelihood of e.g. theft, companies can focus on for example control, secrecy and/or legal protection. According to Laursen and Salter (2005: p. 22), appropriability is curvilinear related to openness (taking an inverted U-shape). Explicitly, this means that as companies follow a tight appropriability strategy, then they will also be more open to external sources, but at some important determinants of firm openness (ibid: p. 5).

1 The other determinants are: 2) Investment in absorptive capacity is an indication of how open firms are to external knowledge. 3) How do problems of disclosure and theft influence knowledge intensive start-ups attitude to the external environment. 4) Richness of industry-level technological on the attitudes of managers to external sources of knowledge (Laursen and Salter, 2005)

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point excessive focus on appropriability will diminish the level of openness to the outside world (ibid).

Openness

Figure 5 Openness - appropriability paradox (Laursen and Salter, 2005)

The strategic choice for most small firms is between secrecy and speed to market (Byma and Leiponen, 2009: p. 1478). The choice between these two preferred methods of appropriation depends on the characteristics of the companies. Companies in low tech or complex product industries (e.g. electronics) tend to prefer speed. On the other hand companies that investment in R&D, discrete product technologies (e.g. chemicals) and that have affiliation with higher technology industries explain preference for trade secrets (ibid: p. 1479). The authors argue that small firms that operate in complex product industries tend to move away from this environment because it is too difficult to operate in as they do not have extensive patent portfolios to cross license from (ibid). Moreover, it is typically easier to invent around technologies in engineering- based industries, thereby reducing the incentive for patenting (ibid). Thus, small firms might decide to focus on product markets where they can effectively compete by getting to market quickly or by providing superior marketing and complementary services (ibid). Byma and Leiponen (2009) make another surprising finding that small innovating firms that engage in horizontal or vertical cooperative R&D do not perceive secrecy as an effective means to protect their intellectual assets (ibid: 1486). The reason may be that in joint projects secrecy is hard to maintain.

Small firms with little R&D investments that do not engage in external cooperative relationships find secrecy to be an important method of protection as patents are too expensive to defend (ibid).

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2.4.2.1 Determining the degree of appropriability hazard

When determining the degree of appropriability hazard associated with an exchange, it is relevant to address whether the information is “diffusible” and whether it requires “absorptive capacity” of the exchange partner.

With his distinction between data, information and knowledge, Boisot (1998) argues that knowledge cannot be observed (p. 12) and talks about how knowledge can be created and applied (p. 34). Articulate vs. tacit knowledge come to play a determining role (pp. 38-39). Boisot draws an I-Space model (p. 56) which incorporates the processes of codification, abstraction (p. 41) and diffusion (p. 52) which make up the social learning cycle (pp. 59-60). He holds that knowledge assets give a firm a competitive advantage (p. 70) and discusses whether sharing an information good lowers its value (p. 74). He argues that extracting value from an information good depends on its ability to diffuse (p. 76). Maximum value is obtained when diffusion is at a minimum and codification and abstraction is at a maximum (p.78).

Cohen and Levinthal (1990: p. 128) talk about “absorptive capacity”, i.e. “the ability of a firm to recognise the value of new, external information, assimilate it, and apply it at commercial ends” as critical to a firm’s innovative capability. They claim that it depends on the firm’s level of prior related knowledge. This means that firms are “sensitive to the characteristics of the learning environment in which they operate” (ibid: p. 149), for instance, absorptive capacity can either emerge as a byproduct of routine activity, or a company can choose to invest [effort] in the generation of absorptive capacity (ibid: p. 150).

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2.4.3 Summary of core issues - governance

TCE Social capital

View of the firm Transaction economising

exchange of property rights Set of distinct resources and capabilities that are not freely bought and sold in the spot market

View of alliances Products of strategic decisions (e.g. make or buy)

The locus of innovation

View of the market Atomistic; where exchange partners are linked by arm’s length ties

Social atomisation prerequisite to perfect competition

Arm’s length transactions inadequate for replicating economic opportunities View of human nature “Economic man”

Man is given to

opportunism and bounded rationality

“Heroic man”

View of governance Because of the above, transaction costs arise

Institutional agreements

Autonomous contracting

Trust discourages malfeasance and opportunism (and minimises transaction costs)

Maintaining good reputation Sanction for cheating Economic penalty Social penalty

Cheating is “the deadly sin of networking” and will be sanctioned

Appropriability Firms must ensure appropriation of innovative efforts and firms must be open to external sources of knowledge in order to be innovative.

Disclosing sensitive information may put the owner at risk.

The openness - appropriability paradox takes a curvilinear shape.

IP can be protected from expropriation by control, patents or secrecy.

Small firms protect IP by secrecy or speed to market, but in joint projects secrecy is hard to maintain.

Sharing an information good may not lower its value, it depends on its ability to diffuse, and on absorptive capacity of exchange partner.

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