Essays in Technology Management and Policy

The following sections are included:

• Acknowledgements

• Contents

It has been recognized for some time now that the key drivers of economic development and progress are well-functioning political, social and business institutions, and stable and fair governance. When the institutional fabric of society facilitates market organization and contractual stability, then investments will be made and technology will be created and/or adopted by private sector firms so that wealth generation can proceed. National States will benefit from such wealth generation…

This paper attempts to explain why innovating firms often fail to obtain significant economic returns from an innovation, while customers, imitators and other industry participants benefit. Business strategy — particularly as it relates to the firm's decision to integrate and collaborate — is shown to be an important factor. The paper demonstrates that when imitation is easy, markets don't work well, and the profits from innovation may accrue to the owners of certain complementary assets, rather than to the developers of the intellectual property. This speaks to the need, in certain cases, for the innovating firm to establish a prior position in these complementary assets. The paper also indicates that innovators with new products and processes which provide value to consumers may sometimes be so ill positioned in the market that they necessarily will fail. The analysis provides a theoretical foundation for the proposition that manufacturing often matters, particularly to innovating nations. Innovating firms without the requisite manufacturing and related capacities may die, even though they are the best at innovation. Implications for trade policy and domestic economic policy are examined.

The following sections are included:

• Knowledge and Competitive Advantage
  • Liberalization of Markets
  • Expansion of What's Tradable
  • Strengthening of Intellectual Property Regimes
  • The Growing Importance of Increasing Returns
  • Decoupling of Information Flows from the Flow of Goods and Services
  • Ramifications of New Information and Communications Technologies
  • Product Architecture and Technology "Fusion"
  • Implications

• Capturing Value from Knowledge and Competence
  • The Nature of Knowledge
    • Codified/Tacit
    • Observable/Non-observable in use
    • Positive/Negative knowledge
    • Autonomous/Systematic knowledge
    • Intellectual property regime
  • Replicability, Imitability, and Appropriability
  • Appropriability and Markets for Know-How and Competence
  • Some Sectoral Differences in the Market for Know-How
  • Complementary Assets
  • Dynamic Capabilities
    • External sensing
    • Organizational action

• Implications for the Theory of the Firm

• Conclusion

• Notes

The dynamic capabilities framework analyzes the sources and methods of wealth creation and capture by private enterprise firms operating in environments of rapid technological change. The competitive advantage of firms is seen as resting on distinctive processes (ways of coordinating and combining), shaped by the firm's (specific) asset positions (such as the firm's portfolio of difficult-to-trade knowledge assets and complementary assets), and the evolution path(s) it has adopted or inherited. The importance of path dependencies is amplified where conditions of increasing returns exist. Whether and how a firm's competitive advantage is eroded depends on the stability of market demand, and the ease of replicability (expanding internally) and imitatability (replication by competitors). If correct, the framework suggests that private wealth creation in regimes of rapid technological change depends in large measure on honing internal technological, organizational, and managerial processes inside the firm. In short, identifying new opportunities and organizing effectively and efficiently to embrace them are generally more fundamental to private wealth creation than is strategizing, if by strategizing one means engaging in business conduct that keeps competitors off balance, raises rival's costs, and excludes new entrants.

This paper extends the transaction cost economics framework to examine the contractual hazards that arise in the course of technological innovation. We identify three main strategic hazards related to future technological opportunities that may develop in business transactions: loss of technological pacing possibilities on the technological frontier, loss of technological control at or behind the frontier, and design omissions. In examining these hazards we focus on the increasingly common phenomenon of vertically integrated firms supplying downstream competitors. We then analyze how constellations of safeguards, particularly relational safeguards, can augment transaction-specific safeguards in many instances to ensure high-powered incentives are maintained. We also consider under what conditions downstream divestiture is a desirable economizing option. Supportive illustrations are drawn from the desktop laser printer and telecommunications industries.

The formal and informal structures of firms and their external linkages have an important bearing on the rate and direction of innovation. This paper explores the properties of different types of firms with respect to the generation of new technology. Various archetypes are recognized and an effort is made to match organization structure to the type of innovation. The framework is relevant to technology and competition policy as it broadens the framework economists use to identify environments that assist innovation.

The following sections are included:

• Introduction

• What's Special about Virtual?

• Types of Innovation

• The Case of Industry Standards

• The IBM PC: Virtual Successor or Failure?

• The Virtuous Virtuals

• Choosing the Right Organizational Design

• Scale and Scope

The following sections are included:

• The Licensing Legacy
  • Background — The Formation of RCA
  • AT&T's Cross-Licensing Practices
  • Cross-Licensing in the Computer Industry — IBM
  • Impact of Consent Decrees on Industry Development

• Licensing Practice at a Semiconductor Company — Texas Instruments
  • Licensing Objectives
  • Types of Cross-Licenses
  • "Proud List" Royalty Valuation Process
  • Strategic Considerations
  • Impact of TI's Licensing Strategy

• IP Management and Cross-Licensing in an Electronics Company — Hewlett-Packard
  • Innovation Strategy
  • Licensing Objectives
  • IP Management

• Managing Intellectual Capital in the Electronics Industry
  • Contrasting IP Management Objectives
  • Changing IP Modes in the Semiconductor Industry
    • Initial growth phase
    • Increased global competition
    • Innovation leadership
  • Lessons for Innovation Management
    • Using IP to support core business
    • Importance of developing a valuable patent portfolio
    • Concentrate R&D where the firm is strongest

• Policy Issues

• Conclusion

• Notes

This article explores the nature of international technology transfer and the operation of the market for know-how. It begins by examining the relationship between codification and transfer costs and then analyzes various imperfections in the market for know-how. The special properties of know-how are shown to confound various aspects of the exchange process when arms-length contracting is involved. The internalization of the exchange process within multinational firms serves to bypass many of these difficulties, and explains why the multinational firm is of such importance. Several forms of regulation of technology imports and exports are examined. It is discovered that the process is insufficiently well understood to permit the design of effective regulation that, moreover, appears unlikely to eliminate inefficiency. An efficiency focus is maintained throughout since I feel no qualification on pontificate on complex and confused distributional issues.

The following sections are included:

• Introduction

• Technology Transfer and the Production of Knowledge

• The Sample

• Definition of Technology Transfer Costs

• Transfer Costs: Data and Hypotheses
  • The Level of Transfer Costs
  • Technology/Transferor Characteristics
  • Transferee and Host Country Characteristics

• Determinants of the Cost of International Technology Transfer: Tests and Results
  • The Model
  • Statistical Tests: Phase I
  • Statistical Tests: Phase II

• Defferences between International and Domestic Technology Transfer

• Conclusion

• References

The following sections are included:

• Overview

• The Nature and Importance of Competition and the Goals of Antitrust

• Innovation and Market Power Assessment

• Innovation and Cooperative Agreements among Competitors
  • The (Traditional) Serial Model
  • The Simultaneous Model
  • Organizational Requirements of Innovation
  • Governance Alternatives for Innovation
    • The price mechanism
    • Internal organization
    • Strategic alliances
  • Antitrust Treatment of Agreements Among Competitors
  • Proposed Modifications to U.S. Antitrust Law Affecting Cooperative Agreements Among Competitors

• Conclusion

• Summary

• Zusammenfassung

• References

The following sections are included:

• Introduction

• Prices as "Sufficient" Statistics

• Information Exchange and Systems of Innovation
  • National Systems of Innovation
  • Industrial Clusters

• Some Additional Circumstances in which Information Sharing Can Support Innovation and/or Competition
  • Establishing Dominant Standards through Information Sharing and Coordination
  • Benchmarking
  • Information Exchanges on "Common Values"
  • Industry Visions

• Conclusion

The following sections are included:

• Introduction

• Characteristics of Industries Experiencing Rapid Technological Change
  • The Episodic Nature of Competitive Disruption
    • The phenomena
    • Implication for antitrust
  • Increasing Returns and Network Externalities
    • The phenomenon of increasing returns
    • Implications for antitrust
  • Network Effects
    • The phenomenon
    • Implications for antitrust
  • Decoupling of Information Flows from the Flow of Goods and Services
    • The phenomena
    • Implications for antitrust

• Scarcity Rents, Schumpeterian Rents, and Monopoly Rents
  • General
  • Ricardian (Scarcity) Rents
  • Schumpeterian (Entrepreneurial) Rents
  • Monopoly (Porterian) Rents

• The Hallmarks of Monopoly Power in High Technology
  • Introduction
  • Market Power
  • Market Definition
    • General
    • A note on switching costs
  • A Note on Barriers to Entry
  • Market Share
    • General
    • Industrial dynamics and concentration levels

• Implications for Conduct Analysis
  • General
  • The Importance of Innovation
  • Predatory Pricing
  • Tying and Bundling
  • Integration of Function
  • "Vaporware" and the Premature Announcement of New Products

• Luck, Incentives, and Ignorance

• Conclusion

• Appendix A Examples of Performance Competition
  • Diagnostic Imaging
  • Microprocessors

• Appendix B A Multi-Attribute Small but Significant and Nontransitory Increase in Price (SSNIPP)

The basis for competition in many high technology industries is fundamentally different from that in more mature and stable industries. Most obviously, there is a much greater emphasis on performance-based, rather than price-based, competition. In addition, the competitive dynamic is different as well, with product often highly differentiated and periodic discontinuous paradigm shifts that can completely overwhelm per-existing market positions. The objective of this paper is to review and evaluate some of the traditional techniques used to define markets and measure market power in antitrust analysis. Most significantly, the limitations of these techniques when applied in high technology contexts are revealed, particular when inherently static analytical frameworks are employed. Often their use results in markets that are defined too narrowly, with the consequence that market power is overestimated. To rectify these problems, several alternative methods are suggested. Any method applied in a high technology context must have due regard for the dynamic nature of competition in such industries and must utilize an appropriate time horizon for analysis.

This paper outlines a theory of the multiproduct firm. Important building blocks include excess capacity and its creation, market imperfections, and the peculiarities of organizational knowledge, including its fungible and tacit character. A framework is adopted in which profit seeking firms are seen to diversify in order to avoid the high transactions costs associated with using various markets to trade the services of various specialized assets. Neoclassical explanations of the multiproduct firm are shown to be seriously deficient.

Discussions of the link between firm size and innovation are outmoded because the boundaries of the firm have become fuzzy in recent decades. Strategic alliances — constellations of bilateral agreements among firms — are increasingly necessary to support innovative activities. Such alliances can facilitate complex coordination beyond what the price system can accomplish, while avoiding the dysfunctional properties sometimes associated with hierarchy. Antitrust law and competition policy need to recognize that these new organizational forms are often the functional antithesis of cartels, though they may have certain structural similarities. A more complete understanding of bilateral contracts and agreements ought to reveal when and how cooperation can support rather than impede innovation and competition.

Financial support from the Sloan Foundation to the Consortium on Competitiveness and Cooperation at the University of California at Berkeley is gratefully acknowledged. Helpful comments were received from Richard Nelson, Peter Grindley, David Mowery, F.M. Scherer, Oliver Williamson, and Klaus Zimmer, as well as from the reviewers and editors of the Journal.