Innovation, Alliances, and Networks in High-Tech Environments

INTRODUCTION In this book, we utilise a knowledge perspective to address the topic of firms alliances, studying in particular the strategic behaviour of firms belonging to high-tech sectors and above all to the bio-pharma industry. Thus, we developed an integrated analysis that combine together three theoretical research paths: the topic of alliances (which emerged in the past as a field within the studies of strategy, based on the cooperation/transaction costs analyses), the network analysis approach (that studied the configuration of networks among firms and their connectivity among actors, resources and activities), and the innovation study tradition (which was rejuvenated by the open innovation paradigm, and by the acknowledgement of the complexity inherent to the innovation process itself, where a multiplicity of resources are working to recombine different pieces of knowledge stemming from various disciplines). In part we we have tried to look at the phenomenon of firms alliances reflecting on the long-term influence that it is exerted by alliances among advanced firms, R&D alliances, and technological alliances, at the meso-level, considering: a) the transformation of industries (the old pharma and the new biotech niche), b) the changing geography of international connectedness within innovation networks (as they emerge in the longitudinal analysis of co-patenting in innovative metropolitan US areas), and c) the evolution of the multifaceted nature of competition and cooperation in entrepreneurial ecosystems (considering the Canadian ICT industry). Part II is dedicated to deep our knowledge to the phenomenon of alliance and acquisition in the bio-pharma industry. Traditionally, research on factors that affect partner selection in alliances emphasizes the role that partners play in bringing critical resources and capabilities (i.e. capability-seeking aspects). However many aspects still remain understudied: are biotech firms forming alliances among technological similar partners or do they choose partner diversity as a mean to build complementary capabilities? But how much this influences the probability that a biotech firm will subsequently be acquired? The formation of R&D alliances can be considered a contractual agreement alternative to a more concentrated and verticalised mode of governance, where R&D activities are internalised in large laboratories owned by the largest firms. For many firms alliances are a necessary step in order to boost innovative performance (Shan, Walker, and Kogut, 1994), new product development (Deeds and Hill, 1996; Rothaermel and Deeds, 2004) and, more in general, early performance (Baum et al., 2000). Despite the evidence that alliance portfolios are beneficial for firms, the question of who ally with whom within entrepreneurial technology ventures remains unexplored. Drawing upon the preceding description of technology licensing agreements and the literature of organizational learning, these partnerships are mechanisms that facilitate the development and commercialization of viable technologies and, at industry level, the division of labor between entrepreneurial technology ventures that focus their innovative efforts upstream and established firms that promote downstream commercialization by leveraging complementary assets (Gans, et al., 2002). These partnerships, that often involve co-development contracts, challenge the traditional business models center around the idea of developing a product in-house, and create business models options that can significantly reduce R&D expense, increase innovation output, and open up new markets, the so-called markets for technology. The emerging paradigm drawn upon molecular biology can be considered as competence destroying for pharmaceutical firms (Powell, Koput, & Smith-Doerr, 1996; Stuart, Hoang, & Hybels, 1999). To sustain their competitive advantage, they have no chance that to ally with new entrant biotech firms that possess R&D competences and capabilities they lack. Thanks to these strategic alliances, pharmaceutical firms have been able to enrich their product pipeline and market seven of the top-ten biotechnology drugs in the late 1990s, even though none of the drugs were developed by the pharmaceutical companies. Therefore, emerging industries such as biotechnology offer significant opportunities for cooperation between small, new entrepreneurial ventures and large incumbents firms that are seeking to exploit technological spillovers in an attempt to realize the potential for commercialization. Our idea is that the formation of an alliance portfolio will benefit from a certain degree of partners’ diversity, defined as dissimilarities of partners in terms of resources, bargaining power differences, geographical distance, and governance mechanisms. We offer two key explanations for why entrepreneurial technology ventures should diversify the source of their partnerships by establishing both vertical and horizontal relationships. Accordingly, new potential partners needed to pursue simultaneously exploration and exploration activities, tend to broadening alliance portfolio to enrich partners’ diversity, and this may be beneficial for patenting activities of focal firm. We suggest that partners’ diversity is a mechanism though which entrepreneurial technology firms balance access to resources and the risk to lose valuable IPRs, render these firms more innovative and consequently more likely to attract the attention of other buyers. But are alliances becoming an complete mechanism for knowledge exploration and exploitation? There are numerous factors which can favour a firm strategy based on acquisition as opposed to alliance. Thorough acquisition firms can reduce the risk of wrong selection, and subsequent difficulties in knowledge integration (Hennart, 1988). Information asymmetry and opportunism inhibit market-mediated resource transactions (Williamson, 1975), and the cost of using the market increases as resources become more firm-specific and complex (Chi, 1994). Thus, acquisitions allow to obtain the required capabilities (Teece, 1987; Mitchell, 1994). Contributions based on the resource-based view of the firms (Barney, 1991; Wernerfelt, 1995) and on the knowledge-based view of the firms (Conner and Prahalad, 1996; Grant, 1996; Levitt and March, 1988; Nonanka, 1991, Cloodt et al. 2006) provide some useful insights to understand this phenomenon. Through M&A firms get access to external sources of innovation (Arora and Gambardella, 1990; Graebner and Eisenhardt, 2004; Hitt et al. 1996), develop and extend their resources and capabilities (Uhlenbruck et al., 2006; Vermeulen and Barkema, 2001) and overcome local searching boundaries (Rosenkopf and Nerkar, 2001; Rosenkopf and Almeida, 2003). Despite their growing popularity, there are still few contributions that look at M&As as strategies to drive firms’ innovative performances. Existing studies tend to investigate the impact of M&A on financial performance (e.g. Greenwood et al., 1994; Hakanson, 1995; Haspeslagh and Jemison, 1991; Shrivastava, 1986; Lindgren, 1982) or to explore strategic alliances instead of considering particularly the activity of M&A (e.g. Hagedoorn and Schakenraad, 1994; Rothaermel and Deeds, 2004; Rothaermel and Deeds, 2006; Rosenkopf and Almeida, 2003; Hagedoorn and Wang, 2012). This book specifically focuses on M&A and attempts to contribute to the existing literature by providing additional insights to better understand the influence of M&As in boosting firms’ innovation performance, both utilising quantitative and qualitative measures. Our study uncovers a neglected, yet positive, side of acquisitions: they may sustain the innovative path of the acquirers and foster its long-term survival. Academic literature has widely examined motivations for acquisition decisions both at firm- and management-level (Hayward and Hambrick, 1997). From the firm-level perspective, the most common and evident drivers include growth and scale advantages, i.e. economies of scale and scope (Walter and Barney, 1990), financial synergies (Slusky and Caves, 1991), improved bargaining power, the elimination of overlaps, and the utilization of complementary assets (Trautwein, 1990). It is in fact clear, for instance, that M&As might allow acquirers to expand their product pipeline and market share, or to increase their bargaining power, thanks to size growth, as well as to rapidly access those complementary resources and knowledge, useful to sustain their competitive advantage. Nevertheless, such firm-level motives have not be proven by numerous empirical studies concerning acquisition behavior (Slusky and Caves, 1991; Hayward and Hambrick, 1997). Consequently, scholars have become interested in other explanations (Schildt and Laamanen, 2006). For instance, some have suggested that acquisitions might result from managements’ incentive compensation schemes (Sanders, 2001), and the building of a “managerial empire” or job-security concerns (Amihud and Lev, 1981); others have found a potential reason for M&A activity in the will of escalating commitment (Roll, 1986; Haspeslagh and Jemison, 1991; Haunschild, 1994). More recently, the resource-based theory of the firm and the theory of dynamic firm capabilities have inspired several studies (Barney, 1991; Rumelt, 1984; Wernerfelt, 1995; Nelson, 1991), which have emphasized how, in order to generate and sustain a competitive advantage with respect to other companies, firms heavily rely on unique and innovative capabilities, i.e. specific expertise and competences related to the development and introduction of new processes and products (Hadegoorn and Duysters, 2002). Such capabilities might be either endogenous or exogenous. Moreover, as already pointed out, knowledge is often tacit, especially in technological- and knowledge-intensive contexts, and thus difficult to be transferred from one firm to another (Larsson et al., 1998). Hence, M&As might allow companies to internalize those required but external knowledge, avoiding high transaction costs generally characterizing the transmission of tacit know how (Hagedoorn and Duysters, 2002b; Bresman et al., 1999). Besides overcoming the lack of knowledge, M&As allow R&D costs and risks reduction, and the enlargement of the number of potential products in pipeline (Ranft and Lord, 2002; Ahuja and Katila, 2001). Furthermore, M&As might reduce uncertainty and help companies to increase their control over their environment, or to reduce their dependency on it (Hagedoorn and Duysters, 2002b). Finally, successful M&As result in an improvement of companies’ exploratory learning, and thus of their long-term technological performances (Hagedoorn and Duysters, 2002b). However, post-acquisition knowledge transfer does not always occur (Al-Laham et al., 2010). A fundamental aspect of the management of knowledge is to evaluate the benefits of the acquiring firms from the process of knowledge transfer/creation. Several chapters of the book are dedicated to study this issue. Part III is dedicated to study and analyze the alliances and collaborations as important instruments for surviving in high-tech and turbulent industries. We examine the role of different forms of collaborations among firms and, also, between firms and universities, which can influence the formation of R&D partnerships in high-tech environment. These strategic network/collaboration capabilities play an important role in enabling companies and organization to continue to interact with other companies through partnerships in a complex network setting. Furthermore, collaborations can be a wellspring of innovation and provide companies with access to a portfolio of new ideas and inventions as in the case of Toto (a Japanese company) in Chapter 10. Alliances, networks and collaborations can help companies to acquire external knowledge in an easy manner, strengthening their ability to survive in these particular environments. The specific characteristic of these collaborations is discussed in Chapters 10, 11 and 12. Typical examples are taken from software, biotechnology and new material industries. Part IV illustrates two interesting cases studies in which alliances and acquisitions have been utilized by firms to reach new knowledge goals, and to pursue a remarkable path of growth and consolidation. Here, again, networks, alliances, and innovation become deeply interwoven. The reuse of knowledge in L’Oréal has opened a new speciation of family products up to arrive to a radical shift in the creation of bio-cosmetic, where the nutritional aspects of some drugs and materials (coming from the research of a large multinational like Nestlè) have been re-combined with the experience of a large producers of traditional cosmetics. In the case of Fidia Advanced Polymers we see how the initial phase of development based on R&D international alliances in tissue engineering has followed the paradigmatic model of open innovation. However, being a contract research without a viable market strategy was putting the firm in a cul-de-sac. Only the strategy of being acquired by a large American biotech has allowed the firm to overcome the entry barriers in the American market. An important lesson for the management of innovation is that very innovative firms are sometimes incapable to turn research into new therapies at reasonable costs. Often science-base firms, following a too extreme path of research miss important market opportunities. Anika srl has, thus, guided the innovation strategy of its acquisition target toward a more profitable strategy.