Absorptive Capacity In A Multi Firm Alliance Business Essay

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Abstract

This study reveals the capacity of firms to learn from an alliance, in case of multiple firms in the same alliance agreement (multi-firm alliance). Currently literature focuses on companies having multiple alliances with different firms simultaneously known as the alliance portfolio. The literature also shows that in a dyadic relationship similarity is important. This research however is looking at the learning potential of a single alliance in which multiple firms are taking part in.

Introduction

Learning is an important goal in many alliances but as different researches in this field show that certain pre-conditions have to be met in order for a firm to truly integrate the acquired knowledge from an alliance (Powell, Koput and Smith Doerr, 1996; Gomess-Casseres, Hagedoorn and Jaffe, 2006; Mowery, Oxley and Silverman; 1996; Stuart, 2000). This study mainly builds on the study of Mowery, Oxley and Silverman (1996) by splitting up the difference between multi-firm alliances and dyadic alliances in relation to the absorptive capacity the firms show. By studying how similarity or distance of alliance partners in a single alliance affects financial performance.

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In this research the definition of an alliance by Lavie and Gulati will be used: "An alliance is a voluntary agreement among independent firms to exchange or share resources and engage in the co-development or provision of products , services or technologies" (Lavie, 2007; Gulati,1998). A multi-firm alliance is an alliance between more than the conventional two firms (Hwang and Burgers, 1997). The alliances in this study are R&D alliances established with the purpose of knowledge transfer, which excludes alliances at the market-end of the continuum such as licensing agreements. R&D is an investment activity with output in the form of intangible assets or knowledge stock (Hall, Jaffe, Trajtenberg, 2005). The collaborative effort is reflected by the outcome of patents which are assigned to all partners of the alliance (Belderbos, Faems, Leten, van Looy, 2009).

There are many different reasons for firms to engage into an alliance; bringing together complementary assets, sharing costs and risks, globalization, shortening product life cycles, among other reasons (Stuart, 2000; Hwang and Burgers, 1997; Mowery, Oxley and Silverman, 1996). Hagedoorn, Link and Vonortas (2000) made a clear table showing the theoretical arguments for alliance creation, see appendix table 1.(extend this part a little bit)

Alliance form

Especially high technology markets have a high degree of alliance formation. Alliances in these rapid changing markets are mainly non-equity contractual agreements, such as joint R&D pacts and joint development agreements (Hagedoorn, 2002). The other form of alliances is equity based joint ventures, in which both firms invest to create this separate legal entity which is most common in medium and low technology industries (Hagedoorn, 2002). The high technology markets have a short product life cycle (Hagedoorn, 2002; Hagedoorn, Roijakkers, van Kranenburg, 2006) and therefore companies need to make sure they have a competitive advantage over competition which they keep on developing. By making use of contractual agreements they can react quicker to changing market conditions then with joint ventures. However joint ventures are more effective for the transfer of complex capabilities than contract based alliances (Mowery, Oxley and Silverman, 1996). "The number of partners in an alliance does not affect the form of governance used" (Gulati, 1995). Although joint ventures would give multi-firm alliances more effective transfer of capabilities and knowledge, according to Gulati (1995) there is no specific preference for joint ventures in a multi-firm alliance.

Knowledge accumulation

The capabilities that are developed by a company over time form two kinds of accumulated knowledge: explicit and tacit knowledge (Hagedoorn, et al., 2006). Explicit knowledge is observable which means it is not rare or costly to imitate and can be transferred from one company to the other (Lane, Lubatkin, 1998). Tacit knowledge however is intertwined in the firm and are capabilities which can not easily be transferred or imitated and form a basis for superior performance (Lane, Lubatkin, 1998; Deeds, 2001). "Much of the detailed knowledge of organizational routines and objectives that permit a firm and its R&D labs to function is tacit" (Cohen, Levinthal, 1990). Tacit knowledge is based on how process function. Since knowledge is becoming so important in fast changing industries competition is becoming knowledge-based and firms try to develop capabilities (tacit and explicit combined) faster then competitors (Lane, Lubatkin, 1998).

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There are two forms of research, exploitation and exploration. "Exploitation refers to the leveraging of existing capabilities by means of activities such as standardization, up scaling and refinement" (Belderbos, et al, 2009). Exploitation mainly leads to positive short-term financial effects because of increased efficiency. "Exploration refers to the creation of new capabilities by means of activities such as fundamental research, experimentation and search (Belderbos, et al, 2009)". Exploration is mainly the goal of R&D alliances and has the potential to open up vast financial opportunities as long as a firm has the absorptive capacity to integrate the new knowledge. However there has to be a balance between exploitation and exploration in order to be successful in the long-term.

In order for a multi-firm alliance to generated the desired result of improved financial performance through mutual learning and knowledge creation several pre-conditions have to be met. Although there is no preferred alliance form in a multi-firm alliance, joint ventures allow for a more effective transfer of knowledge. With regard to the knowledge transfer tacit-to-tacit knowledge sharing allows for the creation and implementation of new knowledge. Explorative research can then help with creation of new innovations. However in order for the combination of these factors to be successful a company needs to develop its own capabilities by means of R&D and find similar partners to be able to absorb their knowledge and truly learn from the alliance.

The structure for the rest of the paper will be: Section 2 explanation of absorptive capacity and the importance of similarity. Section 3 will explain the variables of interest namely: Geographic distance, industry sector, R&D activity and the amount of partners. Section 4 will explain the empirical approach, design, sample and population. Section 5 discusses the data and the results. Section 6 gives conclusions based on the results. Section 7 explains limitations of the research and suggestions for future research.

Absorptive capacity and Similarity

For research alliances to be fruitful a firm needs to possess the ability to learn from the alliance partner, and in order to do so they need absorptive capacity. "The ability to recognize the value of new, external information, assimilate it, and apply it to commercial ends" can be labeled as absorptive capacity (Cohen, Levinthal, 1990). So the actual integration of newly acquired knowledge into the organization, tacit-to-tacit knowledge transfer, with the result of maintaining a competitive advantage and innovativeness. Meaning the knowledge flows and learning opportunities in the alliances have become the bases to improve a firm's financial performance (George, Zahra, Wheatley, Khan, 2000).

In order for a firm to evaluate and utilize the outside knowledge it needs to have a certain level of prior knowledge on that topic (Cohen, Levinthal, 1990). The prior knowledge can be as basic as a shared language or basic skills but also knowledge of the most recent scientific and technological developments in a given field (Cohen, Levinthal, 1990). The best way to gain absorptive capacity is by conducting internal R&D through which a firm can increase its knowledge in a certain technological area (Deeds, 2001). The firm is then able to integrate the newly learned knowledge and link it to what is already known to permit effective, creative utilization of new knowledge. Not investing in R&D in a technological area may foreclose development of capabilities in the future.

Accumulating absorptive capacity can lead to two advantages. By investing in a certain technological area a firm only needs to put little additional effort to exploit any critical external knowledge that may become available at a later stage, cumulative effect (Cohen, Levinthal, 1990). Second the possession of expert knowledge permits the firm to better evaluate the new technological opportunities (Cohen, Levinthal, 1990). These two features show that absorptive capacity is very domain-specific and choices made in the past affect the absorptive capacity of the firm in present day. Furthermore domain-specific knowledge is necessary for Tacit-to-tacit knowledge transfer. Firms within a similar domain can benefit but distance of any sort can disrupt the learning potential.

Similarity

Similarity in this paper is related to technological relatedness, defined as two firms that own capabilities in similar or related technologies (Cantwell, Santangelo, 2002). Firms that share some type of similarity or proximity, for example geographic or technological tend to interact more frequently and intensely (Schilling, Phelps, 2005). The main point made is that firms within technological, geographic and business-segment similarities promote knowledge flows within the alliance (Gomes-Casseres, Hagedoorn, Jaffe, 2006). A shared understanding of the problems and solutions facilitates learning (Schilling, Phelps, 2005). Mowery, et al, (1996) found support for their hypothesis that absorptive capacity is related to pre-technological overlap between the firms in the alliance. So in order for a firm to properly learn from the other firms in the alliance it needs to be relatively similar on different fields. When this overlap is present their combined knowledge can lead to novel associations and innovations. Learning in complete new areas is more difficult and only incremental changes will be the result. The ideal structure would be partially overlapping knowledge complemented by non-overlapping knowledge (Cohen, Levinthal, 1990).

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Lavie and Miller (2008) formed the API (alliance portfolio internationalization) index to describe the degree of difference/ distance between the partners in a firms alliance portfolio. An alliance portfolio is a firms collection of immediate alliance partners (Lavie, Miller, 2008).

This study will use a similar approach, focusing on the differences/ distance between partners within a multi-firm alliance. Topics of interest are: industry similarity and geographical distance of parent companies home country as independent variables, and R&D spending and the amount of partners in the alliance as moderating variables. Arguing that these topics will affect the firms performance in a sigmoid pattern (Lavie, Miller, 2008). Meaning they affect the effectiveness of the collaboration and the ability to learn and gain improved financial performance differently a long the sigmoid pattern.

Industry similarity

Industry similarity is important to determine whether companies are offering similar products/ services. Industry similarity will be determined by the industry SIC code (Standard Industrial Classification). According to the findings of Mowery, et al, (1996) firms operating in the same SIC code have lower levels of learning/ knowledge transfer than those spanning 4-digit SICS.

Geographical distance

Geographical distance of the alliance partners is important for the transfer of knowledge between the partners. Geographical distance can create difficulties which can be related to cultural and logistical complexities that lower the exchange of interfirm knowledge (Mowery, et al, 1996).

R&D spending

The Cohen and Levinthal (1990) paper shows that, in order to learn, a brief exposure to the new knowledge is not sufficient. The more processing of new knowledge makes use of what is already known, the better the retrieval of the new item will be. R&D investments are necessary for the creation of internal scientific and technological capabilities, which accounts for the knowledge that is already in-house (Deeds, 2001). Investing in R&D has two effects; the direct effect is; greater internal development, new discoveries and reduction of costs in the technological area and the second is the capacity to absorb R&D of the partner firms in the alliance, learning effects (Leahy, Neary, 2007; Deeds, 2001).

However Mowery, et al, (1996) found that R&D intensive firms do not exhibit superior capabilities in alliances. This would suggest that R&D investments would not lead to an increased absorptive capacity. Belderbos et al, (2009) on the other hand state that firms spending large amounts on R&D, and are successful in patent applications, are expected to realize a higher market value. Increased market value can be retraced back to the learning effect and the absorptive capacity of the firm, since R&D efforts are positively related to the market value (Bosworth, Rogers, 2001; Deeds, 2001). R&D directly affects the relationship between similarity in the alliance and the absorptive capacity of the firms. Because the prior related knowledge gathered by R&D activities enables the firm to recognize valuable new information, assimilate it and apply it to commercial ends, also known as absorptive capacity. Therefore R&D spending moderates the relationship between the dependent variables, Geographical distance and industry similarity, and independent variables, absorptive capacity/ financial performance .

(patent counts can be indicator of R&D activity, not flawless but do-able, Halle and Jaffe paper explains the pro-s and con-s and also the Blundell paper)

Amount of partners

Alliance type

Joint ventures allow for more exchange of knowledge

Financial performance

The financial performance of firms is a key measure of firm success. As mentioned earlier research and development is very important in high-technology markets in order to stay competitive and financially viable. Financial performance will be denoted by the market value of the firm, because it represents the market's valuation of the future stream of profits, which in turn is based on the assessment of the return on the firms tangible and intangible assets (Bosworth, Rogers, 2001). An inverted U-shape can be found between the share of explorative research activities and the financial performance of firms (Belderbos, Faems, Leten, van Looy, 2009). Furthermore firms that engage in alliances perform better at explorative research but it leads to a reduction of the firm value (Belderbos, et al, 2009). Potential causes might be the increased co-ordination costs and sharing the outcomes of the research across the alliance partners. This last part is even more so the case in a multi-firm alliance in which the outcome of the joint effort will be implemented or used by the different partners.

Sigmoid pattern

Alliances and knowledge flows need great effort and investment to succeed, under which large potential can open up (Gomes-Casseres, et al., 2006). In order for companies to learn something truly new a dissimilar partner in an alliance can provide new knowledge. When multiple companies are present in the same alliance they each have a different background and slightly different specialization. Increasing the chance of dissimilarity. According to Cohen and Levinthal (1990) the ideal knowledge structure is a partially overlapping knowledge complemented by non overlapping knowledge in an organizational sub-unit. Applying this logic to a multi-firm alliance with a sigmoid pattern would have the following three categories:

Firms from a similar industry and geographical area have relatively little new knowledge they can contribute to the alliance that other partners do not posses. Low learning potential, low increased financial performance.

Firms that are either in a similar industry or geographical area have only partial overlapping knowledge and according to Cohen and Levinthal would create the best situation for absorptive capacity. High learning potential, high increased financial performance.

Firms that are in a different industry and geographical area have little common knowledge and making it harder to absorb the information. Low learning potential, low increased financial performance.

Both R&D spending and number of alliance partners moderate the relationship between these two variables and the absorptive capacity of the firms.

Research Limitations

Next to similarity absorptive capacity also depends on the transfer of knowledge across and within sub-units (Cohen, Levinthal, 1990). Within organizations that can be departments, groups of people or individuals known as boundary spanners or gatekeepers. These people translate the new information and knowledge in a way that is understandable to the rest of the organization. Another factor that attributes to organizational learning is experience. The more divers the experience the more extensive the basic knowledge base and technological capabilities the company possesses (Barkema, Vermeulen, 1998).

However the experience factor will not be dealt with in this paper, internal R&D level and company similarity/ distance will be researched in relation to the absorptive capacity.

Methodology

This descriptive study will show the importance of similarity in a multi-firm alliance with regard to learning potential. The general hypotheses are based on performed theoretical research. To examine the hypotheses, a sample was taken from the Cooperative Agreements and Technology Indicators (CATI) data base, a data set of information from 13000 alliances involving 6000 firms from different industries and countries (Hagedoorn, Link, Vonortas, 2000). This database only holds inter-firm agreements with an aim of transferring technology or joint research, mainly R&D co-operations. [1] Additional information to fill gaps can be found in the Compustat database.

Proxy's will be used to show the improvement in performance of the firms in relation to their absorptive capacity during the alliance.

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