Mo Li

Mo Li

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Subtopic 3: Find the Next Wave to Ride on-- New Business Strategies in the Changing World Competition VS. Collaboration -- Strategies in the Generation and Adoption of a Sequence of New Technologies

Mo Li

Background: What determines the long-run rate of growth? Which patterns of economics will gain the fastest growth? Those questions not only interested scholars who studied growth in the 1950s and 1960s, but also remain on the current research agenda.

Two observations have motivated many of the recent contributors to enterprise growth theory.

One stream of theory continues to see capital accumulation, including human capital (Bucci, 2003), as the most significant factor for economic growth. Another approach focuses on external economies as playing a leading role in the growth process. According to this view, when individuals or firms accumulate new capital, they indirectly contribute to the productivity of capital held by others. Such spill-over effect may occur during investment in physical capital (Arrow, 1962) or human capital (Lucas, 1988). These two approaches offer logically relevant explanations of continuous, policy-sensitive growth. However, Grossman and Helpman (1994) do not agree with this point of view, but have another opinion instead. They believe, as indeed did Schumpeter (1934), Solow (1956) and many others today--- that improvements in technology have been the real force behind perpetually rising standards of living. Therefore, there is no doubt that such ‘trend’ in business could be explicitly explained by technologically changes.

Positive influence or not If we accept that technological advance plays a major role in the determination of advances in economic prosperity, how will it affect business, in particular, is there any NET reward for stimulating player to compete with new technology?

Schumpeter (1934) introduced the concept of the ‘process of creative destruction’ as a milestone one in which that a firm enjoys temporary monopoly power as a results of innovation but is soon overthrown by a more inventive challenger. The incumbent can only hold the monopoly benefit in the current interval until newer innovation come along. After that, the profits are captured by other innovators, building upon the basis of the present innovation, but without compensating the present innovator. But Aghion etc(2005) suggest such innovation incentives 1

Mo Li

Post-Westphal approach to real contemporary world order is being crashed with crisis as well (by numerous economists) 4 – when the critical moment has come, nobody told about post-modern actors and their unique influence on the environment. The crisis has shown to theorists of ideal and liberal approaches to international relations and economy that realists, who always believed only in weapon and money as real resources of every times, were right. That’s also traditional understanding of competition – competition relying on state. As Henry Louis Mencken said “The cynics are right nine times out of ten”.

But is it really so simple? Why state as an actor showed its dominance again?

3. Post Westphal form of world communications picture.

In reality, the picture of the world has changed drastically. For more than 50 years European project of integration proves that there is a place for Post Westphal actors in the world, which are not correspond to state directly 5 . Furthermore, international terrorist movements, transnational corporations and etc. also proved its value on the world stage6 . Generally, international organizations, state, NGOs, business, transnational movements and etc. create new atmosphere of communication networks in contemporary world.

At the time when boundaries again became important those who can and have abilities to break and overcome it will get unique competitive advantage in the fight for the best piece of pie.

4. Post Westphal logic of contemporary crisis facing.

In XXI century, in contrary with 1970s and 1930s economic crises, we face multilateral world with many logic angles of analyzing. Apart from state, international organizations, NGOs, businesses (transnational, regional and in associations) have also become actors of world policy and world order change. That’s why binary way of reacting to crisis circumstances – using state as the only weapon in fight against crisis – couldn’t be told as wise strategy. When other actors of world policy came up, it is time to involve them to the processes of world economic processes stabilization. It is obvious that world needs in new international “mixed” organizations, which will unite at one discussion and communication area governments, businesses, NGOs and other Post Westphal actors.

5. Key factors for success of the entity during the crisis and boundaries revival.

The current crisis could be called universal for all kind of actors in world policy as it negatively affects almost all of them. Let’s try to figure out some points of successful behavior for actors (generally for all of Post Westphal actors). Uniqueness of this speak is it brave trial of uniting all of them under the same roof. There are - trust (reputation resources, image value, experience’ successfulness); - flexibility (diversity of skills, education); - networking (amount of connections, level of popularity, abilities to overlap networks, abilities to use effectively information areas) and

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Hull, John. The Credit Crunch of 2007: What Went Wrong? Why? What Lessons Can Be Learned? Rothman School Research Paper, 2008 5 Van Ham, Peter. Europe’s Post Modern Identity: A Critical Appraisal. International Politics, 2001 6 Lebedeva, Marina. Privatization of World Politics. Moscow: Moscow Institute of International Affairs, 2008

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In a dynamic general equilibrium model of product innovation, generated from an innovation growth model by Grossman and Helpman (1991), Segerstrom (1991) they found that the model had a steady-state equilibrium in which the rate of economic growth is constant over time. And in this steady-state equilibrium, firms engage in both costly innovative and costly imitative activities, although not in the same industry at the same time. It seems to be more profitable to imitate with a single leader and more profitable to innovate with two leaders.

Besides, Segerstrom also gives us a connection between innovation and imitation. He claims that increase in the government subsidy to innovation unambiguously increases the steady-state intensity of imitative effort in each industry in which firms engage in imitative R&D; and increase in the government subsidy to imitation increases the intensity of innovative effort in each industry in which firms engage in innovative R&D. In other words, cheaper innovation implies a faster rate of imitation, whilst cheaper imitation implies a faster rate of innovation.

However, as to the question of firms’ best strategy, it always seems like a dilemma.

Game theory offers us a possible way to reveal the link between innovation and imitation. Liu and Shi (2007) build a game-theory model based on the Romer’s leader-follower perspective, to exploit the very circumstance of innovation and imitation respectively. The deduction from studies suggest that innovation possibility goes negatively with self innovation cost, but positively with labour input; whilst the imitation possibility goes positively with self innovation cost, but negatively with labour input. Sun and Cui (2007) believe that when there is technical and cost difference, the technology advanced firm engaging in innovation, and the technology follower engaging in imitation is a Nash equilibrium solution. In contrast, when there is no technical and cost difference, it is an optimal gambling strategy for both firms to choose innovation at the same time. However, as the author realize in their conclusion, in terms of gaining higher welfare and profit, collaboration or joint venture may be another effective strategy for firms.

Why not collaboration?

Indeed, limited previous literature provides us collaboration as an extra firm option when encounter technology changes. Exactly like Shaked and Sutton (1987) realized, the non cooperative games may have collusion as a preferred outcome and games may also suggest that firms would prefer to collaborate rather than compete (Figure 2). However, another question occurs to our mind. That is, in what circumstance firms collaborate and in what circumstance they do not. Is it always necessary to collaborate under any circumstance? The answer to that question may concern with the connection between collaboration and firms’ themselves welfare.

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Find the Next Wave to Ride On - New Business Strategies in the Changing World

Mo Li

Firm Decision

Collaboration

Competition

Innovation

Imitation

Nothing

Figure 2, Alternative Strategies The idea of positive relationship between collaboration and firms’ welfare is widely supported by many scholars (Seade, 1980). Rosenkranz, (1995) analyzed 2 stage, 2 plays non-cooperative game, with vertical product differentiation. Firms determine both the time location and the quality of their innovation. They found there always exists possibility to form research joint ventures (RJVs) in R&D intensive markets even though without spillover effect and stochastic R&D outcomes. That is because under competition, firms expected payoff is normally lower than collaboration. If they write binding contracts over innovation dates, quality or even side payments and split post collaboration payoff, which is helpful to reduce at least uncertainty for one player, which consequently also benefits for both partners. Similar risk shared idea is also supported by earlier studies (Pennings and Harianto, 1992). However, since the decreasing of total social welfare and R&D underinvestment, such collaboration may not be desirable. But by adding legal restrictions, such as simultaneously entry, collaboration attractiveness may increase.

Similarly, Matsubayashi, (2007) studies an instance of price and quality competition in Japanese internet market. The author’s model assume the existence of three firms, two players in downstream and one complementary monopolist supplier. The result is shown that vertical integration always has a positive effect comparing with competition, which increases not only firms’ profits, but also consumers’ welfare. Moreover, surprisingly, more differentiation could also increase both firms and consumers’ welfare, which differs from Bertrand price competition opinions.

On the other hand, it seems that whether firms collaborate is also concerned with scale of product sales. Buckley and Casson (1996) suggested that the joint venture ownership of production is highly relevant to globalisation. With global markets and updating production facilities in mind, firm is always trying to participate in a lower transport cost game to maximise the opportunity for exploiting economies of scale in production. That requires an ideal geographical distribution of its demand, which may lead to technologically collaborate between a leading firm and a local firm. As high-tech firms may make a series of market-access alliances with firms in different localities, that gives the high-tech firms more experience of joint ventures. In particular, the greater the fixed costs of R&D, and the greater the economies 4

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of scale in production, the more important is the marketing synthesis in achieving the critical level of global sales.

Thirdly, global sustainable competitive advantage is another reason for collaboration (Zhang et al, 2007; Feng and Chen, 2004). Recent research emphasized that R&D investment in overseas subsidiaries can help multinational corporations (MNCs) exploit their firm-specific resources to suite local markets better, which also was called complementarity of resource (Chen, 2007).

Fourthly, the traditional analysis of innovations sometimes may heavily underestimate networking effect, consequently leading to a conclusion bias. Love and Roper (1999) suggest that we need to take collaboration and technology diffusion into account, which were called networking intensity and technology transfer respectively. They extend standard Schumpeterian explanation of firms’ innovative activity by this idea. And a unique dataset of UK manufacturing plants are also used for examining. They conclude that technology transfer and networking are crucially important substitutes for R&D in the innovation process rather than complementary inputs. Failure to address them may lead to overestimate the effect of R&D. On the other hand, firm size exhibits no influence on the intensity of R&D or technology transfer, but is positively linked with networking.

Last but not least, recent organisation studies (Gao and Pan, 2007) suggest another alternative explanation of collaboration incentive by introducing five management mechanisms, trust mechanism, knowledge-shared mechanism, group technology diffusion mechanism, communication mechanism and group reputation mechanism. They believe all five mechanisms above could significantly stimulate firms to collaborate, which is not only beneficial for shortrun to avoid price competition, but also for long run term to jointly exploit new markets.

In terms of all features listed above, it is possible therefore that the best strategy for the firm in the face of collaborative possibilities may differ from the predictions of standard models with only three strategy options.

Conclusion According to the creative destruction theory, when market welcomes an innovation trend, it only rewards to the technological leader. The real incentive to innovate depends upon the net differences between post-innovation and pre-innovation rents of incumbent firms. Therefore, the guide line and impact of picking strategy must be the trade-off between post-innovation reward and its corresponding expenditure.

Besides of innovation (being first), imitation (being second) and doing nothing under competition game, collaboration (being joint first) as a strategy when firms encounter a new technology in market, may dramatically increase firms’ welfare, whist reduce innovation uncertainty, cost or waiting time. In particular, collaboration raises both players’ technology to an upper level, which according to creative destruction, must result them a monopoly profit.

However, it still has one big restraint of collaboration. That is, they must obtain both of players’ 5

Find the Next Wave to Ride On - New Business Strategies in the Changing World

Mo Li

consent at an initial stage. Any of player’s disagreement may terminate such collaboration immediately. As a result, for decision and policy makers, the potential opportunity cost for negotiation also needs to be concerned in practice.

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Reference 1. Aghion, Philippe., Bloom, Nick., Blundell, Richard., Griffith, Rachel., Howitt, Peter. (2005). Competition and Innovation: an Inverted-U Relationship. The Quarterly Journal of Economics , 701-728 2. Arrow, Kenneth J. (1962, June). The Economic Implications of Learning by Doing. Review of Economic Studies, 29:2, 155-73 3. Bao, Haibo., Xu, Zhuqing. (2005). the relationship between patent, innovation and economy growth. The Party Studies in Zhejiang Province, 76-81 4. Bucci, Alberto. (2003). R&D, imperfect competition and growth with human capital accumulation. Scottish Journal of Political Economy, Vol.50 (4), 417-439 5. Buckley, Peter J., Casson, Mark. (1996). An economic model of international joint venture strategy. Journal of International Business Studies, Special Issue , 849-876 6. Chen, Minju. (2007). Game studies of determinants of collaboration. Market Modernization, 6, 32-34 7. Feng, Lin., Chen, Hongbing. (2004). Studies on Chinese International Joint Ventures under Globalisation.

Journal of Chongqing University of Posts and Telecommunications, 3, 54-56 8. Gao, Chuang., Pan, Zhongzhi. (2007). Game Analysis of Collaboration Configuration in High-Tech Firms.

Science & Technology Progress and Policy, 24, 65-67 9. Grossman, Gene M., Helpman, Elhanan. (1991). Quality Ladders in the Theory of Growth. Review of Economics Studies, 58, 43-61 10. Grossman, Gene M., Helpman, Elhanan. (1994). Endogenous Innovation in the Theory of Growth. Journal of Economic Perpectives, 8:1, 23-44 11. Liu, Hedong., Shi, Kuiran. (2007, April). Game Analysis between the Independent Innovation and Follow.

Science & Technology Management (Kexue yu Kexuejishu guanli), 68-70 12. Love, James H., Roper, Stephen. (1999). The Determinants of Innovation: R&D, Technology Transfer and Networking Effects. Review of Industrial Organization, 15, 43-64 13. Lucas, Rober E., Jr. (1988, July). One the Mechanics of Economic Development. Journal of Monetary Economics, 22:1, 3-42 14. Matsubayashi, Nobuo. (2007). Price and quality competition: The effect of differentiation and vertical integration. European Journal of Operational Research, 180, 907-921 15. Pennings, Johannes M., Harianto, Farid. (1992). Technological Networking and Innovation Implementation.

Organization Science, 3 (3), 356-382 16. Rosenkranz, Stephanie. (1995). Innovation and cooperation under vertical product differentiation.

International Journal of Industrial Organization, 13, 1-22 17. Schumpeter, Joseph. (1934). the Theory of Economic Development. Cambridge: Harvard University Press 18. Seade, Jesus. (1980). On the effects of entry. Econometrica, 48(2), 479-488 19. Segerstrom, Paul S. (1991). Innovation, Imitation, and Economic Growth. Journal of Political Economy, 99:4, 807-827 20. Shaked, Avner., Sutton, John. (1987). Product differentiation and industrial structure. The Journal of Industrial Economics, XXXVI 21. Solow, Robert M. (1956). A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics, 70:1, 65-94 22. Sun, Jingshui., Cui, Lifang. (2007). Analysis on the Factors, Market Structure and Dynamical Gambling Process of Enterprise Technology Innovation. Science & Technology Progress and Policy, 24 (8), 97-101 23. Tu, Chenglin., Yi, Weihua. (2008). Analysis of China’s self-innovation capability crossed regions. Science 7

Find the Next Wave to Ride On - New Business Strategies in the Changing World

Mo Li

and Technology Management Research, 1, 39-42

24. Zhang, Yan., Li, Haiyang., Hitt, Michael A., Cui, Geng. (2007). R&D intensity and international joint venture performance in an emerging market: moderating effects of market focus and ownership structure.

Journal of International Business Studies, 38, 944-960

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Global Initiatives Symposium in Taiwan 2009