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CRIC Project - Theorising Multi-Firm Innovation (Project completed)

The Problems Addressed
Theoretical Approaches
Key Results and Outcomes
Significance of Results and Outcomes
Key Publications

The Problems Addressed

The central theme of this work is the attempt to combine a capabilities perspective on the innovating firm with the increasingly complex division of labour in the generation of science and technology. It is increasingly the case that technological innovations cannot be accomplished by individual firms acting independently.

In explaining how and why firms differ in their market performance, the capabilities view of the firm has placed its primary emphasis on the internal accumulation of the knowledge and skills which underpin its productive activity. While this certainly is an important part of the explanation of the differential innovative trajectories of firms, it is deficient in two important respects. First, it fails to pick up on one of the principal features of the modern innovation process, namely, its collective, combinatorial character. Secondly, it fails to recognise that a distinguishing feature of the competitive performance of firms is their differential ability to manage the external collaborative relationships required by modern innovation conditions.

These developments have several strong implications for the capabilities view of the firm, for the nature of corporate governance and for systemic perspectives on the innovation process. The boundary of the firm is never entirely clear. The creation of new capabilities is increasingly taking place through the combination of the capabilities of several firms and research organizations and this raises fundamental questions about the co-ordination of capability formation. The governance of extra-firm relationships adds new layers of complexity to intra-firm governance and indeed to our understanding of the boundaries of the firm itself.

There is clearly a mismatch between the received single firm perspective on capabilities, and the now emergent multiple organization perspective on innovation. We therefore need to consider how the capabilities perspective can be extended to embrace a multi-firm perspective on innovation.

Theoretical Approaches

In order to make progress in understanding these issues it is necessary to shift from a framework which sees legally distinct firms as the only unit of analysis, and towards a framework in which firms are still important, but capabilities themselves become an important unit of analysis which is not coterminous with the firm. In such a framework, incentives, opportunities, entrepreneurial behaviour, and indeed the long-term defence of the interests of legally distinct firms, can be reconstructed as the search for and implementation of new combinations of capabilities. Furthermore, the new combinations, and the cross-firm structures in which they are managed, may then become the site for the creation and accumulation of genuinely new capabilities (and technologies) which did not exist prior to the creation of the cross-firm structure.

The central feature of the capabilities view is its link with the creation of valuable knowledge, knowledge which is the basis of competitive advantage. For firms are frameworks in which knowledge is generated as well as used and there is not the slightest reason to expect that the process of knowledge generation ever approaches a state of rest. Knowledge necessarily rests in the minds of individuals (either directly or indirectly), is shared in groups or teams and may be expressed in some symbolic form even if only incompletely. Thus to understand the knowledge of the firm one must, in principle, know how that firm is organized: capabilities depend upon team activity in which the knowledge and skills of the individuals is transformed into the integrated knowledge of the organization. Thus the organization, in all its aspects, becomes an operator for creating the collective from the individual.

Now the processes by which experience is gained inevitably generate imbalances in the capabilities of the firm, imbalances which disrupt or fall short of the requirements of close complementarity of capabilities for the operation of the firm. Expertise is acquired which no longer fits with the existing capabilities and if this slack is to be exploited it can only be done so by attending to the gaps which prevent its classification as a capability. By contrast, the imbalance can take the form not of an under-utilized capability, but of a 'missing' capability needed for the optimal exploitation of other capabilities which are present. We can see how the firm finds itself continually faced with emergent opportunities to bring together complementary but discriminate bodies of expertise, to create capabilities where imbalances existed previously. The crucial point though, is that the firm has to manage its relations with a wider distributed system for generating new knowledge, internal generation and exploitation of capabilities is not always the rational option.

Key Results and Outcomes

There is an entire spectrum of methods for managing external acquisition which lie between the limiting case of spot market transactions and direct administrative control, a spectrum summarized by the phrase co-operative arrangements; agreements between firms such as to guarantee their conduct for the duration of the agreement. Here lies a rich vein of possibilities. A question which arises now is that of the choice of co-operative arrangement for the elimination of imbalances in capability. The choice between them is in part a matter of comparative efficiency, in part a matter of the expertise to be acquired, and in part on the intended manner in which the capability gained is to be exploited.

Significance of Results and Outcomes

The significance of these arguments is threefold. First, they connect the CRIC emphasis on distributed innovation processes with the capabilities approach to the study of firms, and lead us to a new view of the firm as the unique organisation for combining together the many different kinds of knowledge required to innovate in current conditions. Secondly, they complement the emphasis in Evolutionary Theory Underpinnings of Innovation Systems and Policy on the active role of firms creating their own innovation systems in the pursuit of competitive advantage. Thirdly, they raise the problem of how the external organisation of the firm is to be managed. A useful first step in this treating this last point is to list and classify the different organisational structures which firms can use to co-ordinate their respective contributions to a multi-firm innovation process. We have identified five groups.

Group 1: Predominantly Market-mediated relationships

Examples of this form are the use of consultancy services; the hiring of key individuals or teams from other firms; the purchase of licenses; the use of contract R&D services; and, the special case of purchasing firms solely in order to acquire their specific technologies. The common feature of these situations is that the external technology or capability is transferred to the acquiring firm with the payment of a fee of some kind. However, these transactions are clearly not always made in spot markets. (See Outsourcing of R&D, The Innovation Performance of Small Firms and Defining the Role of Knowledge-Intensive Business Services in the Economy) There are considerable subsequent uncertainties, search costs, and transaction costs involved; as well as considerable effort expended in managing the actual transfer process and in successfully integrating the acquired knowledge with the firm's pre-existing knowledge

Group 2: Multi-firm collaborations to produce generic knowledge

Firms can collaborate in various ways to produce new knowledge which is sufficiently generic to be used by all the participants. Industrial research associations are the oldest institutional form for doing this. More recently, technology focused research 'clubs' have been set up around research groups in universities or other research organisations. In some cases separate companies have been set up as research-only ventures with share capital and staff coming from a number of contributing companies. Finally, bi-lateral R&D collaborative agreements between firms are an increasingly frequently used device (Hagedoorn, 1992). In addition to being less market-mediated than the arrangements listed in group 1, these arrangements share the distinction that they focus more on the production of new knowledge than on the transfer of existing knowledge.

Group 3: Application-oriented collaborations

These arrangements are similar to those in group 2, except that they embrace a longer stretch of the 'innovation pipeline'. Rather than producing only 'pre-competitive' technology they progress the work closer to the marketable product, with the important proviso that the firms may then choose to separate and produce and sell the products independently. The significance of this type of arrangement for capability theory is that it may involve the combination of firm capabilities in marketing and production as well as those centred on the R&D function.

Group 4: Joint Venture Companies

Joint ventures in which products are developed, manufactured and sold are clearly larger scale commitments to combine existing capabilities from participating firms and to develop new capabilities across the board. They combine elements of the arrangements in groups 1, 2 and 3 above with other features which give a greater institutional and legal stability to the activity. It is worth remembering though, that even in the case of Joint Ventures, there can be a later stage in which the newly created capabilities are absorbed back into one of the participating firms.

Group 5: Strategic Alliances

Strategic Alliances are difficult to define in terms as clear as those used for the first 4 groups above. In some respects they could be seen as portfolios of arrangements drawn from those in groups 1 to 4, but with the added indefinable ingredient of some public manifestation of 'trust' between the partners. They will often be driven not only by innovation and capability issues, but by larger issues of industrial and market re-structuring. However, they will often have powerful consequences for the exchange and creation of capabilities and knowledge.

As we have already noted, these 5 sets of arrangements can be seen in the short term as alternatives for the solution of the problem which a company faces if it does not have the complete set of capabilities required for an innovation. The actual choice between the alternatives depends on a variety of factors, in which the scale of the innovation relative to the size of the participating firms will play a particularly important role. In the longer term however they can be seen as stages (though not necessarily in a pre-determined order) through which inter-firm co-operations can evolve. To give an obvious example, technology-centred collaboration can evolve into joint product development, and from there to a formal Joint Venture. The degrees of technical risk, financial risk, and exposure of existing proprietary technology are quite different as one passes through these stages.

All this amounts to a general argument in favour of co-operative arrangements but it does not help explain the particular merits of the different forms of co-operation outlined earlier. We now turn finally to this point. To do this we consider the following list of attributes which we present as important issues bearing on the relevance of the alternative forms of co-operation to a given situation:

Creation versus exploitation of new capabilities.
Relative size and power of the collaborators.
Availability of exploitation routes.
Levels of uncertainty and risk.

Thus we see that the choice between co-operative forms is not an exact calculus, but a delicate balance of the contingencies of power asymmetries, availability of complementary capabilities, and risk-shifting and risk-sharing devices. The choice is all the more complex given that these contingencies are all likely to be subject to the peculiarities of 'embeddedness', and to the related issue of the effects of different national systems of innovation. In practical terms, for example, different legal systems and business cultures will have a significant influence on the relative feasibility of different collaborative governance arrangements.

Key Publications

Coombs, R., and Metcalfe, S., (2000), 'Organising for Innovation: Co-ordinating Distributed Innovation Capabilities.' In Foss, N., and Mahnke, V. Competence, Governance and Entrepreneurship, Oxford University Press

Coombs, R., and Battaglia, P. (1998) 'Outsourcing of Business Services and the Boundaries of the Firm', CRIC Working Paper No 5.

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