Chapter 2: Literature review
2.3 The relationship between R&D cooperation, R&D investments, R&D
Knowledge spillovers are known as “knowledge externalities”, meaning the involuntary leakage or voluntary exchange of useful technological information (Bondt 1996). Information spillovers between competing firms are often involuntary, whereas spillovers between buyers and sellers are one instance of a voluntary exchange of information. The leaking of firms’ knowledge to competitors has a negative impact on the firms’ own profitability, thus reducing incentives for investing in R&D (e.g.
Spence 1984; Veugelers 1998). Through cooperation in R&D, this externality problem can be internalized, which will have a positive impact on R&D levels and profitability when spillovers are high (e.g. Goel 1995; Veugelers 1998).
D’Aspremont and Jacquemin (1988) pioneered theoretical research in R&D cooperation by introducing a two-stage duopoly model to formalize firms’ incentives to engage in R&D cooperation. Over the past decade more research has emerged related to R&D investments in a cooperative situation compared to non-cooperation (e.g. Kamien et al. 1992; Steurs 1995; Petit and Tolwinski 1999; Cassiman and Veugelers 2002). Kamien et al. (1992) analyze the effects of R&D cartelization and the effects of research joint ventures on firms, finding that when research joint ventures (RJV) cooperate in R&D decisions, the result is the highest consumer surplus and producer surplus. Vonortas (1994) suggests that R&D cooperation allows members to coordinate their actions in pre-competitive research, which can restore firm incentives for both pre-competitive research and development in the presence of high knowledge spillovers. Petit and Tolwinski (1999) also find that the creation of research joint ventures actually improves social welfare and is beneficial to the firms involved. Likewise, welfare levels with industry-wide cooperation are always higher than in the R&D competition case (Veugelers 1998). Steurs (1995) analyzes the impact of intra-industry and inter-industry knowledge spillovers on the level of strategic R&D investments, output, profits and total welfare. The results show that inter-industry cooperation is more socially beneficial than cooperation in single industry firms (intra-industry cooperation).
Recent research studies have focused more on vertical R&D cooperation. The difference between horizontal R&D cooperation and vertical R&D cooperation is that
often closely monitored by regulators, vertical cooperation is less likely to hinder competition (Atallah 2002). Geroski (1995) finds that the rich information flows that connect innovation producers and users (upstream/downstream spillovers) seem to be much more important than pure information externalities that arise between horizontally related firms. Harhoff (1996) investigates why suppliers engage in vertical R&D cooperation and create knowledge spillovers strategically. The analytical results suggest that high levels of knowledge spillovers induce downstream firms to improve product quality and reduce R&D cost. The effects cause an increase in downstream outputs and thus stimulate the demand for suppliers’ intermediate goods. Under four R&D scenarios: R&D competition, horizontal intra-downstream and intra-upstream industry R&D cooperation, and vertical inter-industry R&D cooperation, Inkmann (2000) shows that vertical R&D cooperation is usually the only stable equilibrium — that is, no firm has an incentive to choose any other R&D scenario. Ishii (2004) indicates that vertical RJV yields the largest social welfare when vertically-related firms can coordinate their R&D decisions and fully share useful knowledge.
The standard framework of R&D cooperation in prior analytical literature considers two vertically-related industries (upstream and downstream industries) with two identical firms in each industry. In this paper I extend D’Aspremont and Jacquemin’s (1988) models and use a more general market structure, including upstream and downstream industries with n firms in each industry. I also apply their effective R&D investment assumption. In Kamien et al. (1992)’s model, most propositions and corollaries obtained for quantity-settings (Cournot competition) continue to hold in the price-competition setting (Bertrand competition). Therefore, in this paper I apply only quantity competition models. Regarding the types of R&D cooperation, Inkmann (2000) applies the following R&D scenarios: R&D competition, horizontal R&D cooperation, and vertical R&D cooperation. In this study I extend his setting and include generalize R&D cooperation in my theoretical model and empirical test. In addition, following the approach proposed by Steurs (1995), I use numerical simulations to compare the ranking of R&D investments, R&D outputs, and financial performance in different scenarios.
See Table 6 for related literature summary of the relationship between R&D cooperation, R&D investments, R&D outputs, and financial performance.
Table 6: Literature summary of the relationship between R&D cooperation, R&D investments, R&D outputs, and financial performance-theoretical research
Author/Year Research topic Research method Research conclusion and research implication D’Aspremont
and Jacquemin (1988)
D’Aspremont and Jacquemin pioneer theoretical research in R&D cooperation by introducing a generalized two-stage duopoly model to formalize firms’
incentives to engage in R&D cooperation.
1. Analytical research.
2. In the first stage, R&D cooperation can take place at the
“precompetitive stage”. In the second stage, firms play a Cournot game.
Research conclusion:
R&D cooperative behavior can play a positive role in industries having a few firms and characterized by R&D activities generating spillover effects.
Research implication:
Starting with the research of D’Aspremont and Jacquemin (1988), a large number of theoretical research papers have emerged over the past decade. In this paper I extend their models to examine the relationship between R&D cooperation and firm performance. In addition, I also apply their effective R&D investment assumption.
Kamien et al.
(1992)
Authors analyze the effects of R&D cartelization and research joint ventures on firms that engage in either
1. Analytical research.
2. Authors apply two stages game including
Research conclusion:
A research joint venture that cooperates in its R&D decisions yields the highest consumer plus producer surplus under
Author/Year Research topic Research method Research conclusion and research implication Cournot and Bertrand
competition in their product market.
four models: R&D competition, R&D cartelization, research joint venture
competition, and research joint venture cartelization.
Cournot competition and under most of Bertrand competition.
Research implication:
In Kamien et al. (1992)’s model, most propositions and corollaries obtained for quantity-settings (Cournot
competition) continue to hold in the price-competition setting (Bertrand competition). Therefore, in this paper I apply only quantity competition models.
Steurs (1995) In the first part of the paper author analyzes the impact of intra- and inter-industry R&D spillovers on the level of R&D investments, output, profits and total welfare when firms compete in both the R&D and output stage. In the second part, he compares the
1. Analytical research.
2. Author extends D’Aspremont and Jacquemin (1988)’s framework to a two-industry,
two-firm-per-industry model allowing for R&D spillovers to occur within industries as well as between
Research conclusion:
R&D agreements that cut across industries may be more socially beneficial than cooperatives whose membership comes from a single industry.
Research implication:
The ranking of R&D investments, R&D outputs, R&D outputs, and financial performance in different scenarios is difficult to interpret. Therefore, following the approach proposed by Steurs (1995), I use numerical simulations by varying spillover parameters.
Author/Year Research topic Research method Research conclusion and research implication equilibrium outcomes that
result from R&D cooperation.
industries.
Inkmann (2000)
Author introduces a second, vertically related industry into the usual one industry oligopoly
framework of cooperative R&D investment between firms operating on the same product market.
1. Analytical research.
2. R&D efforts are affected by intra- and inter-industry R&D spillovers. Horizontal and vertical R&D cooperation scenarios are compared to R&D competition.
Research conclusion:
Author shows that vertical R&D cooperation is usually the only stable equilibrium - that is, no firm has an incentive to choose any other R&D scenario.
Research implication:
Author applies four R&D scenarios: R&D competition,
horizontal intra-downstream and intra-upstream industry R&D cooperation, and vertical inter-industry R&D cooperation. In this study I extend Inkmann (2000)’s setting and include generalized R&D cooperation in theoretical model and empirical test.
Ishii (2004) Author analyzes the impact of R&D cooperation in two
vertically related duopolies
1. Analytical research.
2. His setting focuses on a case where a
final-good
Research conclusion:
His results indicate that vertical RJV yields the largest social welfare when vertically-related firms can coordinate their R&D decisions and fully share useful knowledge.
Author/Year Research topic Research method Research conclusion and research implication with horizontal and
vertical spillovers.
manufacturer and an input supplier cooperate in their R&D activities in the presence of horizontal and vertical spillovers.
Research implication:
The standard framework of R&D cooperation in prior
analytical literature considers two vertically-related industries (upstream and downstream industries) with two identical firms in each industry. However, these models are quite restrictive. In this paper I extend prior models and use a more general market structure, including upstream and downstream industries with n firms in each industry.
2.4 The relationship between R&D cooperation, R&D investments, R&D outputs, and financial performance-empirical research
A number of empirical studies have found a positive impact of engaging in R&D cooperation on R&D investments and firm performance. Hagedoorn and Schakenraad (1994) study the effects of strategic technology alliances on company performance.
The results indicate that companies attracting technology through their alliances, and companies concentrating on R&D cooperation, have significantly higher rates of profit. Stuart (2000) investigates the relationship between intercorporate technology alliances and firm performance. The findings from models of sales growth and innovation rate confirm that organizations with large and innovative alliance partners perform better than comparable firms that lack such partners. Sarkar, Echambadi, and Harrison (2001) also investigate the effect of alliance entrepreneurship on market-based firm performance. Results indicate that alliance proactiveness leads to superior market-based performance, and that this effect is stronger for small firms and in unstable market environments. From the supplier’s standpoint, Chung and Kim (2003) analyze the effects of supplier involvement in a manufacturer’s new product development on the supplier’s financial performance, innovation, and product quality.
The results indicate that a higher level of supplier’s involvement positively impacts innovation and financial performance.
Shrader (2001) employs transaction cost theory to explore factors moderating the relationship between collaboration and performance in foreign markets. The results indicate that R&D intensity and advertising intensity are significant moderators of this relationship. Chang (2003) investigates the innovative activities and inter-organizational cooperation of integrated circuits and biotechnology sectors across Taiwan and the UK. The results reveal that a firm’s innovative performance is not only shaped by internal R&D effort, but also by external links with other firms.
Moreover, Chang (2003) argues that the latter becomes a more powerful factor in influencing a firm’s innovativeness. Belderbos et al. (2004) examine the impact of R&D cooperation in 1996 on subsequent productivity growth from 1996-1998. The results confirm a major heterogeneity in the goals of R&D cooperation. The cooperation between competitor and supplier focuses on incremental innovations, improving the productivity performance of firms, while university cooperation and
products, and improving the growth performance of firms.
Based on prior literature, most research uses questionnaires as a tool to examine the relationship between R&D cooperation and firm performance. Hagedoorn and Schakenraad (1994) pioneer in R&D cooperation empirical research by using a systematic collective database. I follow their method to collect R&D cooperation data in Taiwan’s high technology industries. I also follow Stuart’s (2000) variable measurement and use the number of R&D cooperation to measure R&D cooperation intensity. Furthermore, in this study I divide R&D cooperation into horizontal cooperation, vertical cooperation, generalized cooperation, and R&D competition, and examine how different R&D cooperation types impact companies’ R&D investments, R&D outputs, and financial performance. Finally, according to Shrader’s results, R&D intensity moderates the relationship between collaboration and performance.
However, more studies (e.g. Steurs 1995; Inkmamn 2000; Ishii 2004) indicate that R&D cooperation leads to higher R&D investments. Thus, further examination is needed to verify the relationship between R&D cooperation, R&D investments, R&D outputs, and financial performance.
See Table 7 for related literature summary of the relationship between R&D cooperation, R&D investments, R&D outputs, and financial performance.
Table 7: Literature summary of the relationship between R&D cooperation, R&D investments, R&D outputs, and financial performance-empirical research
Author/Year Research topic Research method Research conclusion and research implication Hagedoorn and
Schakenraad (1994)
Authors study the effects of strategic technology alliances on company performance.
1. Empirical research.
2. The statistical procedure used in study is linear structural modeling (LISREL).
3. The sample of companies covers European, American, and Japanese firms operating in three industrial sectors:
information technologies and electronics, mechanical engineering, and
Research conclusion:
The results indicate that companies attracting technology through their alliances and companies concentrating on R&D cooperation have significantly higher rates of profit.
Research implication:
Most research uses questionnaires as a tool to examine the relationship between R&D cooperation and firm performance.
Hagedoorn and Schakenraad (1994) pioneer in R&D cooperation empirical research by using systematic collective database. In this study I follow their method to collect R&D cooperation data in Taiwan’s high technology industries. Furthermore, I adopt path analysis to analyze causal relations.
Author/Year Research topic Research method Research conclusion and research implication process industries.
Stuart (2000) Author investigates the relationship between intercorporate technology alliances and firm
performance.
1. Empirical research.
2. Author draws the sample from the semiconductor industry and focuses only on horizontal alliance.
Research conclusion:
The findings from models of sales growth and innovation rate confirm that organizations with large and innovative alliance partners perform better than comparable firms that lack such partners.
Research implication:
Stuart (2000) includes only horizontal cooperation in his
research. In this study I divide R&D cooperation into horizontal cooperation, vertical cooperation, generalized cooperation, and R&D competition. In addition, I follow his variable
measurement and use the number of R&D cooperation to measure R&D cooperation intensity.
Sarkar et al.
(2001)
Authors investigate the effect of alliance entrepreneurship on market-based firm performance.
1. Empirical research.
2. Data are collected by mail survey. A total of 184 companies
responded.
Research conclusion:
Results indicate that alliance proactiveness leads to superior market-based performance, and that this effect is stronger for small firms and in unstable market environments.
Author/Year Research topic Research method Research conclusion and research implication Research implication:
Most of the prior studies use survey data in R&D cooperation research which remain some limitations. Therefore, we need more archival data to support the argument and results.
Shrader (2001) Author employs
transaction cost theory to explore factors moderating the relationship between collaboration and
performance in foreign markets.
1. Empirical research.
2. Data are collected for new ventures
headquartered in the United States that were founded between 1983 and 1988 and issued initial public offerings (IPOs) while they were still new ventures.
Research conclusion:
The results indicate that R&D intensity and advertising intensity are significant moderators of the relationship between
collaboration and profitability in foreign markets; however, they were not significantly related to the use or nonuse of
collaboration.
Research implication:
According to Shrader’s results, R&D intensity moderates the relationship between collaboration and performance. However, based on more prior research (Steurs 1995; Inkmamn 2000; Ishii 2004), R&D cooperation leads to higher R&D investments.
Thus, further examination is needed to verify the relationship between R&D cooperation, R&D investments, R&D outputs, and financial performance.
Author/Year Research topic Research method Research conclusion and research implication Chang (2003) Author investigates the
innovative activities and inter-organizational cooperation of integrated circuits and biotechnology sectors across Taiwan and the UK.
1. Empirical research.
2. The research surveyes 400 IC and
biotechnology firms across the UK and Taiwan. One hundred and sixty-two
questionnaires were received.
Research conclusion:
The results reveal that a firm’s innovative performance is not only shaped by internal R&D effort, but also by external links with other firms. Moreover, the paper argues that the latter becomes a more powerful factor in influencing a firm’s innovativeness.
Research implication:
Chang (2003) is one of the few researchers analyzing R&D cooperation in Taiwan via a postal questionnaire survey.
However, a questionnaire survey still remains limited. Thus, in this study I use archival data to comprehensively investigate R&D cooperation and innovation activity in Taiwan’s high technology industries.
Chung and Kim (2003)
Authors analyze the effects of supplier involvement in a manufacturer’s new product development on the supplier’s financial
1. Empirical research.
2. 128 suppliers in the Korean automobile and electronics industries.
Research conclusion:
The results indicate that a higher level of supplier’s involvement positively impacts innovation and financial performance.
Research implication:
Author/Year Research topic Research method Research conclusion and research implication performance, innovation,
and product quality.
“Supplier involvement in new product development” is a very popular phenomenon in high-technology industry. Chung and Kim’s (2003) results further confirm the importance of considering vertical cooperation in the model.
Belderbos et al. (2004)
Authors examine the impact of R&D
cooperation in 1996 on subsequent productivity growth from 1996-1998.
1. Empirical research.
2. Research
questionnaires include Dutch innovating firms in two waves of the Community Innovation Survey (CIS) (1996, 1998).
Research conclusion:
Cooperation between competitor and supplier focuses on incremental innovations, improving the productivity and performance of firms, while university and competitor
cooperation are instrumental in creating innovations, generating sales of products, and improving the growth performance of firms.
Research implication:
The results indicate a major heterogeneity in the goals of R&D cooperation. In this study, I use R&D investments, R&D outputs, and financial performance to measure the performance of R&D cooperation. I also divide R&D cooperation into four types:
horizontal R&D cooperation, vertical R&D cooperation, generalized R&D cooperation, and R&D competition, to examine the impact of different R&D cooperation types on the performance of R&D cooperation.