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Resource–Based View And Cooperative Relationships

    Collaborative linkages refer to the set of formal and informal relationships that create a level of mutual cooperation and dependence between firms (Leiblein & Woo, 1996). Recently, several authors (see for example Eisenhardt & Schoonhoven, 1996; Mowery, Oxley & Silverman, 1996) have introduced resource–based view (see for example Barney, 1986) to explain why firms form strategic alliances. According to this view, individual firms accumulate capabilities over time, and collaboration is seen as one way to share and acquire these capabilities. Firms become more proficient at what they do not only from learning through direct experience but also through collaborative arrangements with other firms (Mody, 1993; Powell et al., 1996).

    Newly created organizations, which face the liability of newness in many areas, are especially likely to benefit from collaboration. Shortcomings in technical, marketing or production expertise, for example, may be overcome by acquiring material and know–how resources, or legitimate support from a collaborative partner (Eisenhardt & Schoonhoven, 1996). Mowery et al. (1996) provided empirical results on how technological capabilities can be acquired through collaboration. Especially newcomers in emerging industries are likely to benefit from collaboration with larger established firms (Shan, Walker and Kogut, 1994). For example in biotechnology, many entrepreneurial organizations possess expertise in R&D, but lack production and marketing capabilities to commercialize their innovations.

    Since firm resources are unique and can only be built over time (for time compression diseconomies, see Cohen & Levinthal, 1989), experience and cumulative routines should be an asset for a technology partner. Consequently, experienced firms are likely to be especially good partners for new startups. Furthermore, it also seems that the more relationships the startups have, the more likely they are to acquire capabilities for growth and innovation.

Industrial Organization Perspective And Incumbent–Entrant Collaboration

    Whereas resource–based view discusses innovation as based on capabilities, industrial organization theory claims that market power is the fundamental source of innovation. Since large companies are better positioned to take advantage of innovation, monopoly power of large companies is the main source of technical progress (Schumpeter, 1950). However, under some conditions, the technological leadership of dominant firms of the industry tends to be overtaken by new entrants.

    Gilbert and Newbery (1982) and Reinganum (1983) were able to reconcile these two opposite cases by analyzing the difference between incremental and radical innovations. They found that industry incumbents invest more in incremental improvements (Gilbert & Newbery, 1982), but under uncertainty (when opportunities for radical innovation exist), incumbent monopolists will rationally invest less in innovation than entrants will, for fear of cannibalizing the stream of rents from their existing products (Reinganum, 1983). In all, in the industrial organization economics literature, the established monopolist has a somewhat reduced incentive to innovate radically because he is earning rents from the old technology (Henderson, 1993). Similarly, Abernathy and Utterback (1978) discussed how over time, the focus of incumbents' innovative efforts shifts from product to process innovations. Furthermore, if we assume that organizational change is risky, or almost impossible (Hannan and  Freeman,  1984),  incumbents may not even be capable of radical innovation. Multiple empirical studies have explored the effects of this reduced incentive to innovate; and have found that extensive experience with a technology may be a substantial disadvantage (Hannan and Freeman, 1984; Tushman and Anderson, 1986). Christensen and Rosenbloom (1995) studied how long–term customer relations may inhibit companies from radical innovation. They showed how new technologies or resource practices may seem initially weaker than the old to those who have extensive experience with the old methods (Christensen and Rosenbloom, 1995). Also Stuart (1996) proposed that institutionalization of organizational routines leads to inertia in innovation directions; incumbent routines (Nelson and Winter, 1982) that are helpful in exploiting existing knowledge may be inefficient in creating radical innovations. Henderson (1993) further showed that incumbents spend more on incremental innovations and cannot utilize their radical innovation investments effectively. What seems relatively unexplored, however, is how the incumbents’ lack of incentives for radical innovation affects cooperative output, that is, what are the effects of the relationships between industry incumbents and entrepreneurial entrants on innovation.
    It has been proposed that the reduced autonomy related to cooperation with older firms in the industry may curtail innovative output of the start–up if the established firm interferes with the start–up's research agenda (Shan et al., 1994). Reasoning in this paper is more specific in a sense that we propose that incumbents as R&D partners could have a negative effect on radical innovation outputs while their effect on incremental innovation is likely to be positive. Established companies may reduce the radical type of innovativeness of start–ups by proposing and favoring traditional research practices. Somewhat in contrast with the resource–based view arguments explained above, we propose that while experienced partners are likely to enhance innovativeness of the startups in general, they are likely to prevent radical innovation. To reconcile these ideas with the resource–based view, it is proposed that while collaboration with incumbents provides a way to exchange capabilities needed for incremental innovation, radical innovation requires a different set of capabilities not possessed by current incumbents.

    Another issue ignored by the resource–based view is the costs involved in collaborative relationships. Since the number of cooperative partners increases the probability of opportunistic behavior, as well as the likelihood of decreased appropriability of know–how (Mosakowski, 1991; Brockhoff, 1992), there could be a negative relationship between the number of partners and innovative output. The more technological partners you have, the higher the risk of knowledge spillovers, for example. Since radical innovation outcomes are especially likely to be vulnerable to these risks, it is likely that a large number, although positive for innovation in general, is going to be harmful if radical innovation is the goal of the relationship.

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