Partnerships betweem SMEs and LCOs and their complementary roles in the cycle of technology innovation

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Knowledge spillover and appropriation

“Collaboration is competition in a different form” (Hamel et al, 1989:134). Successful companies are aware that their new partners may try to disarm them. Successful companies furthermore view the alliance as creating a window on their partner’s capabilities. “They use the alliance to build skills in areas outside the formal agreement and systematically diffuse new knowledge throughout their organizations” (Hamel et al, 1989:134). However, Hamel and Prahalad comment that if both partners are intent on internalizing the other’s skills, distrust and conflict may result and threaten the survival of the alliance. From their study they found that alliance ran most smoothly where one partner was intent on learning and the other was intent on avoidance. (However, they make the comment that the success of an alliance is where the company emerges more competitive than when it entered the alliance, rather than on whether the alliance runs smoothly or not.)
Hamel et al (1989:135) believe that for collaboration to succeed, each partner must contribute something distinctive. However the challenge is “to share enough skills to create advantage vis-à-vis companies outside the alliance while preventing a wholesale transfer of core skills to the partner … Companies must carefully select what skills and technologies they pass to their partners. They must develop safeguards against unintended, informal transfers of information. The goal is to limit the transparency of their operations. The distinction between a technology and a competence is that a discrete, stand-alone technology (e.g. the design of a semiconductor chip) is more easily transferred than a process competence, which is entwined in the social fabric of a company”. Gulati and Singh (1988:789) in discussing the concerns of technology alliances, mention free-riding (benefiting without contributing) and possible appropriation of the key technology by the partner because of the difficulty in circumscribing, monitoring and codifying the knowledge to be included in the alliance.
When dealing with knowledge as a commodity, it is difficult to assess accurately the value of the knowledge without complete disclosure by the partner, who in turn may be reluctant to reveal such information as it is proprietary (Winter (1964), Arrow (1974), Teece (1980:28)). For instance, a company claiming that it has valuable knowledge can only prove this by disclosing detailed information on the content such that the evaluating company can understand and assess the importance and value of the knowledge on offer. However, the company that is making the claim may not wish to make a total disclosure as this would breach the “novelty” aspect, which is essential if it wishes to patent the invention (i.e. the packaged knowledge). Determining the balance of what knowledge to share and what not is important in terms of protecting core knowledge and even possibly core competencies. In the previous section, Takeuchi and Nonaka (2004) described tacit knowledge as the know-how of an individual and ascribed it as being highly personal, hard to formalize and difficult to communicate to others. However, when collaborating disclosure must take place (implicit to explicit) such that all parties can understand the issues and combine resources to address them. In this process of disclosing or sharing, extra insights may be shared unintentionally. Particularly where the environment is one of trust and mutual sharing, “more than is necessary” may be shared. In this way knowledge spills over or “leaks”.
As commented earlier, Hamel et al (1989) discuss a major risk of collaboration being that the partners can also gain access to the knowledge and skills that the company uses in other business areas. Littler et al (1995:18) expand on the risks of leakage associated with collaborative product development. “Leakage of a firm’s skills, experience and “tacit” knowledge may form a significant part of the basis of its competitiveness”. Littler et al (1995:23) from their research found that the risk associated with giving up proprietary information to a collaborative partner to be the most frequently mentioned risk of collaborative product development. The collaborating partner might furthermore, gain information and insights into possible markets and opportunities that were previously its partner’s exclusive domain (Farr and Fischer, 1992). Hamel et al (1989:138) in discussing US and Japanese alliances, comment that one of the Japanese managers noted “we don’t feel any need to reveal what we know. It is not an issue of pride for us. We’re glad to sit and listen. If we’re patient we usually learn what we want to know.” Hamel et al (1989:139) comment that “managers are too often obsessed with the ownership structure of an alliance. Whether a company controls 51% or 49% of a joint venture may be much less important than the rate at which each partner learns from the other … Ambiguity creates more potential to acquire skills and technologies.”

Control systems

“Prior to transaction one is uncertain about the partner’s potential opportunism, and hence should take opportunism into account” (Nooteboom, 1996:987). For the purposes of this research, opportunism is defined as … self-interest seeking with guile (Williamson, 1975:255). Nooteboom (1996:988) comments that “golden opportunities of defection are tempting, even to the trustworthy”. “If the incentives are right a trustworthy (untrustworthy) person may be relied upon to be untrustworthy (trustworthy)” (Dasgupta, 1988:54). Hence the default position in collaborative arrangements is “beware of opportunism” as it can always be lurking in the background, waiting for the appropriate conditions to surface!
This highlights the need for appropriate control mechanisms to control opportunistic behaviour.
Gallivan and Depledge (2003:165) comment that control has no unified definition. There are however, numerous definitions in the literature for control, and a selection of these follows.
Leifer and Mills (1996:117) define control as “a regulatory process by which the elements of a system are made more predictable through the establishment of standards in the pursuit of some desired objective or state”. Gallivan and Depledge (2003:166), refer to the work of Ritzer, 1996) in arriving at a definition of control, namely that control comprises mechanisms for rationalizing behaviour, and that any one of the following signifies control: efficiency, predictability and calculability. Efficiency they qualify as “choosing a means to reach a specific end rapidly, with the lowest cost or effort (citing Keel, 1998)”. They contend that control is a necessary condition for efficiency. Predictability they define as “the attempt tostructure our environment so that surprise and “differentness” do not encroach upon our sensibilities” (citing Keel, 1998). Predictability is a reflection of control. Calculability denotes an emphasis on the “things that can be calculated, counted, quantified” (citing Ritzer, 1996:142)”. Control is described as “fashioning activities in accordance with expectations so that the ultimate goals of the organization can be attained” (Das and Teng, 1998:493). By and large, however, the many forms of control have been grouped into either formal or informal control (Dekker (2004), Eisenhardt (1985), Simons (1996), Das and Teng (1998)). “Formal control systems are based on measurement and often lead to rewards or sanctions, depending on conformance with specified procedures. In contrast, informal control is based on socializing individuals to accept the norms, values and culture of an organization as their own, thus ensuring compliant behaviour” (Gallivan and Depledge, 2003:165, citing Ouchi (1979) and Van Maanen and Schein (1979)).
Williamson (1975:255) comments that real economic actors engage not only in activities that promote self-interest, but they also engage in “opportunism … self-interest seeking with guile; agents who are skilled at dissembling realize transactional advantages”. This section will explain how in the ideal market where there are ample opportunities for both buyers and sellers, there is no opportunism as there is a self-regulating mechanism that constrains opportunistic behaviour. However, as the reality is that there is no “ideal market”, attention needs to be given to what institutional or social mechanisms can be put in place to constrain opportunistic behaviour.
Hirschman (1982:1473) discusses idealized markets as “large numbers of price-taking anonymous buyers and sellers supplied with perfect information … function without any prolonged human or social contact between the parties. Under perfect competition there is not room for bargaining, negotiation, remonstration or mutual adjustment and the various operators that contract together need not enter into recurrent or continuing relationships as a result of which they would get to know each other well.” Granovetter (1985:484) explains that highly competitive markets discourage force or fraud and prevent individual traders from manipulation tactics. This is because where there is perfect competition, should a trader encounter a difficult relationship that is characterised by distrust or misconduct, she can simply move on to conducting business with a host of other traders willing to do business on market terms. Social relations therefore become unimportant.
Transaction Cost Economics (TCE) “provides a comparative framework for assessing alternative governance forms (Williamson, 1994), and it allows us to go beyond descriptive observations of where network governance has occurred and identify the conditions that predict where network governance is likely to emerge” Jones et al (1997:912). Granovetter (1985:494) cites Williamson (1975) in commenting that “the organizational form observed in any situation is that which deals most efficiently with the cost of economic transactions. Those that are uncertain in outcome, recur frequently, and require substantial “transaction-specific investments” – for example, money, time, or energy that cannot be easily transferred to interaction with others on different matters – are more likely to take place within hierarchically organized firms. Those that are straightforward, non-repetitive, and require no transaction-specific investment – such as the on-time purchase of standard equipment – will more likely take place between firms, that is, across a market interface”.
Economic transactions that have a highly uncertain outcome (for example those arising from collaborative development of innovations) are internalized within hierarchies for two reasons. The first reason is “bounded rationality”, or the inability of economic actors to anticipate accurately the many possible contingencies that might be relevant to long-term contracts. Where transactions are internalized, they are governed within the firm’s structures and hence it is no longer necessary to anticipate all the contingencies and enter into complex negotiations. The second reason is “opportunism” “the rational pursuit by economic actors of their own advantage, with all means at their command, including guile and deceit. Opportunism is mitigated and constrained by authority relations and by the greater identification with transaction partners that one allegedly has when both are contained within one corporate entity than when they face one another across the chasm of a market boundary” (Granovetter, 1985:494).
Granovetter (1985:488) mentions that imperfectly competitive markets, that are characterized by “small numbers of participants with sunk costs and specific human capital investments”, the discipline of competitive markets does not mitigate deceit and misconduct. Malfeasance or misconduct is averted and discouraged by “clever institutional arrangements” that make it too costly to engage in such activities. These institutional arrangements are a substitute for trust and include explicit and implicit contracts (Granovetter 1985:489, citing Okun, 1981) and authority structures that deflect opportunism (Williamson, 1975). Granovetter (1985:489) comments that other economists support the view that some degree of trust must be assumed as force or fraud could not be entirely controlled by institutional arrangements. He comments that a common opinion is that the source of this trust could be as a result of the existence of a “generalized morality”. He cites Arrow (1974:26) in suggesting that societies, “in their evolution have developed implicit agreements to certain kinds of regard for others, agreements which are essential to the survival of the society or at least contribute greatly to the efficiency of its working”. As mentioned before, an important concern for firms entering alliances is appropriation and relates to the predictability of their partner’s behaviour. Behaviour can be made predictable either by a detailed contract, or by trust.
Furthermore, “familiarity between organizations through prior alliances does indeed breed trust which enables firms to progressively use less hierarchical structures in organizing new alliances” (Gulati, 1998:303).

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Chapter 1: Introduction
1.1 Problem statement
1.2 Doing business in uncertain environments
1.3 The need for countries to innovate
1.4 Technological innovation in context: knowledge management in the knowledge economy and inter-organizational collaboration
1.5 Forms of partnerships between LCOs and SMEs
1.6 Partnership failure
1.7 An illustrative representation of an SME-LCO partnership
1.8 Summarized problem statement and research goals
Chapter 2: Theoretical framework and conceptual model
2.1 Partnerships betweem SMEs and LCOs and their complementary roles in the cycle of technology innovation
2.2 Types of innovation and the management thereof
2.3 Definition of capabilities and competencies
2.4 Characteristics of knowledge in a company
2.5 Control systems
2.6 Safeguards moderating the relationship between competencies and capabilities, and partnership success
Chapter 3: Research Design and Methodology
3.1 Measurement and key variables
3.2 Sample design
3.3 Data collection
3.4 Data capturing and data editing
3.5 Data analysis
3.6 Verification of the survey findings by means of case studies
Chapter 4: Results of the survey
4.1 Description of the responding population
4.2 Perception of successful partnership (dependent variable)
4.3 Capabilities, competencies and safeguards (independent variables)
4.4 Competencies variable (X3, third independent variable)
4.5 Moderator variables – Number of safeguards in the LCO-SME relationship
4.6 Exploring the hypotheses: Logistic regression models
Chapter 5: Case studies
5.1 Reason for case study approach
5.2 Methodology
5.3 Case studies
5.4 Analyzing the results
Chapter 6: Conclusion and Recommendations
6.1 Main findings from the survey
6.2 Relationship between survey findings and the literature
6.3 Unexpected findings from the survey
6.4 Comparison of survey findings with case study findings
6.5 Relevance of the findings and recommendations
6.6 Shortcomings and possible sources of error
Bibliography 

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