The Growth of Global Business (RLE International Business)

Howard Cox, Jeremy Clegg, Grazia Ietto-Gillies, Jeremy L Clegg

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9781138007833
• eBook ISBN: 9781135134211
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

In this book leading contributors look at the development of the evolutionary approach to international business, the internationalization of service industries and the implications of the changing face of Europe for international business in the 1990s. Providing an excellent blend of theory, analysis and case-study material, this volume is a vital resource for students of international business and related fields.

Part I

Evolutionary Approaches to International Business

2	Technological Competence and Evolving Patterns of International Production^1 John Cantwell

The Nature of Technological Competence

The theory of technological competence forms part of an approach to competitive advantage in which firms are viewed as having inherent capabilities for expansion, rather than simply responding to changing conditions in external markets. The notion of technological competence, therefore, can be placed in the same tradition as the allied concepts of the inherited resources of the firm (Penrose, 1959); firm-specific central skills and resources (Rumelt, 1974); entrepreneurial culture and the leadership of social groups (Casson, 1988); dynamic organisational capabilities (Chandler, 1990); dynamic capabilities (Teece, Pisano and Shuen, 1990); and core competence (Prahalad and Hamel, 1990). In each case, firms gradually accumulate internal expertise that lowers their costs and creates new opportunities in the process of competition with others.

As will become clear, the term ‘technological competence’ is used here in a broad sense that goes well beyond the operation of the research and development function. Rather, technological competence encompasses all changes to the immediate conditions of production which, over time, raise the productivity of inputs and provide for new products. Thus, the physical technology of production is interdependent with the organisation and management of production, so that technological competence is strictly complementary to and overlaps with organisational capacity and managerial skills.

The theory of technological competence suggests that inter-firm variations in innovative capability are a result of the nature of technology and the way in which it develops. The central proposition on this issue was first articulated clearly by Nelson and Winter (1982), although its application in a historical context can be traced to the work of Rosenberg (1976 and 1982). It is consistent with a long tradition of related ideas such as those expressed by Usher (1929) and Atkinson and Stiglitz (1969). The basic tenet is that technology is partially tacit, is specific to the context in which it has been created or adapted (the firm and the location), and is dependent upon the learning and skill of those who have developed and who operate it. Technology in any firm is a product of a steady search for improvements and a learning process.

The procedures required for the generation and application of technology normally become embodied in a set of routines which characterise a specific firm, and which change only gradually. These skills and routines are not deliberately chosen from alternatives, but are developed through trial and error and include many elements that are selected automatically. They consist of an interlinked sequence of steps which require tacit knowledge on the part of those who perform them, and which cannot be fully communicated to others unless they join the firm’s team and undergo the same learning process. This tacit component of skills and routines is greater still where learning is a collective process, in which an individual contribution is developed through interaction with others. Many collaborative skills and routines cannot be reproduced by an individual operating alone, because they are tied to the team and its current operating environment. Some of the common understandings on which they rest are tacit; having evolved through trial and error, they are often difficult to explain to outsiders.

The nature of technological competence develops from the basic proposition that technology always consists of two elements: the codifiable and the non-codifiable. The first element comprises information, patented blueprints and other related types of knowledge. Much of the literature on the economics of technological change defines technology in a narrow sense, restricting it to this element and disregarding the second (for a criticism of which, see Dosi et al., 1988; or Mowery and Rosenberg, 1989). The second element is tacit, and involves that element of the skills, routines and operational practices which accrues from learning processes.

Inherent in the basic proposition is the notion that the two elements of technology are strictly complementary – one cannot function without the other. The relative significance of the two elements may vary between industries or types of technological activity. To a lesser extent they may also vary over time, and to an even lesser extent still, across firms in the same sector. However, for a given sector of activity over reasonably short time-periods, the relationship between codifiable and non-codifiable components required to make technology operational can be regarded as essentially fixed.

In principle, the first element of technology is tradable between firms, though this does not imply that the process of transfer is easy. Even codified knowledge or information is context-specific and is likely to be set out in terms of the standards or codes established by the originating firm and which must be translated into those of the recipient. The ability of the receiving firm to acquire and process new information and to appreciate its significance – the firm’s ‘absorptive capacity’ (Cohen and Levinthal, 1989) – depends upon its existing technological capability. In addition, the cost of learning also includes the creation of the complementary non-codifiable element needed to make the technology work.

Building a supporting structure of skills and routines must be done essentially in-house, because the tacit element of technology is nontradable, by virtue of its non-codifiable nature. Indeed, of the skills, routines and production experience which it has built up, it may be difficult for the firm itself to specify which areas are critical to the success of a technology. This causal ambiguity (Dierickx and Cool, 1989) is closely related to the automatic nature of skills and coordinated routines, of which the various steps do not each have a consciously planned role. The non-codifiable element of technology can be imitated by other firms (with or without assistance, where the first element has been traded) but it can never be exactly copied. The learning process is never exactly the same if repeated; it depends upon the initial capabilities with which the firm begins and which it adapts in the development of a new technology.

One implication of the necessary inclusion of a tacit element is that firms do not develop or adopt technology by maximising some objective over a given choice set. According to Nelson and Winter (1982), since learning a new technology involves a series of automatic steps it cannot be depicted in terms of any deliberate choice, still less a maximising choice. Skills and routines are acquired and exercised with reference to a particular environment, but such an environment is complex and changing. For this reason a firm that is able to maximise its operational efficiency at any time does not behave in a dynamically efficient fashion. The options selected in the development and operation of technology are not deliberately chosen, and allow for error or mistakes. However, a firm or species that makes mistakes generally out-competes a perfectly reproducing rival, because diversity and variability (and making mistakes) are essential elements in successful learning. A firm that searches along some initially unpromising avenues may, by developing the relevant skills and routines at an early stage, gain by becoming more adaptable to changes in the underlying technological opportunities and through an easier appropriability of returns by being more able to forge areas of technological leadership. This is so even if certain of these unpredictable avenues must later be abandoned.

Technological Leadership and Competitive Advantage

Since technology is differentiated across firms, the specific elements of the technology, skills and routines of each firm are what provide it with its essential competitive advantages vis-à-vis its major rivals. Each leading firm in an international industry has facets of technological leadership which are not easily imitated by other firms, given the somewhat different path of their innovative search activity. This occurs because differentiation is grounded on the partially tacit and cumulative nature of technology in which each firm establishes its distinctive area of competence, and does not represent a deliberate choice from a set of technological possibilities available to all firms. The more cumulative that technological development is and the faster technological opportunities grow in any sector, the greater the dispersion of ownership advantages or competence across firms is likely to be. The spread of competence across firms in an industry also depends upon the selection environment (Teece, Pisano and Shuen, 1990). A tight selection environment, made so because of a slow growth of demand, for instance, may result in few survivors with a narrow range of competence among them. Selection environments differ in the variety of types of competence which they are able to sustain (firms with different technological backgrounds or traditions), and in the ease with which they facilitate new entry.

New entry tends to be easiest when there is a shift in the prevailing technological paradigm. A technological paradigm is defined as a widespread cluster of innovations which represent a response to a related set of technological problems, based on a common set of scientific principles and on similar organisational methods (Dosi, 1983 and 1984). While leading firms will tend to consolidate their position where development is cumulative, in the case of a paradigm shift the change in the pattern of competence and growth may become more stochastic in nature. However, windows of opportunity may be open for only a short time before firms find themselves locked out of a new area, or consigned to a limited role.

Technological competence provides a sustainable competitive advantage, because it is based on the tacit element of technology which cannot be traded between firms nor substituted for the codified element that can be traded. Although this tacit element can be imitated by other firms, it can never be exactly copied, given their somewhat different technological traditions as represented by their specific skills and routines. Moreover, imitation takes time and involves a costly learning process. Skills and routines can be developed only gradually, over time, and through accumulated experience. Other than where new fields or industries open up, firms generally need an existing expertise in a related area in order to imitate successfully.

Where a firm establishes technological leadership in a field that is important to others (particularly when others have previously neglected an innovation as being impractical, or when their earlier search efforts have been unsuccessful), competitors attempt to catch up with or to imitate the leader. The ability to catch up depends on having capability in closely related types of activity. If this exists, imitation is generally more likely than the purchase of technology from the leader. Imitation tends to be favoured over licensing because the valuation placed on its own (specific) technology by the leading firm is typically higher than the value placed on it by a rival. The leader already has the supporting structure of relevant skills, routines and complementary technologies required for the effective implementation of the technology, while other firms must adapt their skills and practices to fit the new technology. If a rival firm is to remain competitive, it must bear the costs of setting up its own alternative technological system more akin to its own tradition in any case. Also, the tacit knowledge thereby acquired serves to reduce the additional costs of inventing around patent protection. Much of what is common to the existing technology of the leading firm and the new technology to be created by the imitator is already in the public domain, through the availability of patented blueprints and informal contacts between scientists and engineers.

The emergence of new technological opportunities changes the pattern of technological competence across firms. At the level of individual firms, increased opportunities in their established fields allow leaders to raise the level of their technological superiority relative to weaker firms trying to catch up. Against this, a growing number of opportunities in a related area may undermine such leading firms if they have potential competitors with the appropriate specialisation. Because of the cumulative, differentiated and irreversible nature of technological development, firms become locked into a particular path of innovative activity, and may be able to shift only gradually or incrementally towards fields in which technological opportunities are opening up more rapidly.

Former leaders sometimes make a successful transition. Their ability to do so is greater where their competitors are weaker, potential entrants into new fields are fewer, and where the areas of new growth in technological opportunities are closely related to their original source of strength. Former leaders may also be helped when they are (among) the first to identify and shift towards a new sector. Alternatively, if the new field is highly experimental in the early stages, the first movers may suffer disadvantages (Ames and Rosenberg, 1963); established leaders in related areas may be able to enter through the acquisition of an overstretched pioneer whose skills, routines and codified knowledge can be adapted in line with their own and thereby integrated. During periods of shift in technological paradigm it is likely to be easier for individual firms to switch between sectors of activity than it is for countries.

At the level of national groups of firms or locations, the sectoral pattern of innovation is even more likely to become locked in, owing to the additional constraint imposed by interrelatedness between firms and with other institutions. The pattern of comparative advantage held by each national group of firms in the creation of technology, and the stability of that pattern over the medium term as the sectoral composition of activity becomes locked into a particular course, influences the rate of innovation achieved by each national group (Cantwell, 1991a). American firms historically, and Japanese firms today enjoy a comparative advantage in sectors in which technological activity has been growing fastest. This has helped them to sustain faster growth rates, while former technological leaders have had to meet the heavy costs of moving toward the areas in which opportunities have been rising most rapidly. The question of which industries offer the greatest technological opportunity is influenced by the prevailing techno-economic paradigm that characterises innovation and organisational practices in each historical period (Freeman and Perez, 1988).

For example, prior to 1914 British firms were locked into sectors where there were few opportunities for innovation, such as textiles, shipbuilding and heavy mechanical engineering (Cantwell, 1991a). British companies were often left behind in science-based areas, due to the difficulties of institutional adjustment as well as the cumulative technological advances made by leaders elsewhere. In the case of industrial chemicals, the deficiencies of the educational and training systems and their weak links with industry resulted in a shortage of highly qualified scientists and technicians (Haber, 1958; Liebenau, 1984). In addition to this, British firms also found themselves locked into dated institutions and organisational practices, associated with outdated routines that affected their performance adversely in all sectors. Their inability to adapt quickly especially hampered their capability in the science-based sectors, where technological opportunities were greatest.

However, changes in international technological leadership are not frequent, usually taking place only during shifts in the dominant technological paradigm, based on a radical restructuring of the fields of the fastest growth in technological opportunities. At other times, leading firms are likely to consolidate their position cumulatively in thei...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Contents
• List of figures and tables
• Notes on the contributors
• Preface and acknowledgements
• Introduction
• Part I: Evolutionary approaches to international business
• Part II: The internationalisation of service industries
• Part III: Business in the wider Europe
• Conclusion
• Bibliography
• Index