Innovation, Alliances, and Networks in High-Tech Environments

Fiorenza Belussi, Luigi Orsi

• Publisher: Routledge
• Year: 2015
• Print ISBN: 9781138846609
• eBook ISBN: 9781317539667
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Recent years have seen a growth in strategic alliances, mergers and acquisitions and collaborative networks involving knowledge-intensive and hi-tech industries. However, there have been relatively few studies looking at this form of collaboration as a strategy to drive firms' innovative performances. This book specifically focuses on the role of strategic alliances, M&A and innovation networks, providing insights on if and how they contribute to boosting firms' innovation performances.

The book has a double purpose. Firstly, it investigates at an industry level the role played by the alliance, M&As and networks in high-tech environments such as biotechnology, pharmaceutical, software and nanotechnology in creating, transforming and reshaping the dynamics inside and between industries. Secondly, it explores the impact at the firm level of factors such as cognitive distance, management capabilities, and relational and social capabilities, on firms' global innovation capacity, measured as innovation quantity, innovation quality and innovation novelty. The book will be of interest to scholars working on the economics of innovation, innovation management studies, strategic management, regional science and evolutionary economics, among other areas.

Part I

Alliances and networks

1 The emergence of the red biotech niche and its evanescent dissolution into the integrated parallel ‘knowledge system’ of a new biopharmaceutical filière

An evolutionary perspective

Fiorenza Belussi and Luigi Orsi

Introduction

Over the last three decades, biotechnology has evolved into a new scientific technological paradigm (Nelson and Winter, 1982; Dosi, 1988) that has spurred a large number of new science-based dedicated biotech firms who are responsible for the development and commercialization of numerous biotech innovations (Audretsch and Stephan, 1996; McKelvey, 1996a; Zucker et al., 1998; Zucker and Darby, 2001; Powell et al., 2002; Mangematin et al., 2003; Autant-Bernard et al., 2006; Wang et al., 2012).

These firms differ radically from other high-tech firms, as they face highly risky R&D activities due to the technological uncertainty linked to the multidisciplinary character of the technologies involved (Arora and Gambardella, 1990; Powell et al., 1996). From the outset, biotech firms were mainly focused on research science-based activities and not really on new marketable products (Pisano, 2006). They were creating new science and new technologies outside, or often in conjunction with, universities, with the strategic aim of immediately profiting from the new knowledge developed, both throughout the market for technology (Arora et al., 2001), selling and/or licensing patents or by offering the new start-up they had created to the stock market or to venture capitalists (via IPO and PE). Usually, new biotech firms created during the 1980s lacked the traditional managerial functions necessary for the development, marketing and commercialization of new products; therefore, from the outset, they built strong relationships with potential final users of the new knowledge and technologies created within the industrial, agricultural (white and green biotech) and life sciences sectors (red biotech).

Several studies have documented that the strategic collaborations established by biotech firms were a relevant issue in terms of the new configuration of the industry sector (Baum et al., 2000; Rothaermel and Deeds, 2004, 2006). The relevance of complementary assets (Teece, 1986) between old pharma and new biotech firms in alliance formation was underlined by many authors, because incumbents, allied with new entrants, may benefit from the new biotech knowledge brought about by the new firms who possessed the specialized assets necessary to commercialize the new technology (Rothaermel, 2001; Rothaermel and Deeds, 2004). Thus, despite the presence of ‘technological discontinuities’, both existing pharma firms and new biotech firms have integrated the new techniques into existing industrial practice. The key to survival for old pharma firms has been a combination of integration with biotech competencies and establishing a dense network of relationships with in-house R&D, new biotech firms and star scientists working in universities (Audretsch and Stephan, 1996; McKelvey, 1996b).

Overall, the growing number of biotech-pharma alliances at the industry level, with their effect on the symbiotic co-existence of old incumbents and new biotech firms, has in some ways blocked the Schumpeterian process of ‘creative destruction’. In other words, the biotech industry has emerged without any turbulence, incumbents exiting or shakeouts (on the concept of shakeouts, see: Klepper, 1996; Christensen, 1997; Bonaccorsi and Giuri, 2000). Therefore, in the first phase of the evolution of the biotech trajectory (in the 1980s), the persistence of the industry structure largely stemmed from the competence-enhancing effects of new technologies on existing pharmaceutical firms’ capabilities to deal with, and finance, the complex research pipeline of clinical trials of new drugs, profiting from their experienced commercial capabilities (Tushman and Anderson, 1986). During the 1980s and 1990s some large pharma firms entered into a process of mega mergers and business concentrations; therefore, incumbent exit was not dependent on the new revolutionary technology brought about by biotech, but was more explained by a tendency toward an oligopolistic configuration of the industry (Galambos and Sturchio, 1998; Lazonick and Tulum, 2011; Comanor and Scherer, 2013).

Incumbents introduced enhanced learning processes, which enabled them to adapt over time (McKelvey, 1998). This implied a systematic division of labour and a greater industry specialization along the firms’ value chains between biotech firms performing the most risky and technologically advanced R&D in genomic issues, DNA recombinant technologies and tissue engineering, and large pharma firms who were more involved in licensed acquisitions and market commercialization (Pisano, 1991). However, the emphasis on the existence of a stable vertical relationship between pharma and biotech firms may represent an incomplete picture of the industry’s evolution: this view suffers from being a static picture. Industry structure is not stable since capabilities, investments and underlying technologies evolve (Utterback and Abernathy, 1975). In fact, biotech partnering strategies evolved over time, becoming more and more heterogeneous. In this chapter we analyse how, as a result of the technology evolution, biotech firms’ partnering strategies have evolved during the ‘maturing’ phase of their discovering new science into developing a number of horizontal relationships – defined here as bio-to-bio alliances – with some central ‘biotech actors’. These actors represent a clearly distinctive new market niche formed by firms that, over time, have developed some internal organizational capabilities in applying the new science to novel products and biotech treatments and following the path of new personalized medicines. However, in the last decade a tremendous flow of merger and acquisitions (M&As), perpetrated by large pharma firms, has undermined this novel emerging biotech niche. A previously open model of innovation (Chesbrough, 2003), with a distinct duality between biotech and pharma organizations, is being reconverted into a closed one, characterized by the dominance of a hierarchical control of the entire ‘discovering’ value chain. This chapter analyses the emergence of the biotech niche through the lens of firm creation, as well as alliances and M&As. Its main contribution is of an empirical nature, leading to questions about the traditional division of labour embodied in alliances between dedicated biotech firms and Big Pharmas (BP) (large pharmaceutical companies), the former specializing in research and innovation activities located upstream in the biotech value chain and the latter holding as incumbents the critical complementary resources necessary for the development of new drugs, clinical trials and commercial activities. Although the question of the division of labour between dedicated biotech firms and BP is not a recent one (it was already at the core of Pisano’s (1991) paper), recent data are lacking. Such data are very interesting now, since the passing of time makes it possible to study the evolution of the phenomenon. On a more theoretical viewpoint, this chapter establishes the connection between an evolutionary view ‘à la Nelson and Winter’ and the technological alliances and M&A approach (Teece, 1992; Gulati, 1999; Grant and Baden-Fuller, 2004; De Man and Duysters, 2005).

We established three primary findings. First, there is not a simple division of labour between pharma and biotech firms, rather the division encompasses more actors and more recombinative types of alliances. This division of labour was clearly important in the nascent phase of the biotech niche, but it was very soon followed by a more heterogeneous and recombinative approach toward a plurality of alliance partner selection. Second, in the last few decades the largest biotech firms have become ‘poles of alliances’ in comparison to the old traditional BP firms and an emergent new biotech niche has been created. Third, incumbents – BP firms – did not follow the alternative of internally absorbing the new ‘disruptive’ biotech technologies (moving quickly toward the new technological paradigm, transforming their R&D laboratories and their research focus, as has been demonstrated by examples from all the large pharma firms), neither were they displaced from the market (as shown in the industry model evolution by Klepper (1996)). Rather, they used their established oligopolistic power to rapidly acquire these new competitors – which over time had been able to grow from being R&D laboratories into ‘real’ functioning innovative firms––integrating them into a diverse industrial conglomerate complex, whose overlapping, multilevel borders define the nascent biopharma filière.

On the whole, worldwide, red biotech remains a small and distinct subset (estimated by Rader (2008) to be about 15 per cent) of the biopharmaceutical industry, whether considered in terms of products, R&D, companies, revenue or other parameters. For example, worldwide annual biopharmaceutical revenues in 2008, using the broad biotechnology definition, were about $100 billion, compared with about $650 billion for all pharmaceuticals. The worldwide annual sales of vaccines and blood products were less than $15 billion, comparable to that of sales of the leading pharmaceutical, Lipitor (atorvastatin calcium; Pfizer, New York).

However, the sales of biopharmaceuticals relative to drugs and all pharmaceuticals have been growing in the last few years and, by 2012 (Rader, 2013), they had reached a value of about $165 billion (the sales of vaccines and blood products were about $110 billion). Today BP are not primarily concerned with small-molecule drugs, but they are investing their R&D budget heavily in the development of biopharmaceuticals.

In order to delineate the evolutionary pattern of biotech firms and their portfolio alliances (Wassmer, 2010) we used and compared the two most worldwide complete and informative databases: Bioscan and Medtrack (Schilling, 2009). Bioscan covers mainly the biotech sector, while Medtrack is a larger database that includes information for the pharma sector as well. All information relative to the analysis of M&A was extracted by Medtrack. We assembled a dataset of 530 US and 237 EU biotech firms and 4,695 alliance agreements (3,282 deriving from the US sample and 1,413 from the EU sample).

This chapter is organized according to some specific research questions and is followed by a literature review and a presentation of the empirical results supporting our arguments. The next section includes a brief literature review on the division of labour hypothesis. This is followed by the presentation of some empirical findings on biotech firm creation and a short history of the main companies reflecting the emergence of the biotech niche. The following section begins with a literature review concerning alliances in biotech. In this section we discuss the hypothesis of an existing heterogeneity of alliances, which implies the overcoming of the fixed division of labour between pharma and biotech firms. Empirical support is provided through the elaboration of a novel dataset based on Medtrack. The following section begins with a literature review on M&As in biotech. The extent of the phenomenon of M&A is shown in line with the analysis of the evolution of the biotech niche, which has now evolved into a larger integrated parallel knowledge complex constituting the biopharmaceutical filière.

Disruptive technologies and the emergence of new niches

Technological change in an industry is generally characterized by long periods of incremental change, punctuated by ‘discontinuous’ radical progress (Nelson and Winter, 1977; Mokyr, 1990). As argued by Schumpeter (1942), the introduction of radical innovations in the economic system activates a process of ‘creative destruction’, leading to the disruption of industry structure and turbulence...

Table of contents

• Cover Page
• Innovation, Alliances, and Networks in High-Tech Environments
• Series Page
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• List of Contributors
• Introduction
• PART I Alliances and Networks
• PART II Alliances and Innovation
• PART III Alliances in High-Tech Environments
• PART IV Case Studies
• Index