1. Introduction                                                          

Technological advances based on genetic engineering have profoundly affected the scientific and technological basis of the chemical, and in particular, :the pharmaceutical ‘industry.  “Biotechnology could potentially affect any current industrial biological process or any process in which a biological catalyst could replace a chemical one” (OTA [1984] page 5).  New biotechnology products include new drugs, specialty chemicals, animal and plant agricultural products.

At present, innovations in biotechnology depend upon the contribution of three types of agents the universities, small/medium sized research-intensive firms or .the so-called New Biotechnology Firms: (NBFs),: and the large “established” chemical and pharmaceutical corporations.  Universities, NBFs, and large companies are endowed with complementary assets to generate, develop and commercialize new: biotechnology products [1].  Thus, there are wide ranging opportunities for collaboration among them.  Indeed, one does observe systematic linkages among universities, NBFs, and large corporations.

This paper analyzes the external linkages of the large firms in biotechnology.  We identify four types of linkages: agreements with other firms,

research agreements with universities, investments in the capital stock of NBFs, and acquisitions of NBFs.  Each type of linkage targets a particu1ar set of resources specific to the universities and the NBFs.  We then suggest that, from the point of view of the large firms, the four types of linkage above are complementary strategies.  We; test this hypothesis, and find that it is not falsified by the data.

In this paper, we do not model the strategies of the NBFs.  Many NBFs are founded just to exploit a particular discovery.  Apart from a few cases, they do not seem to have major long-run strategic objectives. [2]  Recently, it has even been suggested that many NBFs are founded with the specific intent of later on being sold to large corporations. [3]  To some extent, their behavior can be taken as given.

We think that our paper can be viewed as part of a broader research program dealing with the changing nature of the organizational structures responsible for the development of new technologies in recent years.  Up to the early 1970s, most technological innovations introduced by the large firms resulted primarily, from systematic in-house R&D investments. [4]  However, in the past two decades, in many sectors large firms appear to be unable to internalize all the resources necessary to produce and commercialize new technologies.  The increasing complexity and multi-disciplinarity of resources required for innovation, and of the stock of knowledge itself; tend to make .technological innovations the outcome of interactions and cooperation among fundamentally autonomous organizations commanding complementary resources. [5]  As a result, it is increasingly difficult to identify the innovator with a particular organization.  Imai [1980], Vaccà [1986], and Imai [1988], inter alia, have suggested that the locus of innovation could well be a “network” of various types of organizations.  While the empirical results of our paper hold only for biotechnology, we think that they raise interesting questions about whether biotechnology is an isolated case or, perhaps, an extreme case of a more general phenomenon.

This paper is organized: as follows.  Section II focuses upon the four strategies of external linkage of the large firms in biotechnology.  It examines the specific set of tangible and/or intangible resources that each strategy brings to the large firm, and discusses the ensuing complementarities.  Section III develops an analytical model to serve as a more formal and rigorous framework for the empirical exercise in section IV.  Section V concludes the paper.  Appendix 1 describes the data set.

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Science plays an important role in biotechnology.  Historically, biotechnology originated from fundamental scientific breakthroughs in the 60s, and especially in the 70s [6].  Moreover, in biotechnology the distance between scientific advances and their commercial application is relatively short.  In many cases, a new scientific discovery is almost a new product. [7]

Following the seminal works of Nelson [1959] and Arrow [1962], it is widely accepted that there are serious problems of appropriability in the production of scientific knowledge. [8]  In view of this and the importance of science in biotechnology, the large firms rely extensively upon the services of the university based scientific community

The NBFs are small-medium sized companies whose major asset consists of knowledge capital in biotechnology. [9]  They have skills and know-how in applied laboratory research.  The typical output of their activities is a new protein, obtained from genetically engineered organisms.  The synthesis of a new protein, however, whilst an important step in the development of new drugs or new chemical products, does not exhaust the entire innovation cycle.  Engineering know-how is required to scale up from the laboratory bench to manufacturing, and to control the industrial-scale processes. [10]  In pharmaceuticals, which covers the largest fraction of the present applications in biotechnology, a fundamental asset of the innovation cycle is familiarity with clinical testing procedures, as well as with the regulatory process.  Finally, commercialization structures are vital in successfully bringing a new product to the market.

These assets are not typically part of the resources and knowledge base of the NBFs.  They are instead part of the tangible and intangible capital of the large firms.  Moreover, the large firms have financial capabilities which are not available within the NBFs.  Thus cooperations and other relations between NBFs and large firms are often critical to successfully complete the development and commercialization of new biotech products. [11]

Following the previous literature in this field [12] one can identify four types of external Inks set up by the large chemical and pharmaceutical producers with other agents in biotechnology: (i) research and/or joint development agreements with other firms, (ii) research agreements with universities, (iii) investments in the capital stock of NBFs (minority participations); (iv) acquisitions of NBFs.  To a large extent, each of these four strategies targets a particular objective of large firms.  Each strategy enables the firm to gain access to a specific set of tangible and/or intangible resources necessary for the development of innovations in biotechnology

Most agreements signed by large chemical and pharmaceutical producers with other companies, usually with NBFs, tend to be product-specific.  They focus on rather “downstream” activities of the innovation cycle [13]  They are aimed at developing and commercializing a particular discovery of the NBF, (e.g. the synthesis of a new enzyme or hormone or growth factor) in the areas of specialty chemicals, agricultural biotechnology, and, above all, pharmaceuticals. [14]

The agreements with universities tend to focus on more basic research objectives  Large firms finance research activities performed by academic laboratories to acquire, by interacting with the university scientists, some familiarity, with the basic knowledge in this field.  Moreover, the relations with a university laboratory often provide the large firms with a first option on the license of any new discovery made: out by that research center. [15]

Minority participations in the capital stock -of small biotech start-ups provide a means of monitoring the internal research activities of the NBFs

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The objective of the large firm is to keep in touch and acquire some familiarity with the applied laboratory research skills of the NBFs.  By acquiring part of the capital stock of an NBF, the large companies also hope to establish a ‘preferential” link with the biotech company.  This offers the possibility of preempting rivals in the commercialization of any relevant discovery made by the NBE.  Moreover, in keeping with the theoretical predictions of Williamson [1985], we observe that in many cases large firms acquire part of the capital stock of a biotechnology company, and also develop formal agreements with the same company to; develop a particular product.  Such investments may be useful in averting problems of moral hazard, and serve as tokens of good faith. [16]

As far as acquisitions are concerned, there seem to exist two different - and in part contrary -motives for acquiring a small biotech company.  On the one hand, large companies that have substantial in-house capabilities aim at acquiring NBFs specialized in particular areas of biotechnology research.  The NBFs top specific lack of expertise in the general knowledge base of the large companies.  On the other hand, the direct acquisition of a biotechnology firm represents a way of “catching-up” when large firms are relatively late entrants in this business and have not yet invested substantial funds in internal  biotechnology R&D.  In both cases, acquisitions add internal knowledge to the large firms, and they are motivated by long run objectives of the large companies. [17]

These considerations strongly suggest that each of the four types of external links targets a separate goal of the large firms:

The agreements with universities provide the large firms with access to basic scientific knowledge.  They are complementary to agreements with other firms, which typically focus on more “downstream” product-specific development activities.  They are also synergistic with acquisitions, as the latter aim at internalizing a whole body of laboratory and/or product development capabilities of the small firms.  Finally, they are complementary to minority participations.  To the extent that the knowledge base of the NBFs

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NBFs through minority participation is complementary with joint product development agreements to implement and commercialize a specific compound.  Moreover, we have seen that the large firms often acquire minority participations in an NBF, and set up formal agreements to develop a particular product.  It appears that minority participations and agreements are complementary also because the preferential link between an NBF and a large company, which: follows from the acquisition of minority stocks, translates into a formal agreement once a specific new discovery needs to be implemented and possibly commercialized.

[III. The Model, pp. 367-370, not included]

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[IV. The Empirical Results, pp. 370-374, not included ]

This paper explores the relations among the strategies of external linkage, of the large chemical and pharmaceutical producers in the new biotechnology business.  We find that agreements with other firms, research agreements with universities, minority participations in New Biotechnology Firms, and acquisitions of New Biotechnology Firms, are positively correlated even after controlling for firm characteristics.  We conclude that these strategies target distinct and complementary sets of resources, and therefore, are complementary to one another.

Our analysis suggests that in biotechnology the large firms are no longer the sole locus of innovative activity.  The locus of innovation should be thought of as a “network” of inter-organizational relations.  Biotechnology is probably an extreme case of this tendency.  Moreover, the network-like structure of the organizations responsible for innovation, in biotechnology may well be a temporary phenomenon arising from the relative immaturity of the technological paradigm.  Yet, our findings raise the question whether in modern capitalist economies the innovation process requires new and different organizational arrangements in order to allow specialized complementary assets, controlled by different types of agents, to be combined.  An interesting topic for further research is .to see whether (viz., to what extent and in what forms) other “high tech” sectors, e.g. semiconductors or electrical machinery, also display similar organizational patterns in the innovation process.

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