Markets for Technology This Page Intentionally Left Blank Markets for Technology The Economics of Innovation and CorporateStrategy Ashish Arora, Andrea Fosfuri, and Alfonso Gambardella The MIT Press Cambridge, Massachusetts London, England © 2001 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and re- trieval) without permission in writing from the publisher. This book was set in Palatino by Graphic Composition, Inc., Athens, Georgia, using QuarkXPress 4.1. Printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data Arora, Ashish. Markets for technology : the economics of innovation and corporate strategy / Ashish Arora, Andrea Fosfuri, Alfonso Gambardella. p. cm. Includes bibliographical references and index. ISBN 0-262-01190-5 1. High technology industries—Management. 2. Technology—Marketing. 3. License agreements. 4. Technology transfer—Economic aspects. 5. Technological innova- tions—Economic aspects. 6. Globalization—Economic aspects. 7. Employees—Effect of technological innovations on. I. Fosfuri, Andrea. II. Gambardella, Alfonso. III. Title. HD62.37 .A76 2002 338'.064—dc21 2001044324 This book is dedicated to Esther (AF), Sonal (AA), and Veevan (AG) This Page Intentionally Left Blank Contents Preface and Acknowledgments ix 1 Markets for Technology: Why Do We See Them, Why We Don’t See More of Them, and Why We Should Care 1 I Markets for Technology: Extent and Development 15 2 Preliminary Evidence 17 3 The Division of Innovative Labor in High-Tech Industries 45 II Limitations and Determinants 91 4 Context Dependence, Sticky Information, and the Limits of the Market for Technology 93 5 Intellectual Property Rights and the Licensing of Know-How 115 6 Markets for Technology and the Size of the Market: Adam Smith and the Division of Innovative Labor Revisited 143 III Functioning and Economic Implications 169 7 Licensing the Market for Technology 171 8 Global Technology Suppliers and the International Division of Innovative Labor 197 viii Contents IV Implications for Public Policy and Corporate Strategy 221 9 Implications for Corporate Strategy 223 10 The Institutional Context: Problems and Policy 253 11 Conclusions 281 Notes 289 References 309 List of Figures and Tables 327 Index 331 Preface and Acknowledgments This book is part of nearly a decade-old and ongoing research project focused on the process of technological change and its implications for industry structure, corporate strategy, and, ultimately, for economic growth. In the course of our earlier research, we have tried to under- stand the complex and variegated process of innovation and technical change, particularly during the 1980s and 1990s, decades that appear todiffer from the post–World War II era of economic growth in many im- portant respects. Although economists and management theorists have made signifi- cant advances in understanding innovation, its determinants and its consequences, not enough attention has been paid to understanding in- novation as an economic process, and the different ways of coordinating the actions of the various economic agents involved in such a process. In particular, it is not yet well understood how different economic actors, such as universities and firms, or large and small companies, or firms in developed and in developing countries jointly contribute to the process of creation, development, commercialization, and widespread use of new technologies. As a result, there is an insufficient appreciation of the implications, for public and business policy and for the rate and direc- tion of technical change itself, when innovation involves trade in tech- nology, or when firms specialize in developing technology as a part of a division of labor in innovation. This book tries to fill this gap. In earlier research, we have individually and jointly addressed many of these issues. Our prior research has focused on topics such as tech- nological alliances (particularly between large and small firms in high- tech industries), technological licensing, technological spillovers, the role of intellectual property rights in developing countries and their im- plications for industry structure, along with detailed studies of these and other issues in pharmaceuticals, biotechnology, and chemicals.