Biotech knowledge and market exchange

Inter-institutional spillover effects in the commercialization of bioscience, Lynne Zucker, Michael Darby and Jeff Armstrong, ISSR Working Paper, vol. 6, no. 3, 1994.

In this study, Zucker, Darby and Armstrong lay out a proposition that partly contradicts a study on knowledge networks by Liebeskind et al. Both studies try to answer the question of how scientific knowledge flows into biotech firms.

Summary
Liebeskind et al. propose that firms source their knowledge through social networks to overcome the problems of market failure and inefficiencies involved in internalizing knowledge. On the other hand, Zucker et al. propose that there is a market exchange at work, especially for knowledge that is successfully commercialized. They work from the observation that much work in rDNA research is characterized by natural excludability, e.g. acquiring it requires working together with someone in a lab and/or a time-consuming effort to learn new skills. This results in intellectual capital for the discovering scientists. This intellectual capital diminishes as the new skills and knowledge diffuse throughout the industry. However, during an initial phase, companies that want to commercialize the intellectual capital must employ the services of the scientist who embody it. Scientists can be formally employed or hired as consultants. Links can also be less evident: full or partial ownership, membership in a scientific advisory board, etc.

Zucker, Darby and Armstrong find that formal affiliation or less formal links (joint publications and various forms of compensation) with 'star' scientists are a significant success factor for biotechnology enterprises. This, together with the presence of scientific and financial links, suggests that there is a market exchange at work.

Market or social network and hierarchy?
Which is true? Do biotech firms source their knowledge primarily through market exchange or primarily through social networks and the internal hierarchy?

Both seem to be relevant to some extent. Many of the market exchange mechanisms described above seem designed to bring a 'star' scientist within the firm boundaries, so that knowledge can then be transferred through the hierarchy. Social networks become relevant when scientific knowledge embodied in leading scientists is scarce and human mobility is limited (e.g. limits on the amount of time professors can spend consulting or formal full-time employment of scientists in a firm ). Where lack of mobility hinders market exchanges, social networks become more important. Also, Liebeskind et al. point out that it is very difficult for firms to evaluate newly available knowledge. Social networks play an important role in assessing knowledge before formal evaluations have ascertained its value or relevance to a specific firm.

Finally, social networks and market exchange are not entirely independent in this case. In both cases a great deal of trust is necessary for successful cooperation between a 'star' scientist and a biotech firm. This trust is probably established to a large degree through the social network: the norms and values of the scientific community provide a basis for cooperation; the reputation of the cooperating partners and initial informal contacts will likely be established through the network. A great deal of knowledge exchange mediated through the social network will probably precede a market exchange, which involves closer cooperation and knowledge, which has greater direct commercial benefits.

Apparently, the market only comes into play where factors such as tacitness and absorptive capacity reduce the market failure generally encountered in trading knowledge (Arrow).

Questions of location
Liebeskind et al. found that most successful partnerships involved a 'star' scientist who lived in the same region as the participating biotech enterprise was located. They mention that a few stars have been affiliated with NBEs (new biotechnology enterprises) outside California or published with NBEs outside of their region. Though they seem to be few cases, it would be interesting to see whether they were as successful as cases of local cooperation. Data may be available at the ISSR site...

New rules of work
A few days ago I wrote about Frances Cairncross's book 'The death of distance'. One of the chapters that I didn't mention dealt with new forms of work in the networked economy. Traditional lifetime employment has been disappearing for a long time now. In a continuation of this development, more and more people are engaging in non-traditional employment: freelancing, entrepreneurship, personnel "leasing" and many others.

Cairncross specifically mentioned that firms will pay a high premium for top talent, especially since the most highly qualified knowledge workers will be scarce and demand for them will be worldwide. 'Star' scientists fall squarely in this category. Zucker, Darby and Armstrong mention a study finding that bioscientists act as individual actors, as opposed to acting as agents of their primary ties, whether to the university or the firm (Zucker, Brewer, Oliver, and Liebeskind, 1993). These bioscientists can exercise their expertise independently primarily because they are recognized as having excellent "scientific taste" in the selection of rescues problems and using exceptional care and expertise in exuding that research. They use their 'scientific taste' to advise firms on the relative merit of different lines of research - certainly an example of intellectual capital that has characteristics of excludability, since this 'scientific taste' is highly tacit, embodied knowledge based to a large extent on personal experience.