Biotech knowledge sourcing

Social networks, learning, and flexibility: sourcing scientific knowledge in new biotechnology firms, ISSR Working Paper, vol. 6, no. 4, Julia Liebeskind, Amalya Oliver, Lynne Zucker, Marilynn Brewer, 1994. Published in Organization Science, Jul/Aug 1996, vol. 7, no.4, p. 428-443.

Lynne Zucker was recommended to me as someone who has extensively studied cooperation and innovation in the biotechnology industry. She is probably best known for her work together with Michael Darby on the role of 'star' scientists in the biotechnology industry. It was through their work that I came across this paper. (This requires access to JSTOR. An alternative is to download the working paper.)

Liebeskind et al. treat a different aspect of biotech firms. How do they get their most important input: knowledge. The various forms of contracts and alliances to secure supply chains are relatively well understood by economists where manufacturing industries are concerned. These market-based forms of exchange, however, don't seem to work for firms that need to source science-based knowledge in a hypercompetitive environment.

Summary

Traditional transaction-costs theory analyzes the costs and benefits of internal, hierarchical exchanges vs. external, market-based exchanges. In the first case, exchange depends on rules set by managers and enforced by managerial authority down through the hierarchy of the firm. In the second case, fairness in exchange is assured by price competition or by contract. In situations of high uncertainty, and/or asset specificity internal exchanges tend to be more efficient because the market mechanism and ex ante contracting cannot allocate costs and benefits fairly. (Based on Coase and Williamson.)

However, in fast-changing industries, external knowledge-sourcing may be more efficient than internal sourcing despite the transaction-costs argument above. According to Zucker: While bureaucratic authority is by definition located within the firm's boundaries, expert authority depends on the information resources available to an individual, and not on the authority of office. Thus authority may be located within the organization... but when an external expert authority market can provide information that leads to greater effectiveness, then expert authority tends to migrate into the market. Teece argues that it may not be optimal for a firm (i.e. hierarchy) to seek to internalize numerous exchanges when technology is changing rapidly because the value of internalizing those exchanges may change rapidly under conditions of technological uncertainty, resulting in excess sunk costs. And Camagni adds that, when technology is changing rapidly, firms lose their ability to assess the value of information accurately, because they cannot learn and institutionalize appropriate assessment routines in short periods of time. Hierarchies are just not suited to efficient distribution of fast-changing technological knowledge.

Markets are not well-suited either. As Arrow demonstrated, markets for information are subject to failure, because an efficient price cannot be established for knowledge without revealing its contents. This problem of appropriation can be solved by patenting, secrecy or licensing and first-mover advantages. However, during the innovation process and where exchange of knowledge is necessary to advance innovation, these options are of limited value.

In addition to the traditional forms of exchange (market and hierarchy), a third form has been proposed: social networks. Shared norms and values serve to ensure fairness in exchange, without resort to market pricing, contracts, or managerial authority.
- Unlike hierarchies, but like markets, social networks involve exchanges between legally distinct entities. Network exchanges, like market exchanges, are external to the firm. Therefore, these exchanges are not formally excluded from the rule of law, as are exchanges which take place within hierarchies.
- Unlike markets, but like hierarchies, social networks support exchanges without using competitive pricing or legal contracting. Specifically, exchanges between individuals or organizations which are conducted through social networks have no need for price competition or legal contracting because the shared norms of the exchange partners alone will ensure that outcomes are fair.

This form of exchange is based on trust created through socialization and tradition, repeated exchange, or mechanisms such as posting a bond, testing, or performance monitoring. Biotech firms have access to a particularly useful network. Since the knowledge they use is strongly science-based, they work closely with academic researchers. As Blau and Crane pointed out, there are very strong norms that regulate intellectual property in the academic research network. This significantly reduces the main problem of external exchange.

The authors' own summary:
Where expert information is necessary external sourcing through networks is more promising. Where appropriation becomes too sensitive an issue, internal exchange is better suited. Firms may prefer to use social networks, rather than markets or their won hierarchies (i) for governing exchanges of information or knowledge which (ii) is potentially but uncertainly valuable, (iii) which is appropriable, and (iv) whose production is characterized by human capital immobility.

What might this mean for global innovation networks?
Knowledge sourcing through academic networks would seem to encourage global cooperation in biotech innovation. The academic research network already maintains global links and is probably one of the few global networks that shares such strong norms and values. As the proportion of co-authored papers rises, the network is becoming denser. Other trust-based networks that have fulfilled a similar role to overcome market failures in the past have been families and ethnic groups. Here, as with academic-entrepreneurial cooperation, the boundaries of individual firms are blurred. More recently, another global professional network has received attention: programmers, e.g. the LINUX community. Eric von Hippel has written several papers about such user-communities who share a strong set of common values and also drive innovation in a certain market.