Creating Value Through Interorganizational Relationships

The benefit of economies of scale from joint research can be one of the strategic reasons for alliance formation (Hagedoorn, et al. 2000). In an R&D alliance driven by economies of scale, both partners may have similar technological capabilities to undertake the project independently, but they can make more efficient use of their combined resources, including capital, facilities/laboratories, and human resources, and lower costs by using comparative advantage of each other (Hladik, 1988).

Also, firms join forces to meet the 'demand for speed' and share the expense of developing costly products that have short life spans (Powell, 1990). Given the achievements of Chinese firms in developing technological capabilities in recent years, MNCs may engage in joint R&D with Chinese partners who have similar technological bases for the benefit of economies of scale in R&D. Forms of R&D Alliances Strategic alliances include a variety of organizational forms that lie between internal hierarchies at one extreme and market-mediated exchanges at the other (Pangarkar and Klein, 2001).

Strategic alliances are differentiated by the presence or absence of equity. Equity alliances include any exchange agreement in which the partners share or exchange equity. These include agreements in which partners create a new entity in which they share equity as well as those in which one partner takes an equity interest in the other (Zollo, Reuer and Singh, 2002). Equity-based alliances most closely replicate the hierarchical control features of organizations, while non-equity-based alliances with no sharing of equity have few hierarchical controls built into them (Hagedoorn and Narula, 1996).

Similarly, in R&D alliances are distinguished two types of governance forms by the presence or absence of equity sharing: equity based R&D joint ventures and non-equity-based R&D cooperative agreements (Li and Zhong, 2003). An equity-based R&D joint venture (RJV) involves the sharing of equity, which usually involves the formation of a new organization jointly controlled by two or more partners to engage in R&D activities (Hagedoorn and Narula, 1996).

RJV in China includes R&D center in the form of Equity Joint Venture (EJV) and R&D branch or department of EJV. A non-equity based R&D cooperative agreement (RCA) does not involve the sharing or exchange of equity. These agreements cover technology and R&D sharing between two or more companies in combination with joint research or joint development projects (Hagedoorn, 2002). Non-equity based alliances usually do not involve the creation of new firms. However, a non-equity based R&D cooperative agreement may acquire the status of a legal person in China.

According to Chinese laws, an equity-based joint venture (EJV) shall take the form of a limited liability company and the profits, risks and losses of an EJV shall be shared by the parties in proportion to their investment. (Walsh, 2003) In contrast, a cooperative joint venture (CJV) is jointly established by partners without equity sharing. The investment or conditions for cooperation, the distribution of earnings or products, and the sharing of risks and losses, and the manners of operation and management, etc.

are agreed upon by parties of the CJV as the conditions for the cooperation. A CJV which meets the conditions for being considered a legal person under Chinese law shall acquire the status of a Chinese legal person in accordance with law. RCA in China includes various types of R&D cooperation relationship: joint research projects, joint product development, joint R&D centers or labs in the form of CJV, open R&D center, and research and development cooperation agreements or partnership. (Walsh, 2003) Functions of R&D alliances

The function of R&D alliances refers to the types of R&D activities carried out in R&D alliances. There have been various classifications of R&D activities in previous research. The most widely accepted definitions for R&D activities are those of the National Science Foundation (NSF, 2002) and the OECD Frascati Manual 2002 (OECD, 2002). They have been used for practical R&D surveys for several decades in US and OECD countries respectively. The NSF defines three types of R&D, i. e. basic research, applied research, and development.

The Frascati Manual 2002 recognizes three categories of R&D: basic research, applied research, and experimental development. These two sets of definitions are generally consistent in distinguishing the R&D activities. According to NSF definitions, the objective of basic research is to gain more comprehensive knowledge or understanding of the subject under study without specific applications in mind. Applied research is oriented to discovering new scientific knowledge with specific commercial objectives with respect to products, processes, or services.

Development is the systematic use of the knowledge or understanding gained from research directed toward the production of useful materials, devices, systems, or methods. These classifications, however, have received criticism for practical R&D data collection because of the lack of clear boundaries between basic research and applied research. For this reason, some researchers divide the R&D activities into two groups, i. e. research-oriented and development-oriented (Li and Zhong, 2003).

Development-oriented activities include: product/material/process adaptation or improvement, and product/system testing and interoperability or compatibility testing for local markets; and system integration, and product/system design and development for local and/or global markets. Research-oriented activities include both basic research and applied research, which are aimed at gaining new scientific knowledge without or with specific commercial objectives respectively.

New scientific knowledge gained from basic research and applied research is converted into commercially viable products and processes in the development stage (Li and Zhong, 2003). In an international R&D alliance in China, the primary contributions of MNCs are often advanced technologies and skills. MNCs may have great concerns on the possible appropriation of their proprietary knowledge by partner firms and thus will prefer non-equity based cooperative agreement as the governance form of their R&D alliances with Chinese partners. However, the governance form selected by partner firms of an alliance is the result of negotiations.

As the primary motive of Chinese firms is most likely to gain access to advanced technology (especially tacit know-how) that MNCs bring to the alliance, Chinese firms may have greater preference of equity-based joint ventures to facilitate technology transfer. A governance form of non-equity based cooperative agreement may be agreed upon when both partners contribute knowledge-based resources and have the same concern about unintended transfer. Therefore the contributions of Chinese partners should be taken into consideration when we examine the choice of governance forms.

Because MNCs seek different resources and capabilities from their partners, their motives underlying the alliances can lead to different choice of governance forms. While MNCs may have multiple motives to form R&D alliances with local partners in China, it is necessary to take consideration of the predominant motive in the discussion. When alliances are formed by MNCs to obtain market access and market share or government relationships from their local partners, Chinese partners may have little concern on the appropriation of their contributed resources.

Instead, Chinese partners may place great emphasis on the transfer of technology from foreign partners and thus may prefer equity-based joint ventures that can facilitate technology transfer. Taking into consideration the special business environment in China, MNCs are likely to enter into equity-based joint ventures in order to conform to the Chinese policy of 'technology for market'. When the motive of an MNC is to obtain local human resources, the MNC may wish to take advantage of the scientific inputs from local talents for its global R&D strategy.

The primary contribution of MNCs is often property-based resources, such as capital and research equipment, instead of the transfer of technology. Since both partners contribute property-based resources, neither firm will be interested in appropriating partner's tacit knowledge. A non-equity-based cooperative agreement may serve well for the combination of complementary resources to create new knowledge and share the scientific output. When the motive of an MNC is to create a vertical linkage, each partner contributes different elements in the value chain.

Chinese firms, usually as system integrators, may focus on the development of the final products instead of learning the technology for the components. MNCs may adapt their technology and products through R&D alliances to meet their partner's requirements and ensure the interfaces of the supplied component work properly for the partner's integration work. Non-equity based cooperative agreement is likely to be chosen as an efficient governance form. When the motive of an MNC is to seek complementary technology or economies of scale of R&D, the primary contributions of both partners are technology.

Both partners may have the same concern to protect their own core capability and prefer a non-equity based governance form. In this case, non-equity based cooperative agreement is most likely to be chosen for the alliance.

References Ball, D. , 1999. Conference Report: The R&D Management Conference 1998. Barringer, B. R. and J. S. Harrison, 2000. Walking a Tightrope: Creating Value Through Interorganizational Relationships. Journal of Management, Vol. 26, Issue 3, pp. 367-403.