innovation, networks, and vertical integration

8/14/2019 Innovation, networks, and vertical integration

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EL SE VI ER Research Policy 24 (1995) 543-562

r e s e a r c hpolicyInnovation, networks, and vertical integration

Paul L . Rober t son a , , , R ichard N. Langlo i s ba Department of Economics and Management University College, University of New South Wales, ADFA,Campbell, A.C.T. 2600, Australiab Department of Economics, The University of Connecticut, U63 Storrs, CT 06269-1063, USA

Final version received March 1994

A b s t r a c t

A c e n t r a l d e b a t e i n i n d u s tr i a l p o l ic y t o d a y is t h a t b e t w e e n p r o p o n e n t s o f l a rg e v e r ti c a ll y i n t e g r a te d f ir m s o n t h eo n e h a n d a n d t h o s e o f n e t w o r k s o f sm a l l s p e ci a l iz e d p r o d u c e r s o n t h e o t h e r . T h i s p a p e r a r g u e s t h a t n e i t h e ri n s t i tu t i ona l s t ruc t u re i s t he pa na cea i ts suppo r t e r s c l a i m. The m enu o f i n s t i tu t i ona l a l t e rna t i ves i s i n f ac t qu i t e l a rge ,a n d b o t h f i r m s a n d n e t w o r k s , o f w h i c h t h e r e a r e s e v e ra l k i n d s, c a n b e s u c c e s s f ul , g r o w t h - p r o m o t i n g a d a p t a t i o n s t ot h e c o m p e t i ti v e e n v i r o n m e n t . I n d u s t r ia l s t r u c t u r e s v a r y i n t h e i r a b i li ty t o c o o r d i n a t e i n f o r m a t i o n f l o w s n e c e s s a r y f o ri n n o v a t i o n a n d t o o v e r c o m e p o w e r r e l a t i o n s h i p s a d v e r s e t o i n n o v a t i o n . T h e r e l a t i v e d e s i r a b i l i t y o f t h e v a r i o u ss t r u c tu r e s , t h e n , d e p e n d s o n t h e n a t u r e a n d s c o p e o f t e c h n o l o g ic a l c h a n g e i n th e i n d u s t r y a n d o n t h e e f f e c ts o fvar i ous p roduc t l i f e - cyc l e pa t t e rn s . The p r i nc i pa l po l i cy conc l u s i on o f t h i s ana l y s i s i s t ha t t he governmen t ' s r o l eo u g h t t o b e f a c il it a ti n g r a t h e r t h a n n a r r o w a n d p r e s c r i p ti v e , a l l o w i ng s c o p e f o r f ir m s t o d e v e l o p o r g a n i z a t i o n a l f o r m st h a t a r e b e s t a d a p t e d t o t h e i r p a r t i c u l a r e n v i r o n m e n t s .

I . I n t r o d u c t i o n

T h e d e b a t e o v e r th e i n s t it u t i o n a l f o r m s m o s tc o n d u c i v e t o e c o n o m i c g r o w t h h a s i n te n s i fi e d i nr e c e n t y e a r s . I n t h e m i d - 1 9 8 0 s , M i c h a e l P i o r e ,C h a r l e s S a b e l , a n d J o n a t h a n Z e i t l in c h a l l e n g e d

WAn earl ier version of this paper was presented at theEuro-Conference on Evolutionary and Neoclassical Perspec-t ives on Market Structure and Economic Growth, held inAthens on 24-25 September 1993, at the C olumbia Universi tyworkshop on Comparative Corporate Governance, IndustrialOrganization, and Competi t ive Performance, 22 November1993, and to seminars at the Australian National Universityand the Universi ty of M anchester. W e part icularly wish tothank David Audretsch and Dick Nelson for their help andencouragement.* Corresponding author.

t h e n o t i o n t h a t t h e g r o w t h o f la r g e b u s in e s s e s i nt w e n t i e t h - c e n t u r y B r i ta i n a n d t h e U n i t e d S t a te sh a d b e e n e i t h e r n e c e s s a r y o r d e si ra b l e . O n t h eb a s is o f d e v e l o p m e n t s i n C o n t i n e n t a l E u r o p e ,t h e y h a ve c o n t e n d e d t h a t c o m m u n i t i e s o f s k il le dc r a f t s m e n a r e a s c a p a b l e o f g e n e r a t i n g h i g h s ta n -d a r d s o f l iv i ng a s a r e g i a n t , v e r ti c a l ly i n t e g r a t e df i r m s ( P i o r e a n d S a b e l , 1 9 8 4 ; S a b e l a n d Z e i t l in ,1 9 8 5 ; S a b e l e t a l . , 1 9 8 7 ; S a b e l , 1 9 8 9 ) . M o r e o v e r ,t h e y c l a i m , s m a l l f i r m s a r e m o r e f l e x i b l e a n d t h u sb e t t e r a d a p t e d t o e n g e n d e r i n g a n d a d o p t i n g in -n o v a t io n s . T o t a k e a d v a n t a g e o f t h e s e c a p a b i l i-t ie s , t h e y r e c o m m e n d r e o r i e n t i n g th e A m e r i c a ne c o n o m y t o w a r d s s m a l l, c r a f t - b a s e d f i rm s t h a to p e r a t e i n a c o o p e r a t i v e e n v i r o n m e n t . M i c h a e lB e s t ( 1 9 9 0 ) h a s r e i n f o r c e d t h i s c a l l , q u e s t i o n i n gt h e e f f i c i e n c y o f b o t h v e r t i c a l l y i n t e g r a t e d W e s t -e r n fi rm s a n d J a p a n e s e n e t w o r k s a n d a r g u i n g

0048-7333/95/$09.50 1995 Elsevier Science B.V. All rights reservedSSDI 0 0 4 8 - 7 3 3 3 ( 9 4 ) 0 0 7 8 6 - 7


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544 P.L. Robertson, R.N. Langlois Research Policy 24 (1995) 543-562instead for the growth of geographical concentra-tions of small firms organized cooperatively alongthe lines of the 'Third Italy.' 1

Other writers believe that large vertically inte-grated firms are in the best position to developand exploit innovations. In contrast to Piore andSabel and Best, William Lazonick contends thateconomies of scale will remain overwhelminglyimportant and that small firms will not be able tocompete effectively in many areas. As a result,Lazonick believes, growth must be based on giantorganizations that are able to combine strategicflexibility with access to economies of scale. Butto survive, such organizations must have 'privi-leged access to resources,' including control ofmarketing and the supply of inputs, in order toprovide the security to justify investments in largeproduction facilities (Lazonick, 1990 and 1991a).Richard Florida and Martin Kenney also be-lieve that a high degree of vertical integration isdesirable, but stress the need to coordinate basicresearch and development activities with productdevelopment and manufacturing in order to gainmaximum benefits from scientific and engineer-ing breakthroughs (Florida and Kenney, 1990a).Florida and Kenney and Lazonick are critical ofPiore and Sabel and of current American devel-opments in Silicon Valley and along Route 128 inMassachusetts because, they claim, small firmscannot fully realize the potential that seminaldiscoveries offer. As a result, well-articulatedJapanese and Korean industrial conglomeratesare appropriating the bulk of the benefits ofAmerican discoveries and, increasingly, are them-

1 The 'Thi rd Italy' is the area of nort heast Italy centeringon the regions of Emilia-Romagna and Tuscany. Although anumber of substantial cities, such as Bologna, Modena, Flo-rence, and Reggio-Emilia, are in the area, much of theindustry is located in smaller towns that specialize in theproduction of various i tems including ceramic tiles, textiles,and machine tools. These local industries are frequently orga-nized in government-sponsored cooperatives that provide ac-cess to cheap capital and to services in marketing, accounting,etc. Initiative in design and other fields, however, is retainedby the member firms, that are commonly family-owned andhave twenty or fewer employees. See also Lazerson (1988),Brusco (1982), and Hatch (1987).

selves making the important breakthroughs onwhich future growth will be based (Florida, 1990a,chapter 6). 2

An intermediate position has been staked outby Michael E. Porter. Porter believes that, inorder to be successful in international markets,firms must first develop the knack of competingdomestically. To achieve this, he advocates a highdegree of rivalry among firms in their home mar-kets. He also cites the importance of networks ofsuppliers to provide inexpensive and flexible ac-cess to inputs (Porter, 1990). And, like Piore andSabel, Porter believes that geographic concentra-tions of producers can increase productivity byenhancing access to knowledge and other factorsof production. Although Lazonick (1991b) hascriticized Porter's support for a high degree ofdomestic competition and networks of supportfirms, it is clear that, in contrast to Piore andSabel, Porter is not advocating the establishmentof ateliers when economies of scale are present.

There appear to be two basic differences be-tween Porter and Lazonick. First, Porter believesthat the American economy is large enough inmost industries to justify competition among sev-eral large firms, while Lazonick supportsmonopolies or very tight oligopolies in the do-mestic economy. To Lazonick, the most impor-tant rivalry is on the international stage and in-dustries on the national level should conservetheir strength for competition with firms fromother countries. Second, Porter believes that anextensive web of outside suppliers and regionalagglomerations of producers provide flexibility tocushion downturns and give broad access to tech-nical improvements, whereas Lazonick empha-sizes the security that arises from maintainingresources under centralized control.

Prescriptions for government industrial policyalso vary among analysts. Lazonick (1990, 1991a,1991b), for example, contends that governmentsshould promote centralization and concentration

2 This chapter is reproduced in Florida and Kenney (1990b).See also Lazonick (1991b).


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P.L. R obertson, R.N. Langlois / R esearch Policy 24 (1995) 543-562 54 5to permit firms to meet competitive challengesfrom large foreign firms. Piore and Sabel (1984)and Best (1990), on the other hand, recommendthat governments actively support the growth ofsmall firms and industrial districts by generatingpolicies that simultaneously promote competitionand cooperation. Finally, Porter (1990) believesthat governments should emphasize the creationof environments that encourage domestic andinternational competition by promoting techno-logical change, but that governments are in gen-eral ill-equipped to provide detailed economicdirection.

All of these authors are grappling with thesame problem of locating the patterns of indus-trial and firm organization that are most efficientin permitting a nation to innovate and gain ormaintain p roductive superiority. 3 They have nev-ertheless reached a variety of contradictory pre-scriptions. The fundamental reasons for this con-fusion are twofold: the authors define firms andnetworks in fuzzy and inconsistent ways; and theyprovide sweepingly general recommendations tocover a variety of cases that are in many waysdissimilar.

In this paper, we examine the relationshipbetween innovation and industry and firm struc-ture to determine whether flexibility and the scopefor change vary across environments. We con-clude th at the ability of various types of organiza-tional structures to support innovation success-fully depends crucially on the scope of the inno-

3 L a z o n i c k , P i o r e a n d S a b e l , B e s t, a n d F l o r i d a a n d K e n n e ya r e a l s o e x p l ic i tl y i n t e r e s t e d i n f i n d i n g w a y s o f p r o v i d i n g m o r ei n t e r e s t i n g w o r k , g r e a t e r j o b s t a b il i ty , a n d b e t t e r w a g e s f o r t h ei n d u s t r i a l l a b o r f o r c e t h a n c u r r e n t l y p r e v a i l s i n t h e U n i t e dS t a t e s . I n g e n e r a l , t h e y r e c o m m e n d t h a t t h i s c a n b e a c c o m -p l i s h e d b y i n c r e a s i n g t h e i n t e l l e c t u a l c o n t e n t o f fa c t o r y e m -p l o y m e n t a n d t h e s c o p e f o r d e c i s i o n - m a k i n g av a i l a b le t o i n d i -v i d u a l w o r k e r s . F l o r i d a a n d K e n n e y , f o r e x a m p l e , " s e e t h eJ a p a n e s e m o d e l a s a s u c c e s s o r to F o r d i s m t h a t u s e s n e wo r g a n i z a t i o n a l f o r m s t o h a r n e s s t h e i n t e l l e c t u a l a s w e l l a s t h ep h y s i c a l c a p a b i l i ti e s o f w o r k e r s . " ( 1 9 9 1 , p . 3 8 3 .) H e r e , h o w -e v e r , w e c o n c e n t r a t e o n t h e a u t h o r s ' p r o p o s a l s c o n c e r n i n gf i r m a n d i n d u s t r i a l o r g a n i z a t i o n .

vation and the relative maturity of the industriesinvolved. As a result of the wide range of varia-tions present in advanced industrial economies,any generalized government policy towards inno-vation is likely to be unsuitable for the needs ofmany sectors.

2 . T h e l e s s o n s o f h is t o r y ?

Lazonick and Piore, Sabel, and Zeitlin have allused historical evidence to support their policyrecommendations. Lazonick draws heavily on thework of Alfred D. Chandler, Jr. to demonstratethat the growth of manufacturing since the latenineteenth century has been closely correlated tothe degree of horizontal and vertical integrationin 'cutting-edge' industries. In The Visible H an d(1977), Chandler showed that the rapid growth offirms in a number of American industries be-tween 1870 and 1940 was based on significant andcontinuing increases in economies of scale. Inorder to take advantage of these scale economies,small firms that had been restricted to local mar-kets merged to serve regional or even nationalmarkets. Horizontal in tegration in itself was rarelyif ever enough to guarantee viability, however,because such collections of small enterprises couldnot gain the benefit of scale economies unlessthey were rationalized into larger units undercentral control. Thus the 'visible hand' of man-agement was needed to initiate and direct thenew giant firms. Moreover, because of the largerinvestments in fixed capital which were required,enormous size entailed greater risk. As a result,managers attempted to shield giant firms frommarket uncertainties by integrating forwards andbackwards in the hope of ensuring supplies ofinputs and, in particular, increasing the demandfor finished products to keep pace with growingproductive capabilities.

More recently, Chandler has extended hisanalysis to British and German history. He states,for example, that Britain's relative decline as amanufacturing power after 1870 occurred be-cause "British entrepreneurs failed to make theessential three-pronged investment in manufac-


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5 4 6 P.L. Robertson, R.N. Lan glois / Research Policy 24 (1995) 543-56 2turing, marketing, and management in a numberof the capital-intensive industries of the SecondIndustrial Revolution." 4 In other words, theBritish erred in not building large facilities or,when they did, in continuing to rely on marketmechanisms and not providing adequate internalmarketing and management skills to coordinateand protect their investments.

This, essentially, is the model that Lazonickprojects into the future. He believes that to pros-per nations must take advantage of substantialeconomies of scale in major industries, and thatthis requires centralized management and a highdegree of vertical integra tion to overcome marketdeficiencies. To the extent that American firmsare inhibited, either through government policy,market fragmentation, or managerial ineptitude,from matching the control that foreign competi-tors hold over resources, they will, he feels, loseout in a world of increasing returns.

Piore, Sabel, and Zeitlin provide a very differ-ent view of recent developments. 5 To them, theadoption of the paradigm of mass productionrepresents the triumph of an idea rather than aneconomic necessity. Because of the highly publi-cized triumphs of producers such as Henry Ford,large firms came to be regarded as the norm.Nevertheless, craft production retained advan-tages in flexibility and variety that were over-looked as Britain and the United States movedtowards gargantuan factories in the twentiethcentury. As counter-examples, Sabel and Zeitlincite certain industries in France and Italy thatmaintained their craft traditions and prosperedas a result. Piore, Sabel, and Zeitlin maintain that

large firms often fail to cope successfully with theaccelerating rate of innovation that they perceive,or to take advantage of the flexibility permittedby new production technologies. They recom-mend instead that the American economy bereoriented towards smaller firms, clustered in in-dustrial districts, similar to those in the ThirdItaly, where they can develop symbiotically.

It is clear that Lazonick and Piore, Sabel, andZeitlin are all correct in the sense that both largeand small firms have thrived historically and con-tinue to exist. But neither set of examples pre-cludes the other because different industries areinvolved. In certain industries, such as iron andsteel, automobile manufacturing and somebranches of chemicals, economies of scale provedso strong that small firms were virtually wiped outin the first half of the twentieth century. 6 Chan-dler, however, probably overestimates the impor-tance of these industries (Supple, 1991; Landes,1991). In many other cases, economies of scalewere limited, although increases in productivitymay nevertheless have been great. In these latterindustries, which include some branches of ma-chinery manufacture, clothing, and retailing,small, highly competitive firms have been able toretain strong positions. Thus, if history is a guideto the future, then either the Lazonick or thePiore and Sabel scenario is feasible.But it is a fundamentally ahistorical procedureto project future developments on the basis ofsupposed past, or even current, trends. Each ex-perience occurs within its own context. The pat-terns outlined by Lazonick and Sabel and Zeitlinare essentially compressions of the experiences ofmany institutions (firms or industries) within theirown environments. Not only is there reason tobelieve that the context of future developmentswill be different from that of the past, but therewill be a variety of different contexts within which

4 C h a n d l e r ( 1 9 9 0 ) , p . 2 3 6 . C h a n d l e r e x p l a i n s t h e t h r e ep r o n g s i n m o r e d e t a i l o n p . 8 .

5 T h e h i s t o r i c a l m a t e r i a l i n c h a p t e r 2 o f P i o r e a n d S a b e l( 1 9 8 4 ) is a r e w o r k i n g o f a n a r t i c l e b y S a b e l a n d Z e i t l i n ( 1 9 8 5 ).S e e a l s o S a b e l ( 1 9 8 9 ) a n d S a b e l e t a l . ( 1 9 8 7 ) . T h e l a t t e r a r t i c l ec o n t r a s t s t h e r e c e n t d e c l in e o f l a r g e t e xt il e m a c h i n e r y f i r m sb a s e d i n M a s s a c h u s e t t s a n d t h e p r o s p e r i t y o f s i m i la r b u t m u c hs m a l l e r f i r m s i n B a d e n - W u r t t e m b e r g .

6 E x c e p t , o f c o u r s e , f o r a f e w s p e c i a l i s t f i r m s s u c h a s R o l l sR o y c e t h a t c o u l d p r o d u c e i n s m a l l v o l u m e s b e c a u s e c u s t o m e r sw e r e w i l l in g to p a y p r e m i u m p r i c e s f o r h i g h q u a l i t y o r d i s ti n c -t iv e f e a t u r e s .


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P.L. R obertson, R.N. Langlois / R esearch Policy 24 (1995) 543-562 547f u t u r e f i r m s a n d i n d u s t r i e s w i l l b e d e v e l o p i n gs i m u l t a n e o u s l y . 7

W h a t is n e e d e d , t h e r e f o r e , is a w a y o f p r e d i c t -i n g h o w t h e s e i n s t i t u t i o n s w i l l b e h a v e w i t h i n t h e i rp a r t i c u l a r e n v i r o n m e n t s r a t h e r t h a n a n o v e r a r c h -i n g m o d e l t h a t m a y b e i n a d e q u a t e t o d e a l w i t ht h e n e e d s o f a n y p a r t i c u l a r i n s t i tu t i o n . I t i s t o t h i st h a t w e n o w t u r n .

3 . N e t w o r k s a n d n e t w o r k s

V e r t i c a l l y i n t e g r a t e d f i r m s a n d l o o s e w e b s o fs m a ll p r o d u c e r s a r e o n l y t w o o f t yp e s o f n e t w o r k so p e r a t i n g i n m o d e r n e c o n o m i e s , s O n e w a y o fc l a ss i fy i n g n e t w o r k s i s a c c o r d i n g t o t h e i r d e g r e eo f fo r m a l a r t i c u l at i o n . W h e n e x a m i n e d i n th i sw a y , t h e y r a n g e a l o n g a s p e c t r u m f r o m m a r k e t -b a s e d s y st e m s , w i t h e a c h t r a n s a c t i o n b e t w e e nc o m p o n e n t s b e i n g c o n d u c t e d s e p a r a t e l y , t o u n i -f i e d c o n c e r n s t h a t , a s f a r a s p o s s i b l e , i n t e r n a l i z et h e i r a c t i v i t i e s t h r o u g h c o m m o n o w n e r s h i p a n dc o n t r o l o f t h e f u n c t i o n s o f su p p l y , r e s e a r c h , o p e r -a t i o n s , a n d m a r k e t i n g . T h i s w a y o f c a s t i n g t h es p e c t r u m f r o m ' m a r k e t ' t o ' fi r m ' g o e s b a c k a tl e a s t t o C o a s e ( 1 9 3 7 ) a n d i s i m p l i c i t ( a n d s o m e -t i m e s e x p l i c it ) i n m o s t o f t h e m o d e r n t r a n s a c -t i o n -c o s t l i t e r a t u r e . 9 A l t h o u g h u s e f u l f o r m a n yp u r p o s e s , h o w e v e r , t h i s u n i d i m e n s i o n a l c h a r a c -t e r i z a ti o n l a c k s m u c h o f th e s u b t le t y n e e d e d t ot h i n k c a r e f u ll y a b o u t n e t w o r k s . T h e r e a r e i n f a ctm a n y d i m e n s i o n s a l o n g w h i c h v a r i o u s f o r m s o fi n d u s tr i a l o r g a n i z a t io n d i f f e r f r o m o n e a n o t h e r .F o r t h e m o m e n t , w e s u g g e s t t h a t e x p a n s i o n f r o m

7 Lazonick (1991a, pp. 271-273) contends tha t an historicalapproach to development is preferable to the pared-downmethodology of conventional economists, who have sacrificedmuch of the explanatory complexity of reality to produce 'aneconomic theory that is not bound by time and place.' Even ifone accepts Lazonick's critique of 'conventional' economics,however, the fact remains that immersion in historical com-plexity will not, in itself, lead to good predictions if theconditions pertaining in the past were significantly differentfrom those of the future.8 For a summary of the literatu re surrounding networks,see Bureau of Indus try Economics (1991).

9 For example, Williamson, 1985.

o n e d i m e n s i o n t o t w o w i l l y i e l d a h i g h m a r g i n a l10i n c r e a s e i n e x p l a n a t o r y p o w e r .T h e r e is s o m e t h i n g o f a d e b a t e i n t h e p r e s e n t -

d a y e c o n o m i c s o f o r g a n i z a t i o n b e t w e e n t h en e x u s - o f - c o n t r a c t s v i e w o f t h e f i r m ( C h e u n g , 1 9 8 3)a n d t h e p r o p e r t y - r i g h t s v i e w ( H a r t , 1 9 8 9 ) . T h ef o r m e r h o l d s t h a t o r g a n i z a t i o n w i t h i n a f i r m i s n ol e ss it c o n t r a c t u a l m a t t e r t h a n o r g a n i z a t i o nt h r o u g h m a r k e t s , a n d a ' f i r m ' i s n o t h i n g m o r et h a n a p a r t ic u l a r l y d e n s e i n t e r s e c t io n o f c o n -t r ac t s. W h a t d i f fe r s b e t w e e n m a r k e t a n d f i r m i st h e n a t u r e o f th e c o n t r a c t s i n v o l v e d , w i t h c o n -t r a c t s w i t h i n t h e f i r m h a v i n g a n o n g o i n g a n dm o r e o p e n - e n d e d c h a r a c t e r ( B e n - P o r a t h , 1 9 8 0 ) .S u c h c o n t r a c t s r e q u i r e v a r i o u s d e g r e e s o f c o n -s c i o u s , o n g o i n g a d m i n i s t r a t i v e c o o r d i n a t i o na m o n g t h e p a r t i e s . W e m i g h t s a y , t h e n , t h a t t h ee s s e n c e o f t h e f i r m i n t h i s v i e w i s t h e n a t u r e o ft h e c o o r d i n a t i o n i n v o l v e d . I n t h e p r o p e r t y r i g h t sv i e w , b y c o n t r a s t , o w n e r s h i p i s t h e i s s u e . T h eb o u n d a r i e s o f t h e f i rm , r a t h e r f u z z y u n d e r t h e' n e x u s ' v i e w , a r e h e r e b r i g h t l y i l l u m i n a t e d b y t h et i tl e t o o w n a b l e a s s e ts , a n d t w o s t a g e s o f p r o d u c -t i o n a r e h e l d t o b e v e r t i c a l ly in t e g r a t e d w h e n t h ea s s e t s i n v o l v e d a r e u n d e r c o m m o n o w n e r s h i p .

R a t h e r t h a n d e b a t i n g w h ic h v ie w b e st c a p t u r e st h e e s s e n c e o f t h e n o t i o n o f v e r t i c a l i n t e g r a t i o n ,w e c a n r e c o g n i z e th a t e a c h c a p t u r e s a n a s p e c t o fw h a t i n t e g r a t i o n m e a n s . M o r e o v e r , t h e s e t w o a s -p e c t s a r e p o t e n t i a ll y s e p a ra b l e . A m a j o r a u t o m o -b i le f i rm c a n b e i n t e g r a t e d i n to t h e p r o d u c t i o n o fa p a r t i c u l a r p a r t i n t h e s e n s e t h a t i t o w n s ac o m p a n y p r o d u c i n g s u c h p a r ts , e v e n i f t h e p a r e n td e a l s w i t h th e s u b s i d i a r y l a r g e l y t h r o u g h t h e m a r -k e t o n a m o r e - o r - l e s s e q u a l f o o t i n g w it h o t h e rs u p p l i e r s . A t t h e s a m e t i m e , t w o d i s t i n c t l e g a le n t i t i e s m a y b e e n g a g e d i n a n o n g o i n g d e v e l o p -

i0 Powell (1990, pp. 296-300) suggests that the notion thatthere is a 'continuum' of organizational forms ranging frommarkets through networks to vertically integra ted firms is bothinaccurate and analytically unhelpful. We feel that there aresystematic relationships between organizational forms andvarious exogenous and endogenous conditions which can use-fully be represen ted as spectra. We do concede, however, thatas in Fig. 2 below, the orde r in which the organizational formsappear along a given spectrum may vary depending on whichother factors are under consideration.


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5 4 8 P.L. R obertson, R.N. Langlois / Research Policy 24 (1995) 543-562me nt p ro je c t tha t invo lve s e xc lus ive de a l ing , s ig -n i f i c a n t e xc ha nge o f in fo rma t ion , a nd a dmin is t r a -t ive c oord ina t ion .

W e t h u s h a v e t w o d i m e n s i o n s a l o n g w h i c h t oa na lyz e o rga n iz a t iona l fo rms . One d ime ns ion i st h e d e g r e e o f o w n e r s h i p i n t e g r a t io n , t h e o t h e r i sthe de g re e o f c oord in a t ion in te g ra t ion . ( s e e F ig .1 ) . We c a n use th i s c ons t ruc t to r e v i s i t va r iousk inds o f a c tua l ly e x i st ing ne tworks .

T h e l o o s e s t ty p e o f n e t w o r k is t h e M a r s h a ll i a nindus t r i a l d i s t r i c t . A l f r e d Ma rsha l l (1961) ba se dt h is c o n c e p t o n a p a t t e r n o f o r g an i z a ti o n t h a t w a sc o m m o n i n l a t e n i n e t e e n t h c e n t u r y B r i t a i n i nw h i c h f i r m s c o n c e n t r a t i n g o n t h e m a n u f a c t u r e o fc e r ta in p roduc ts we re ge ogra ph ic a l ly c lus te re d . Insom e c a se s , the se c lus te r s we re h igh ly spe c ial i z e d .W h i l e L a n c a s h i r e a s a w h o l e w a s t h e c e n t e r o fc o t ton te x t i l e p roduc t ion , fo r e xa mple , ind iv idua lt o w n s w i t h in t h e c o u n t y c o n c e n t r a t e d o n s p i n n i ngo r w e a v i n g a n d o n s p e ci f ic c o u n t s o f y a r n o rs tyles of fabr ic . S imilar ly , d if fe rent shipbu ildingd is t r ic t s spe c ia l i z e d in pa r t i c u la r c la s se s o f ve s -se ls , a nd va r ious M id la nds c i t ie s suc h a s Bi rming-h a m a n d C o v e n t r y b e c a m e c e n t e r s o f d i f f e r en tb ra nc h e s o f the e ng in e e r ing indus t ry . T he c ha ra c -

te r i s t i c s o f Ma rsha Uia n indus t r i a l d i s t r i c t s a res imi la r to the " soc ia l s t ruc tu re s o f innova t ion"l i s te d by F lo r ida a nd Ke nne y : " in te g ra t ive sys -t e m s co m p r i s e d o f . . . t e c h n o l o g y - o r i e n t e d e n t e r -pr ise , h ighly ski l led labor , con s ide rabl e . . . pr i -v a t e R & D e x p e n d i t u r e s, e x t en s i v e n e t w o r k s o fs u p p l i e r s , m a n u f a c t u r e r s a n d v e n d o r s , s u p p o r tf i rms suc h as la w f i rms a nd c onsu l ta n t s . . . . s t ronge n t r e p r e n e u r i a l n e t w o r k s , a n d i n f o r m a l m e c h a -n i sms fo r in fo rma t ion e xc ha nge a nd te c hno logytransfer." (1988, p. 130.)

T h e t w o d o m i n a n t c h a r ac t e ri s ti c s o f a M a r -sha l l i a n indus t r i a l d i s t r i c t a re h igh de gre e s o fve r t i c a l a nd hor iz on ta l spe c ia l i z a t ion a nd a ve ryh e a v y r e l i a n c e o n m a r k e t m e c h a n i s m s f o r e x -c ha nge . F i rms te nd to be sma ll a nd to foc us on as ing le func t ion in the p roduc t ion c ha in . Supp l ie r so f i n t e r m e d i a t e g o o d s c o m m o n l y s el l t h e i r s t o c k sloca l ly , within the dis t r ic t , a l though the f ina lp r o d u c t s m a y b e m a r k e t e d i n t er n a ti o n a ll y . F i r m sloc a te d in indus t r i al d i s t r ic t s a re a l so h igh ly c om-pe t i t ive in the ne oc la s s ic a l s e nse , a nd in ma nyc a se s the re i s l i t t l e p roduc t d i f f e re n t ia t ion . T hema jor a d va n ta ge s o f M a rsha l l i a n indus t r i a l d i s -t r i c t s the re fo re a r i s e f rom s imple p rop inqu i ty o f

D e g r e e o fO w n e r s h i pIntegra t ion

H o l d i n g IC o m p a n y

Marsha l l ian ]Dis t r ic t I

J a pa ne seK a i s h aN e t w o r k

Ve ntu reCa p i ta lN e t w o r k

FirmChandlerian I

"ThirdItalian"Dis t r i c t

De g re e o f c oord ina t ion in te g rat ionF i g . 1 . T w o d i m e n s i o n s o f i n t e g r a t i o n .


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P.L. Robertson, R.N. Langlois / Research Policy 24 (1995) 543-562 549

firms, which allows easier recruitment of skilledlabor and rapid exchanges of commercial andtechnical information through informal channels.As Marshall described them, industrial districtsillustrate competitive capitalism at its most effi-cient, with transaction costs reduced to a practi-cal minimum; but they are feasible only wheneconomies of scale are limited.

Recent commentators have revived the term'industrial district' to describe somewhat differ-ent types of organizational arrangements. As ap-plied to the 'Third Italy', the term indicates ahigher degree of cooperative coordination thanwould be present in a Marshallian industrial dis-trict. In this part of Italy, vertical and horizontalspecialization are again high and firms are gener-ally small. Competition is high and barriers toentry and exit are low. Competition is limited tocertain spheres of activity, however, in whichfirms might be expected to develop distinctivecompetences (Lazerson, 1988). 1~ In general, thismeans design, especially in industries such asceramics and textiles. For those activities in whicheconomies of scale extend beyond the range ofindividual small firms and the degree of standard-ization is high, firms in industrial districts in Italytend to favor cooperative arrangements, whichare normally government sanctioned. Coopera-tion is common in such activities as businessservices, including bookkeeping; sponsorship oftrade fairs and other domestic and, in particular,international marketing ventures; and the provi-sion of utilities and other infrastructure. 12 Coop-eration also extends to the provision of capital,

i1 This is consistent with the analysis that Bettis, Bradley,and Hamel (1992, pp. 18-20) prese nt of outsourcing by West-ern firms, in which they indicate that firms should protecttheir core competences by producing them internally and thatthey should restric t outsourcing to peri pheral activities. Sabelet al. (1987) describe similar conditions in Baden-Wiirttem-berg. Sabel (1989, p. 53) also discusses the role of distinctivecompetences in networking situations.

12 Good descriptions of the operat ion o f Italian industrialdistricts is given in Best (1990) and Lazerson (1988). Similararrangements prevail in certain American agricultural cooper-atives such Land-o-Lakes or Ocean Spray that provide infras-tructure and processing and marketing facilities for members.

which the banks lend directly to official coopera-tives, who guarantee the loans and determine thedistribution of funds among member firms(Brusco and Right, 1987). As a result, small firmsare able to sell their output in world markets andto gain some of the benefits of scale economieswhile continuing to compete strongly with eachother.

Because of the legal advantages that pertain tosmall firms, many producers in the 'Third Italy'are reluctant to employ directly more than 15 orso workers. To avoid expanding too far, however,firms do take ownership positions in 'satellitefirms' that maintain legal independence. Interest-ingly, the satellite firms are not generally used toexpand output and increase market control, butto protect the core competences of the originalenterprise by providing intermediate goods atlower cost or with greater security. The acquisi-tion of satellites is also used to gain control overcomplementary design capabilities. The networksof satellites therefore represent small islands ofownership and control integration within thelarger horizontally integrated networks of the co-operatives (Lazerson, 1988).

A second recent variation on the industrialdistrict is the innovative network, as representedby Silicon Valley and Route 128. As in Marshal-lian industrial districts, coordination integrationis low in these districts, ~3 but some coordinationis supplied by the venture capitalists who put upthe initial seed money. The venture capitalists arespecialist investors who have close connectionsthroughout the districts and are also able to pro-vide new firms with entrepreneurial and manage-rial guidance and connections with potential sup-pliers and customers (Florida and Kenney,1988). 14 Under this arrangement, there are twonetworks, one of producers that approximates the

13 According to Saxenian (1991), however, in Silicon Valleythere is now considerable cooperation among vertically spe-cialized firms in the computer systems industry.

14 Although Florida and Kenney are moderately well dis-posed towards venture capitalists in their article, they are farmore negative in chapter 4 of their 1990 book on The Break-through Illusion.


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550 P.L. Robertson, R.N. Langlois Research Policy 24 (1995) 543-562market orientation of the Marshallian industrialdistrict, and a second network of venture capital-ists that is superimposed on the network of pro-duers. In addition, the degree of local focus isfrequently reduced to the extent that the venturecapitalists come from other regions.

Although there is stronger orientation towardscooperation in the 'Third Italy' than in Marshal-lian industrial districts, both models are based onorganic growth. Even the government sponsor-ship of collective action in Italy is a reinforce-ment of a socialist ethos that has been the domi-nant attitude among small producers in Emilia-Romagna for nearly a century. Thus the emphasisin both models is on competition within an ap-propriate institutional context. In such innovativenetworks as Silicon Valley and along Route 128,there has been a similar organic growth: Thedevelopment of nuclei of isolated firms into largeclusters required more than two decades (Dorf-man, 1983; Miller and C6t6, 1985). The imposi-tion of a network of venture capitalists, however,marks a significant step in the direction of cen-tralization and outside control. As a conse-quence, the organic nature of competition in thelocal industries is reduced and industrial districtsdominated by venture capitalism represent amovement along the dimensions of both coordi-nation integration and ownership consolidation,even if such ar rangements fall far short of verticalintegration in the Chandlerian vein.

Modularity is a form of organization that isrelated conceptually to industrial districts. Whenthere are few economies of scale in assembly andconsumers prefer the ability to choose compo-nents rather than pre-packaged sets, vertical spe-cialization will occur, with firms concentrating onindividual modules. But while firms retain signifi-cant independence in design, manufacturing, andmarketing, they cannot be totally oblivious to thepractices of either their competitors or of manu-facturers of other modules because assembly re-quires a high degree of standardization to permitcompatibility. When there is modularity, there-fore, both vertical and horizontal networks mayarise, perhaps with government enforcement as inthe case of radio frequencies (Langlois andRobertson, 1992).

Writers like Piore and Sabel extol industrialdistricts for their 'flexible specialization,' whichallows swift adaptation to market changes andpermits the realization of a wide range of sepa-rate visions as manufacturers concentrate onproduct niches (Piore and Sabel, 1984; Saxenian,1990). Industrial districts are less appropriate,however, when there are potentially largeeconomies of scale or high transaction costs. Un-der these conditions, different types of organiza-tion are needed.

One possibility is the establishment of corenetworks. As the name implies, these are orga-nized around a single firm, which is usually alarge assembler. The satellite firms supply inter-mediate inputs to the core, which effectively co-ordinates the network as a whole. The relation-ships between US and Japanese automobile man-ufacturers and their assemblers illustrate twotypes of core networks. US auto firms have tradi-tionally dealt with suppliers at 'arm's length,'using short-term contracts and exacting disciplineby switching to other sources if they are dissatis-fied with price, quality, or regularity of delivery.Suppliers fill orders as detailed by the core pur-chasers and are seldom given any discretion overdesign (Helper, 1991).

American core networks often approximatemonopsonistic market relationships. Although, intheory, suppliers may serve a variety of firms, inpractice this may be precluded by asset speci-ficity, as dies and other capital equipment cannotbe readily transferred to other uses. As a result,large US firms are able to use their bargainingpower to exact low prices when dealing with smallsuppliers operating in competitive markets. Thetransaction costs of maintaining impersonal mar-ket relationships may be great, however, as thewillingness of US core firms to switch suppliersengenders little loyalty from the latter, whotherefore tend to stick to the letter of contractsand are reluctant to offer help when they areable. In any case, given the centralized nature ofdecision-making, there is only a slim chance thatsuggestions emanating from suppliers, includinginternal captive suppliers, would attract any at-tention at the core.

By contrast, the networks of Japanese automo-


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P.L. Robertson, R.N. Langlois / Research Policy 24 (1995) 543-562 5 51bile firms arguably serve to reduce transactioncosts by establishing what Florida and Kenney(1991, p. 395) have termed "tightly networkedproduction complexes." One aspect of this net-working lies along the coordination dimension.As Smitka (1991) and others have argued, thelonger-te rm' relational' contracts among Japaneseassemblers and suppliers, supported by rational,economically motivated structures of trust, re-duce the transaction costs of bilateral monopoly.Moreover, such contracts, by encouraging thesharing of information, spur supplier-generatedinnovation in a way foreclosed to the Americanfirms. Another, less-noticed, aspect of Japaneseautomotive networks is that they represent a moreeffective decentralization scheme. Rather thanhoarding most technical and design knowledgeinhouse, Japanese lead auto firms parcel out dis-crete modules to suppliers. "Typically," as Helperand Levine (1992, p. 563) write, "a Japaneseautomaker will not undertake the design of a partthat it requires for a new model. Instead it willspecify exterior dimensions and performancecharacteristics, and allow a specialist supplier todesign the part to best match its process." Forexample, an American firm typically assembles acar seat from parts supplied by some 25 differentsubcontractors. By contrast, a Japanese firm willsubcontract the entire seat to a 'first-tier' subcon-tractor, who will then assume primary responsibil-ity for design, quality, and compatibility (Womack,Jones, and Roos, 1990). This efficient modular-ization also serves to reduce transaction costs,allowing the network of outside suppliers toachieve a higher level of productive capabilitiesthan in the American system. The suppliers re-spond in Japan by increasing product specializa-tion to a high degree (Odaka, Ono, and Adachi,1988), giving the system some of the character ofa Marshallian network. ~5Another aspect of the Japanese supplier net-work in automobiles lies along the ownershipdimension. Although Japanese core firms directlyproduce a smaller proportion of their compo-

15 O n n e t w o r k s i n J a p a n f r o m a n a t i v e ' s p e r s p e c t i v e , s e el m a i a n d I t a m i (1 9 8 4 ) a n d I m a i (1 9 8 9 ) .

nents than do their American competitors andhave a far smaller number of workers per unitproduced, they often own a substantial stake intheir suppliers, who are therefore not truly inde-pendent. Japanese suppliers are also providedwith help in finding land close to the core factoryto facilitate just-in-time deliveries. In part, thevirtues of this ownership quasi-integration derivefrom the coordination integration it facilitates.Because of their close financial connections,Japanese core firms have an interest in the pros-perity of their suppliers and an incentive to en-gage in reciprocal cooperation that is not presentin America. But a dynamic perspective casts theownership aspects of the network in a somewhatdifferent light. Such ownership ties are part ofefforts by the lead firms to create and cultivatethe network of suppliers rather than efforts tomanage the network once created. The strategyof creating an external network rather than pro-ducing in-house has long been a conscious strat-egy in the Japanese auto industry, albeit oneforced on the industry in part in response tolabor unrest in the early 1950s (Smitka, 1991).

Formal vertical integration is at the far end ofour spectrum. Here, stages of production areunder common ownership, and administrative co-ordination prevails over arm's-length coordina-tion. Again, ownership integration does not byitself lead to centralized control, as firms maychoose to have divisions deal with each other onan arm's-length basis to simulate market transac-tions. Alternatively, central management maythrough oversight or weakness lose control overinternal divisions, which are then able to actindependently. Indeed, it is important to remem-ber that the innovation of the multi-divisional(M-form) structure was in one sense an innova-tion in decentralization. What made the largevertically integrated firms possible was an effi-cient parceling out of knowledge and control tomodular subunits, with the core retaining onlyhigher-level strategic functions. 16 This system is

1~, W i l l i a m s o n ( 1 9 8 5 ) d i s c u s s e s t h i s d e c e n t r a l i z a t i o n i n c y b e r -n e t i c t e r m s : t h a t i t p e r m i t s a s e p a r a t i o n o f c o n t r o l o v e rd i s t u r b a n c e s i n d e g r e e ( d a y - to - d a y m a n a g e m e n t ) f r o m c o n t r o lo f d i s t u r b a n c e s i n k i n d ( s t ra t e g ic m a n a g e m e n t ) .


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5 5 2 P.L. Robertson, R.N. Langlois Research Policy 24 (1995) 543-562thus rather closer to the Japanese core networkthan one might think, except that strategic con-trol is arguably greater in the M-form firm and,as Williamson argues in theory and students ofindustry have confirmed in practice, 17 internalsupply divisions lack the 'high-powered incen-tives' of a financially independent (or at leastquasi-independent) relationship.

Thus, in practice, the degrees of vertical inte-gration available to producers are finely gradedand may be chosen according to needs. There isno single degree of integration, or fo rm of firm orindustry organization, that suits all purposes. Insome cases, firms may even mix forms as in thecase of taper integration, in which firms producea proportion of their needs for a given inputinternally and purchase the remainder from out-side suppliers (Harrigan, 1983).

The degree of horizontal integration is alsoimportan t in determinin g how effectively an inno-vation is adopted. The ability to generate re-search funds, for example, and the variety ofoptions that might be tried in an uncertain re-search environment may be affected by the sizeof firms and their ability to cooperate. Smallfirms are often lauded for their responsiveness tothe need for change. Moreover, many indepen-dent research efforts may generate more ideasthan a few larger teams (Nelson and Winter,1977). When research is expensive, however, smallfirms may be unable to pay the price of admissionwhile large firms and consortia can tap greaterpools of resources.

Forms of horizontal integration also vary. In aMarshallian industrial district, firms are indepen-dent for most purposes. 18 Formal horizontalcombinations characterize the industrial districtsof the 'Third Italy', however, and ad hoc horizon-tal combinations promoted by venture capitalistsoperate in American industrial districts that fea-ture Innovative Networks. In general, large USfirms are discouraged by antitrust laws and other

17 F o r e x a m p l e , W o m a c k , J o n e s , a n d R o o s ( 1 9 90 ) , p . 14 3 .18 A l t h o u g h e v e n i n n i n e t e e n t h - c e n t u r y B r i t a in c e r t ai n k i n d s

o f c o ll e c ti v e a c t io n w e r e c o m m o n , e s p e c i a l ly e m p l o y e r s ' a s s o -c i a ti o n s t o c o m b a t u n i o n s .

regulations from horizontal cooperation, but thisis less true in Japan and Europe. As in the caseof vertical integration, the most efficient form ofhorizontal integration for promoting innovationdepends on the circumstances of the particularcase.

4 . S p e c i a l i z a t i o n a n d a p p r o p r i a b i l i t ySpecialization and the appropriability of bene-

fits also exert conflicting influences on the choiceof organizational form in an innovative environ-ment. The advantages that flow from specializa-tion and the division of labor should lead to a lowdegree of vertical and horizontal integration. Theability of an originator to appropriate the benefitsarising from an innovation may be constrained,however, if the adoption and use of the innova-tion dep end significantly on the activities of otherfirms, either at the same or different stages in theproduction process. When there are importantappropriability problems (when the benefits flow-ing from an innovation are likely to elude theoriginator and fall into the pockets of others),increases in horizontal and vertical integrationmay therefore enhance the probability of bothorigination and adoption.The advantages of specialization for promotinginnovation are well-known. Adam Smith believedthat workers would become more alert to im-provements as they concentrated on performingfewer activities. By analogy, vertically specializedfirms would also be expected to be more adeptthan integrated firms at isolating and solvingproblems. Horizontal specialization could alsofoster innovation by increasing the number ofcompeting units searching for solutions to a givenproblem. Whereas there would be only a fewgroups of problem solvers in an oligopolistic mar-ket and the number of firms in which innovationscould be implemented and tested would be lim-ited, competition among a large number of firmscould generate significantly more ideas and pro-vide more opportunities for trial and adoption.Furthermore, if firms were clustered and themobility of personnel high, as in an industrialdistrict, rapid exchanges of information would


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P.L. Robertson, R.N. Langlois Research Policy 24 (1995) 543-562 553s p e e d u p t h e s o r t i n g p r o c e s s l e a d i n g t o t h e i d e n -t i f ic a t i o n o f t h e b e s t s o l u t i o n .

H o w e v e r , t h is m e t h o d o f p r o b l e m s o lv in g m i g htb e i n a p p r o p r i a t e f o r c e r t a i n t y p e s o f s y s te m i ci n n o v a ti o n . W h e n t h e i n n o v a t i o n i n v o lv e s c h a n g e st h a t s p a n s t a ge s o f p r o d u c t i o n o r e v e n i n d u s t ri e s,t h e s a m e s o r t o f c o n c e n t r a t i o n o f a c ti v it y t h a tS m i t h p r a i s e s c o u l d m a k e i t l e ss l ik e l y t h a t l in k -a g es w o u ld b e d i s c o v e r e d - - t h a t i n f o r m a t i o nw o u l d f l o w t o w h e r e i t is n e e d e d . A s a r e s u l t,s p e c i a l i z a t i o n c o u l d r e t a r d r e c o g n i t i o n t h a t a ni n n o v a t i o n p r o d u c e d f o r o n e p u r p o s e c o u l d s e r v eo t h e r n e e d s . M o r e o v e r , i n n o v a t i o n s a d o p t e d a to n e s t a g e o f a p r o d u c t i o n c h a i n c o u l d p r o v e t o b es u b o p t i m a l f o r e f f i c i e n c y a t o t h e r s t a g es . T h u se x c e s s i v e s p e c i a l i z a t i o n m i g h t h a m p e r b o t h t h ed e v e l o p m e n t a n d a d o p t i o n o f in n o v a t io n s . D e v e l -o p m e n t , f o r e x a m p l e , w o u l d a p p e a r l es s a tt r a c ti v ei f o n l y a p o r t i o n o f a w i d e v a r i e t y o f p o t e n t i a lu s e s w e r e e n v i s i o n e d i n it ia l ly ; a n d a d o p t i o n w o u l db e l e s s li k e ly i f p o t e n t i a l u s e r s w e r e u n a w a r e o fi n n o v a t io n s t h a t w e r e d e v e l o p e d f o r o t h e r p u r -p o s e s b u t m i g h t b e o f u s e t o t h e m .

S u c h f a c t o r s u n d e r l i e t h e a p p r o p r i a b i l it y p r o b -l e m s d i s c u s s e d b y D a v i d J . T e e c e ( 1 9 8 6 ) a n d W i l lM i t c h e l l ( 1 9 8 9 ; 1 9 9 1 ) . T h e r e a r e t w o e s s e n t i a ls e ts o f b a r r ie r s t h a t c o u l d k e e p t h e d e v e l o p e r o fa n i n n o v a t i o n f r o m g a i n i n g a h i g h e n o u g h s h a r eo f th e b e n e f i t s t o m a k e d e v e l o p m e n t w o r th w h i l e .T h e s e b a r r i e r s c o r r e s p o n d t o o u r t w o d i m e n s i o n so f c o o r d i n a t i o n a n d o w n e r s h i p . T h e f ir st , as w eh a v e ju s t d i s c u s s e d , is im p e r f e c t i n f o r m a t i o nf lo w s . W h e n p e o p l e a r e u n a w a r e e i t h e r o f t h ee x i s t e n c e o f s u i t a b l e s o l u t i o n s f o r t h e i r p r o b l e m so r o f p r o b l e m s t h a t c a n b e b e n e f i c ia l l y t r e a t e d b yp a r t i c u l a r s o l u t io n s , t h e n t h e p a y o f f t o , a n d i n -c e n t i v e f o r , i n n o v a t i v e a c t i v it y w i ll b e r e d u c e d .T h e s e c o n d s e t o f b a r r i e r s c o n c e r n p o w e r r e l a -t io n s h ip s . D i s c o v e r s o f a b r e a k t h r o u g h w h o a r en o t d i r e c t l y i n v o l v e d i n t h e i n d u s t r y t o w h i c h t h ei n n o v a t i o n i s t o b e a p p l i e d m a y h a v e v e r y li m i t e db a r g a i n i n g p o w e r b e c a u s e t h e y c a n n o t t h e m s e l v e sb r i n g a b o u t i m p l e m e n t a t i o n . I n o r d e r t o g a i n a n yb e n e f i t s , t h e y m a y t h e r e f o r e b e f o r c e d t o s e l l o rl i c e n s e t h e i n n o v a t i o n a t a s m a l l f r a c t i o n o f i t su l t i m a t e v a l u e t o t h e u s e r i f t h e y a r e t o g a i n a n yp r o f i t s a t a ll . M o r e o v e r , i f i m i t a t i o n i s e a s y - - i fp a t e n t s o r t r a d e s e c r e t s d o n o t e f f e c ti v e ly p r o t e c t

t h e i n n o v a t o r - - a n i n n o va t in g f ir m m a y b e a t t h em e r c y o r c o m p e t i t o r ( o r e v e n s u p p l i e r ) f i r m s w h oc a n e n t e r q u i c k ly a n d t a k e c h e a p a d v a n t a g e o ft h e c a p a b i l i t i e s c r e a t e d a t h i g h c o s t b y t h e i n n o -v a t o r . T o p r o f i t w e l l f r o m i n n o v a t i o n i n s u c hc i r c u m s t a n c e s, t h e i n n o v a t o r w o u l d h a v e t o o w nm a n y o f t h e a s s et s c o m p l e m e n t a r y t o t h e i n n o v a -t i o n .

B o t h o f t h e s e k i n d s o f o b s t a c l e s p o i n t t o w a r d sv e r t ic a l i n te g r a t i o n a s a m e a n s o f s p e e d i n g u p t h er a t e o f in n o v a t io n . I n f o r m a t i o n i m p a c t e d n e s s ( t ou s e W i l l ia m s o n ' s t e r m ) c a n b e r e d u c e d i f t h ed e v e l o p e r o f a n i n n o v a t i o n a n d t h e u s e r a r e i nt h e s a m e o r g a ni z a ti o n . U s e r s - - m a r k e t i n g o r p ro -d u c t io n t e a m s - - c a n m a k e R & D e x p e r t s ( w h e t h e rw i t h i n t h e i r o w n o r g a n i z a t i o n s o r e l s e w h e r e i nt h e n e t w o r k ) a w a r e o f s p ec i fi c c o m m e r c i a l n e e d st o w h ic h t h e y s h o u l d d e v o t e a t t e n t i o n . O n t h eo t h e r h a n d , i f r e s e a r c h e r s i n s u c h a n e t w o r kc o m e u p w i t h a n u n a n t i c i p a t e d d e v e l o p m e n t , t h e yc a n e a s i l y a l e r t o t h e r s i n th e e x t e n d e d o r g a n i z a -t i o n w h o m i g h t b e a b l e t o u s e i t . I n t h e a b s e n c eo f c o o r d i n a t i o n i n t e g ra t i o n , p o t e n t i a l b e n e f i t sm i g h t b e l o s t a l t o g e t h e r o r c e d e d t o o t h e r s . I t i sa r g u a b l e , f o r i n s t a n c e , t h a t t h e r e l a t i v e d e c l i n e o fm a n y m a t u r e i n d u s t r i e s in W e s t e r n e c o n o m i e s inr e c e n t d e c a d e s is i n p a r t t h e r e s u l t o f t h e i r s t a r ks e p a r a t i o n f r o m m a n y i n d u s t r i e s , p a r t i c u l a r l y i ns e m i c o n d u c t o r s , i n w h i c h r e l e v a n t in n o v a t i o n sh a v e b e e n g e n e r a t e d . I n t h e m o r e c o o r d i n a t e dk e i r e t su s y s te m o f J a p a n , h o w e v e r , t h e s e p a r a t i o nh a s b e e n m u t e d a n d m a n u f a c t u r e r s o f m a t u r ep r o d u c t s h a v e h a d b e t t e r a c c e s s t o t h e i n f o r m a -t i o n n e e d e d f o r i n n o v a t i o n .

V e r t i c a l i n t e g r a t i o n c a n a l s o r e d r e s s a d v e r s ep o w e r r e l at i o ns h i p s. U n d e r j o i n t o w n e r s h i p , t h eo w n e r s o r t h e i r i m m e d i a t e d e l e g e e s c a n r e o r g a -n i z e c a p a b i l i t i e s b e c a u s e t h e y h a v e u l t i m a t e( t h o u g h n o t n e c e s s a r i l y d a y - t o - d a y ) c o n t r o l . T h e yc a n b u y a n d s e ll a n d h i r e a n d f i r e . W h e n t h es a m e o r g a n i z a t i o n i s b o t h t h e d e v e l o p e r a n d t h eu s e r o f a n i n n o v a t i o n , t h e n , t h e b e n e f i t s a r e i n -t e r n a l i z e d a n d a p p r o p r i a b i l i t y i s n o l o n g e r a p r o b -l em . P o t e n t i a l d e v e l o p e r s w o u l d n o t b e d e t e r r e db y th e p r o s p e c t o f s u r r e n d e r i n g a h i g h p r o p o r t i o no f t h e p a y o f f . N o t i c e , h o w e v e r , t h a t t h i s a r g u m e n ta p p l i e s t o o w n e r s h i p i n t e g r a t i o n , n o t c o o r d i n a -t i o n i n t e g r a t i o n , s i n c e i n p r i n c i p l e t h e i n n o v a t o r


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554 P.L. R obertson, R.N. Langlois ~Research Policy 24 (1995) 543-562need only take financial positions in the comple-mentary assets--long positions in those likely toappreciate and short positions in those likely todepreciate. 19 How much coordination integra-tion is necessary will depend on the pure infor-mation costs of informing and persuading thosewith de facto control over cooperating assets.Ownership integration itself does not guaranteeenough coordination to solve the problem of in-formation fragmentation, which could in principlebe solved by a closely linked network that was notintegrated in ownership.

Morris Silver (1984) has provided a furtherexplanation of the role of vertical integration inpromoting innovation. According to Silver, inno-vating firms sometimes are forced to integrateforwards or backwards because they cannot findspecialists who appreciate the full potential of theinnovation and are willing to associate themselveswith a new product. This may be either becausethey literally cannot understand what the innova-tors need or because they do not believe that theinnovation is commercially viable. In these cases,in order to implement their ideas, innovators mayhave to engage in tasks they would rather dele-gate to existing specialists through market mecha-nisms. For example, when developing the assem-bly line, the Ford Motor Company was obliged toproduce the prototypes for many of its new dedi-cated machines because it could not convincemachine tools firms that it was practicable tobuild machines of the required specifications(Langlois and Robertson, 1989).

One implication of this is that the desirabilityof vertical integration may depend on the existingarray of capabilities already available in the econ-omy. When the existing arrangement of decen-tralized capabilities is very different from thatrequired by a major systemic innovation, verticalintegration, which permits a quicker and cheapercreation of new capabilities, may prove superior(Langlois, 1992b). This may indeed help explainthe prevalence of large vertically integrated com-panies in the historical periods that Chandler

19 On this point, see also Mark Casson (1982), pp. 206-8.

chronicles. The major rearrangements o f capabil-ities enabled by rapid economic growth and therapid decline of transportation and communica-tions costs in the nineteenth century were refrac-tory to the existing system of decentralized capa-bilities. Change came from large integrated firmswho could sweep away ill-adapted structures in awave of 'creative destruction.' At other times andin other places, however, entrenched vertical in-tegration can prove just as refractory to change(Robertson and Langlois, 1992). In the pre-warAmerican automobile industry, for example, thestrategic move by General Motors to the annualmodel change, along with product innovationsemanating from smaller, less-integrated automakers, forced Ford reluctantly into the produc-tion of a new model (the Model A), whose devel-opment disrupted the firm's entrenched internalsourcing chain and forced considerable verticaldisintegration (Abernathy, 1978; Langlois andRobertson, 1989). One can make the case thatthe overall American problem in dealing withJapanese and other foreign competition since the1970s has had much the same character.

5 . N e tw o r k s a n d e c o n o m i c c h a n g eBound up in the preceding discussion were

two distinct characteristics of innovation that af-fect the appropriateness of organizational forms,namely, the systemic character of the innovationand its radicalness. These two factors often ridetogether, but in principle they are separable. Fol-lowing Teece (1986), we can talk about an inno-vation as systemic if change in one part of thesystem (one stage of production, for example)necessitates corresponding change in other parts;by contrast, an innovation is autonomous if changein one part can proceed without materially affect-ing the rest of the system. The conventional view,which we have followed so far, is that decentral-ized networks of innovation do well under condi-tions of autonomous innovation but that systemicinnovation calls for integration of both ownershipand coordination in order to surmount adversepower relationships and avoid information im-pactedness. Moreover, one would typically think


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P.L. Robertson, R.N. Langlois Research Policy 24 (1995) 543-562 55 5o f s y st e m i c i n n o v a t i o n a s m o r e ' r a d i c a l ' t h a n a u -t o n o m o u s , s i nc e c h a n g i n g m a n y p a r t s o f a s y s t emi s c l e a r l y a r e l a t i v e l y d r a s t i c p r o c e d u r e , w h e r e a sa d j u s t i n g o n l y a p a r t s e e m s t o b e n e c e s s a r i l y a ni n c r e m e n t a l b u s i n e ss . B u t t h e r e is a n o f t e n - f o r -g o t t e n s e n s e i n w h i c h a u t o n o m o u s i n n o v a t i o n c a nb e t h e m o s t r a d i c a l o f a ll ; o r r a t h e r , i n w h i c h t h em o s t r a d i c a l o f i n n o v a t i o n s i s n e c e s s a r i l y a u -t o n o m o u s .

C o n s i d e r a n i n n o v a t i o n t h a t m o s t w o u l d v i e wa s r a d i c a l : t h e p e r s o n a l c o m p u t e r . T h i s i n n o v a -t i o n r e q u i r e d b r i n g i n g t o g e t h e r i n f o r m a t i o n f r o mm a n y d i v e r s e a r e a s : s e m i c o n d u c t o r s , p r o g r a m -m i n g , e l e c t r o n i c a s s e m b l y , e t c . Y e t t h i s i n n o v a -t i o n w a s n o t t h e w o r k o f l a r g e v e r t i c a l l y i n t e -g r a t e d f i r m s w h o s e c a p a b i li t ie s s p a n n e d m a n yd i s c ip l in e s . R a t h e r , i t w a s t h e w o r k o f s m a l l f i rm s ,w h o s e e a r l y a t t e m p t s t o g e t t h e l a r g e o r g a n i z a -t i o n s to t a k e t h e m s e r i o u s l y w e r e p e r s i s t e n t l yr e b u f f e d . M a n y l a r g e f i r m s f a i l e d m i s e r a b l y i n t h eb u s i n e s s , a n d e v e n th e s u c c e s s o f I B M c a m e a st h e r e s u l t o f a l m o s t c o m p l e t e l y a b a n d o n i n g i tsi n t e r n a l c a p a b i l i ti e s i n f a v o r o f t h o s e o f t h e m a r -k e t (L an g l o i s , 1 9 9 2 a) .

A l t h o u g h t h e r a d i c a l n e s s t o w h i c h i n t e r n a l o r -g a n i z a t io n i s a d a p t e d m a y b e g r e a t e r t h a n t h a t t ow h i c h c e r t a i n k i n d s o f m a r k e t - b a s e d n e t w o r k s a r ea d a p t e d , t h e r e i s i n t h e e n d a k i n d o f r a d i c a l n e s s( o r n e w n e s s o r u n c e r t a i n t y ) t h a t l a r g e o r g a n i z a -t i o n s d o n o t h a n d l e w e l l. F o r t h i s t y p e o f u n c e r -t a i n t y , a d e c e n t r a l i z e d n e t w o r k d o e s m u c h b e t t e r( L a n g l o i s a n d E v e r e t t 1 9 9 2 ) . B u t s u c h a n e t w o r km a y b e v e r y d i f f e r e n t f ro m t h e k i n d o f d e c e n t r a l -i z e d n e t w o r k a d a p t e d t o s l o w o r i n c r e m e n t a lc h a n g e . C o n s i d e r t h e f o l l o w i n g d i s t in c t i o n s . ( S e eF i g . 2 ). A t o n e e n d o f a s p e c t r u m w e m i g h t t h i n ko f p a r a m e t r i c c h a n g e , t h a t is , c h a n g e o f c e r t a ink n o w n v a r i a b le s w i t h i n a k n o w n f r a m e w o r k . 20F o r e x a m p l e , i t m a y b e h i gh l y u n c e r t a i n w h i c hg r a d e o f c l o t h o r w h i c h s t y l e o f t i l e w i l l b e d e -m a n d e d t h is s e a s o n , b u t i t i s w e l l k n o w n t o a l lw h a t i t m e a n s t o p r o d u c e a g r a d e o f c lo t h o r as t y le o f ti le . F o r t h i s k i n d o f u n c e r t a i n t y , M a r s h a l -

20 T h e d i s t i n c t io n b e t w e e n p a r a m e t r i c a n d s t r u c t u r a l f o ll o w sL a n g l o i s ( 19 8 4) .

M a r s h a l l i a n [ C h a n d l e r i a nand I t a l i an , F i rms

D is t r i c t si

P a r a m e t r i c

J a p a n e s eN e t w o r k s

I n n o v a t i v eN e t w o r k s

S t r a t e g i c S t r u c t u r a lF i g . 2 . D e g r e e s o f r a d i c a l n e s s o f u n c e r t a i n t y .

l ia n a n d T h i r d - I t a l i a n s t r u c t u r e s a r g u a b l y w o r kw e l l. A m o r e r a d i c a l k i n d o f u n c e r t a i n t y o r c h a n g ewe m i g h t ca l l s t r a t eg i c . T h i s wo u l d t y p i ca l l y i n -v o l v e r e a r r a n g i n g c a p a b i l i t ie s i n f a i r l y d r a s t i cw a y s, b u t w i th i n k n o w n b o u n d a r i e s . H e r e a v er t i-c a ll y i n t e g r a t e d f i r m m a y h a v e a n a d v a n t a g e o v e ra p u r e m a r k e t n e t w o r k , f o r m a n y o f th e r e a s o n sd e t a i l e d a b o v e . O n c e t h e d y n a m i c r a n d o m - a c c e s sm e m o r y c h i p b e c a m e a k n o w n c o m m o d i t y , f o ri n s ta n c e , l ar g e J a p a n e s e ( a n d m o r e r e c e n t ly , K o -r e a n ) f i r m s w e r e a b l e s t r a t e g i c a l l y t o r e d i r e c tc a p a b i l i t i e s i n t o t h e i r m a s s p r o d u c t i o n m o r e d e c i -s iv e l y t h a n l e s s - i n t e g r a t e d A m e r i c a n f i r m s . A t t h em o s t r a d i c a l e x t r e m e , h o w e v e r , i s w h a t w e m a yc a l l s t r u c t u r a l c h a n g e . T h e p e r s o n a l c o m p u t e rm a y b e a n e x a m p l e . H e r e t h e a b i li ty o f a d e c e n -t r a l i z e d I n n o v a t i v e N e t w o r k t o g e n e r a t e a w i d ed i v e r s i ty o f i n f o r m a t i o n s i gn a l s a n d t o m o v er a p id l y m a y b e a n o v e r w h e l m i n g a d v a n t a g e . O fc o u r s e , a s t i m e p a s s e s , t h e s a m e t e c h n o l o g y w i llc h a n g e s t a t u s , s u g g e s t i n g , a s w e d e v e l o p m o r ef u l ly b e l o w , t h a t t h e a p p r o p r i a t e n e s s o f o r g a n i z a -t i o n a l s t r u c t u r e s v a r i e s o v e r t h e p r o d u c t l i f ecycle. 21

21 C o n t r a r y t o w i d e s p r e a d p r e d i c t i o n t o t h e c o n t r a r y , h o w -e v e r , t h e p e r s o n a l c o m p u t e r i n d u s t r y h a s n o t m a t u r e d i n s u c ha w a y t h a t a d v a n t a g e h a s f a l l e n t o l a r g e v e r t i c a l l y i n t e g r a t e dc o n c e r n s , R a t h e r , t h e i n d u s t r y h a s a r g u a b l y m a t u r e d i n t o ah i g h - v o lu m e m a s s - p r o d u c t i o n n e t w o r k a k i n t o n i n e t e e n t h - c e n -t u r y L a n c a s h i r e i n c o t t o n t e x t i l e s . L a r g e f i r m s c o n t i n u e t o b es i n g u l a rl y u n s u c c e s s fu l , a n d t h o s e l a r g e f i r m t h a t d o p l a y i nt h e m a r k e t d o s o b y e m u l a t i n g t h e i r v e r t ic a l l y d e c e n t r a l i z e dc o m p e t i t o rs . T h e J a p a n e s e a n d K o r e a n s h a v e m a d e f e w in -r o a d s d e s p i t e d o m i n a n c e i n c e r ta i n h i g h - t e c h c o m p o n e n t s l i kef l a t - p a n e l d i s p la y s a n d C D d r i v e s. T h e m o s t s u c c e s s f u l fi r m si n t h e i n d u s t r y a r e I n t e l a n d M i c r o s o f t , b o t h o f w h o m e s s e n -t i a l l y l i m i t t h e i r i n t e g r a t i o n t o s o m e s t r a t e g i c a l l i a n c e s . O v e r -a l l , u n i t c o s t s a n d i n d u s t r i a l c o n c e n t r a t i o n c o n t i n u e t o f a l lh a n d i n h a n d . ( L a n g l o i s , 1 9 9 2 a . )


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556 P.L. Robertson, R.N. Langlois /Re sear ch Policy 24 (1995) 543-5626 . I n d u s t r y s t r u c t u r e a n d t h e s c o p e o f i n n o v a t i o n

I f , a s w e h a v e o u t l i n e d , t h e r e i s a t r a d e - o f fb e t w e e n t h e d i v e r s i ty o f i d e a s t h a t s p e c i a l i z a t i o na n d f r a g m e n t a t i o n m a y e n c o u r a g e , o n t h e o n eh a n d , a n d t h e e a s e o f im p l e m e n t a t i o n a n d i n t er -n a l iz a t i o n o f r e t u r n s p e r m i t t e d b y v e rt i c al i n t e -g r a t io n , o n t h e o t h e r , t h e n t h e c h o i c e o f a na p p r o p r i a t e i n d u s t r y s t r u c t u r e w il l v a r y d e p e n d -i ng o n t h e m a r k e t f o r c e s o p e r a t i n g w i t hi n a n du p o n t h e i n d u s tr y . W h e n , f o r e x a m p l e , a p p r o p r i -a b i l i t y i s n o t a p r o b l e m , v e r t i c a l s p e c i a l i z a t i o nw ill b e f a v o r e d m o r e s t ro n g l y t h a n w h e n t h eo r i g i n a t o r s a r e u n l i k e l y t o c a p t u r e t h e r e t u r n s t oa n i n n o v a t i o n t h e m s e l v e s . T h e o p t i m a l d e g r e e o fh o r i z o n t a l i n t e g r a t i o n i s a l s o a f u n c t i o n o f s p e -c i fi c i n f l u e n c e s s u r r o u n d i n g a n i n n o v a t i o n , e s p e -c ia l ly w h e n d e v e l o p m e n t c o s ts a r e b e y o n d t h er e s o u r c e s o f s m a l l f i r m s .

O u r d i s c u s s i o n h e r e c o n c e n t r a t e s o n t w o f a c -t o r s t h a t w e c o n s i d e r t o b e p a r t i c u l a r l y i m p o r t a n t .I n t h i s s e c t i o n , w e i n v e s t i g a t e t h e w a y s i n w h i c ht h e r a n g e o f u s e s o f a n i n n o v a t i o n , i .e . it s sc o p e ,m i g h t i n f l u e n c e t h e p a t t e r n o f i n d u st r ia l s t r u c t u r et h a t m a x i m i z e s t h e b e n e f i t s d e r i v e d f r o m t h ei n n o v a t i o n . I n t h e n e x t s e c t i o n , w e c o n s i d e r t h ee f f e c t s o f d i f f e r e n t p r o d u c t l i fe - c y c l e p a t t e r n s i nt h e u s i n g in d u s t r ie s o n t h e a d o p t i o n o f a n i n n o v a -t i o n .

M o s t i n n o v a t i o n s h a v e a l i m i t e d n u m b e r o fu s es . T h i s is t ru e o f m u c h i n c r e m e n t a l c h a n g ea n d a l s o a p p l i e s t o s i g n i f i c a n t i n n o v a t i o n s t h a ta r e c o n f i n e d t o o n e o r a f e w i nd u s tr i e s. W h e n t h es c o p e o f a n i n n o v a t i o n i s l i m i t e d , t h e n e e d f o rc o m m u n i c a t i o n b e t w e e n d e v e l o p e r s a n d u s e r s i sr e s t r i c t e d t o a n a r r o w a n d e a s i l y - d e f i n a b l e g r o u p .I n t h e s e c i r c u m s t a n c e s , i n f o r m a t i o n e x c h a n g e i se s p e c i a l l y e a s y w h e n t h e r e a r e e x i s t in g c h a n n e l so f c o m m u n i c a t i o n , a s i n a n i n d u s t r i a l d i s t r ic t i nw h i c h s u p p l i e r s a n d c u s t o m e r s d e a l w i t h e a c ho t h e r r e g u l a r ly a n d h a v e a g o o d i d e a o f t h e irr e s p e c t i v e n e e d s . E v e n w i t h o u t g e o g r a p h i c c l u s -t e ri n g , e s t a b li s h e d m a r k e t m e c h a n i s m s c a n w o r kw e l l w h e n t h e s c o p e o f i n n o v a t i o n i s c o n f i n e d .F o r e x a m p l e , s p e c i a l i s t m a c h i n e m a n u f a c t u r e r sw h o s u p p l y a p a r t i c u l a r i n d u s t r y m a y h a v e g o o dn a t i o n a l o r i n t e r n a t i o n a l c o n n e c t i o n s t h a t a l l owt h e m t o p r o v i d e i n f o r m a t i o n o n n e w m o d e l s t o

p o t e n t i a l c u s t o m e r s q u i ck l y a n d c h e a p ly . A n o t h e rc h a n n e l f o r c o m m u n i c a t i o n w o u l d b e t h e t r a d ep r e s s , w h i c h c a n p i c k u p n e w s o n d e v e l o p m e n t sf r o m d i v e r s e s o u r c e s a n d s u p p l y i t t o o t h e r i n t e r -e s t e d f i r m s .

T h e r e a r e , h o w e v e r , l i m i t s t o t h e a b i l i t y o ff i r m s t o u s e m a r k e t s e f f e c t i v e l y . W h e n t h e r e i sp r o d u c t d i f f e r e n t i a t i o n , t h e p r o d u c i n g f i r m s a r er e l a t iv e l y s m a l l, a n d t h e p o p u l a t i o n o f c u s t o m e r si s d i v e r s e a n d g e o g r a p h i c a l l y d is p e r s e d , a s i n t h ece rami c t i l e , c l o t h i n g , o r t ex t i l e i n d u s t r i e s , i n fo r -m a t i o n p r o b l e m s m a y b e o v e r w h el m i ng . U n d e rt h e s e c i r c u m s t a n c e s , t h e c o s t s o f s p r e a d i n g a n da c q u i ri n g i n f o r m a t i o n a b o u t i n n o v a t io n s m i g h t b eb e y o n d t h e r e s o u r c e s o f b o t h s u p p l i e r s a n d b u y -e r s . I n s t i t u t i o n a l a r r a n g e m e n t s l i k e t h o s e i n t h e' T h i r d I t a l y ' c a n h e l p t o o v e r c o m e t h e p r o b l e m .V e r y f e w i n d i v i d u a l t i l e m a n u f a c t u r e r s a r e c a p a -b l e o f a d v e r t i s i n g t h e i r d i s t i n c t i v e p a t t e r n s w o r l d -w i d e , a n d v e r y f e w t il e d i s tr i b u t o r s a b r o a d h a v et h e t i m e o r m o n e y t o v i s i t t h e m a n u f a c t u r e r s t oi n f o r m t h e m s e l v e s o n a v a i l a b l e s t y l e s . A s t h ep r o s p e r i t y o f t h e i n d u s t r y d e p e n d s h e a v il y o ne x p o r ts , o n e o f t h e m a j o r f u n c t i o n s o f th e p r o -d u c e r c o o p e r a t i v e s is t o a r r a n g e w i t h s m a ll m a n u -f a c t u r e r s t o p r o v i d e c e n t r a l i z e d e x h i b i t s a n d o r g a -n i z e p a r t i c i p a t i o n i n i n t e r n a t i o n a l t r a d e f a i r s . A sa r e s u l t , q u a s i - h o r i z o n t a l i n t e g r a t i o n , t h e p r o -d u c e r c o o p e r a t i v e , f o r m s t h e b a s is o f q u a s i- v e r t i-c a l i n t e g r a t i o n , a s t h e p r o d u c e r s a r e a b l e t o a d dm a r k e t i n g e x p e r t i s e t o t h e i r d i s t i n c t i v e c o m p e -t en ces i n d es i g n (Bes t , 1 9 9 0 ; Po r t e r , 1 9 9 0 ) . 2 2

W h e n a n i n n o v a t i o n h a s a w i d e s c o p e o f us e s,s m a l l f i r m s o p e r a t i n g i n e s t a b l i s h e d c h a n n e l s m a yb e l e s s s u c c e s s f u l a t c o m m u n i c a t i n g t h e i r d i s c o v -e r i e s b e c a u s e t h e p r o b l e m o f g a i n i n g c r e d ib i l i tye x p a n d s a s t h e d e v e l o p e r n e e d s t o a t t r a c t a t t e n -t i o n a m o n g f i r m s i n u n f a m i l i a r s e c t o r s . P o t e n t i a lu s e r s m a y a l s o e x p e r i e n c e d i f f i c u l t i e s i n l o c a t i n g

22 These arrangem ents result in impo rtant two-waychannelsof information because they reduc e the cost to producers ofcollecting information on customers' preferences as well asspreading information on the produc ers' wares.


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P.L. Robertson, R.N. Langlois Research Policy 24 (1995) 543-562 5 5 7i n n o v a t i o n s f r o m d i v e r s e s o u r c e s i f t h e i n i t i a la p p l i c a t i o n s a r e i n d i f f e r e n t i n d u s t r i e s .

M a j o r e c o n o m y - w i d e c h a n g e s l i k e e l e c t r i f i c a -t i o n o r t h e u s e o f s e m i c o n d u c t o r s o r r a i l r o a d s a r ee x t r e m e l y r a r e , b u t i n n o v a t i o n a c r o s s s e v e r a l i n -d u s t r i e s o c c u r s f r e q u e n t l y . I f d i s c o v e r i e s a r e m a d eb y s p e c ia l i st s , i n l in e w i t h t h e S m i t h i a n m o d e l ,t h e d e v e l o p e r s m a y h a v e n e i t h e r k n o w l e d g e o fn o r i n t e r e s t i n a p p l i c a t i o n s i n o t h e r i n d u s t r i e s . I no t h e r w o r d s , t h e v e r y i n st i tu t i o n a l f r a m e w o r k t h a te n c o u r a g e s t h e i n n o v a t i o n i n t h e f i r s t p l a c e c a na l s o r e t a r d i t s s p r e a d . I n v e n t o r s w i t h a w i d e rp e r s p e c t iv e , h o w e v e r , w h o s e t o u t f r o m t h e b e g i n -n i n g t o m a k e d i s c o v e r i e s w i t h b r o a d a p p l i c a b il i ty ,m a y n o t h a v e t h e c o n t a c t s w i t h u s e r s r e q u i r e d t og a i n a d o p t i o n i n a n y s in g l e i n d u s t ry , l e t a l o n e i n av a r i e t y o f s e c t o r s .

T h e s e a n d s i m i l a r i n s t i t u t i o n a l c o m p l i c a t i o n sm a y a c c o u n t f o r t h e r e l a ti v e ly sl ow s p r e a d o fd i s c o v e r i e s a c r o s s i n d u s t r i e s . I t t o o k s e v e r a ld e c a d e s , f o r e x a m p l e , f o r t h e d i f f u s i o n o f e l e c t r i c -i ty f o r d o m e s t i c , i n d u s t ri a l , a n d t r a c t i o n p u r p o s e s( H u g h e s , 1 9 8 3 ) , a n d t h e s p r e a d o f a p p l i c a t i o n s o fe l e c t r o n i c c o m p o n e n t s i s s t i l l g a i n i n g p a c e m o r et h a n f o u r d e c a d e s a f t e r t h e i n v e n t i o n o f t h e t r a n -s i st o r . T h e s e a r c h f o r s u i t a b l e i n s t i t u t io n s i s a g a i ni m p o r t a n t b e c a u s e , t h e l o n g e r t h e t i m e p e r i o di n v o l v e d i n d i f f u s i o n , t h e m o r e d i f f i c u l t i t b e -c o m e s f o r t h e i n it ia l d e v e l o p e r s o f a n i n n o v a t i o nt o a p p r o p r i a t e t h e g a i n s . 2 3 I f t h e g a i n s a r e u n -c e r t a i n , t h i s m a y m e a n n o t o n l y a d i s i n c e n t i v e tod e v e l o p m e n t i n t h e f i r s t p l a c e , b u t a l s o a l o s s t ot h e c o u n t r y o f d e v e l o p m e n t i f t h e i n n o v a t i o n i sc a p t u r e d t o a d e g r e e b y f o r e i g n p r o d u c e r s w h or e c o g n i z e u se s t h a t w e r e n o t a p p a r e n t t o p o t e n -t ia l u s e r s i n th e c o u n t r y o f d e v e l o p m e n t . W h e nt h e e v e n t u a l a d o p t i o n b y f o r e i g n e r s i s s ig n if i-c a n t ly g r e a t e r t h a n in t h e c o u n t r y o f o r ig i n , e v e nt h e o r i g i n a l c o r e i n d u s t r y m a y m i g r a t e i n t e r n a -t i o n a l l y ( R o b e r t s o n a n d L a n g l o i s , 1 99 2 ).

23 T h e n e e d f o r ( v e r ti c a l ) o w n e r s h i p i n t e g r a t i o n m a y b es t r e n g t h e n e d b y t h e l i m i t e d t im e p e r i o d a l l o w e d t o h o l d e r s o fp a t e n t s . I f p o t e n t i a l u s e r s o f a n i n n o v a t i o n c a n n o t b e r e -c r u i t e d q u i c k l y , t h e e f f e c t i v e l if e o f p a t e n t s , a s m e a s u r e d b yt h e p r o f i t s to t h e i r h o l d e r s , i s s h o r t e n e d s i g n i f ic a n t ly .

7 . In n ovat ion an d t h e p r od u c t l i f e c yc l eT h e c h o i c e o f s u i t a b l e f o r m s o f i n t e r n a l a n d

e x t e r n a l o r g a n i z a t i o n t o p r o m o t e i n n o v a t i o n a n dc a p t u r e t h e r e s u l t a n t g a i n s d e p e n d s a s w e l l o nt h e p r o d u c t l i f e c y c l e s ( P L C s ) o f i n d u s t r i e s t h a tm i g h t a d o p t o r b e a f f e c t e d b y t h e i n n o v a t i o n . I t isw e l l k n o w n t h a t u n c e r t a i n t y v a r i e s o v e r t h e s t a g e so f th e P L C , i n g e n e r a l r e d u c i n g a s t h e p r o d u c tp r o g r e s s e s f r o m t h e i n t r o d u c t o r y s t a g e t o m a t u -r i t y . U n c e r t a i n t y c a n a g a i n i n c r e a s e i n m a t u r ei n d u s t r i e s , h o w e v e r , i f t h e i m p a c t o f a n i n n o v a -t i o n i s s o h i g h t h a t i t g r e a t l y a f f e c t s t h e n a t u r e o ft h e p r o d u c t o r t h e p r o d u c t i o n p r o c e s s . T h e c h o i c eo f a n a p p r o p r i a t e s t r u c t u r e w i l l t h e r e f o r e d e p e n do n w h i c h s ta g e s o f t h e P L C t h e s o u r c e a n d u s e ri n d u s t r i e s a r e a t .

W h e n a n i n n o v a t i o n is a d o p t e d b y a n i n d u s t ryt h a t i s i n t h e i n t r o d u c t o r y a n d g r o w t h p h a s e s o ft h e P L C , t h e d e g r e e o f u n c e r t a i n t y in b o t h t h es o u r c e a n d u s e r i n d u s t r i e s i s v e r y hi g h . T h e r e a r eu n l ik e l y t o b e e s t a b l is h e d c h a n n e l s o f c o m m u n i -c a t i o n t h a t t h e f i r m s i n t h e s o u r c e i n d u s t r y c a nt a p b e c a u s e t h e n a t u r e o f t h e u s e r i n d u s tr y isa m o r p h o u s , w i t h a h i g h t u r n o v e r o f f ir m s a n dl a c k o f k n o w l e d g e a s t o t h e n a t u r e o f t h e u s e r s 'p r o d u c t s u n t i l a s t a n d a r d v a r i a t i o n i s f i n a ll y d e -c i d e d u p o n b y u s e r s . I n s u c h c a s e s , i t i s v e r yd i f f i c u l t t o e c o n o m i z e o n i n f o r m a t i o n c o s t s f o rb o t h t h e u s e r a n d t h e s o u r c e b e c a u s e t h e n e c e s -s a r y i n f o r m a t i o n m i g h t b e c o m i n g f r o m m a n yd i r e c t i o n s a t o n c e .

C o o r d i n a t i o n i n t e g r a t i o n i s u n s u i t a b l e i n s u c ha n e n v i r o n m e n t b e c a u s e i t i n c r e a s e s ' c e r t a i n t y 'w i t h i n a n o r g a n i z a t i o n ( a f i r m o r c l o s e l y a r t i c u -l a t e d n e t w o r k ) b y a r t if i ci a ll y r e d u c i n g t h e n u m b e ro f s o u r c e s o f i n f o r m a t i o n t h a t a r e t r e a t e d a sc r e d i b l e . I n n o v a t i o n s f r o m e x t e r n a l o r n o n -a c c r e d i t e d s o u r c e s t e n d t o b e i g n o r e d o r d o w n -g r a d e d w h e n t h e r e i s c o o r d i n a t i o n i n t e g r a t i o n .W h e n t h e f l o w o f in n o v a t i v e i d e a s i s h i g h a n d t h ef o r m o f t h e u s e r p r o d u c t i n fl u x , i t i s c r u c i a l t o b ea b l e t o t a p a s m a n y o p t i o n s a s p o s s i b l e .

T h i s i m p l i e s t h e u s e o f a n i n n o v a t i v e n e t w o r k ,o r ' n e t w o r k o f n e t w o r k s , ' t h a t a l l o w s r a p i d e x -c h a n g e s i n w h i c h b o t h t h e s o u r c e a n d u s e r f i r m sd r a w o n t h e w i d e s t r a n g e o f i n f o r m a t i o n a v a i l -a b l e . c o n s i s t e n t w i t h a r e a s o n a b l e c o s t o f c o l l e c -


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558 P.L. Robertson, R.N. Langlois / Research Policy 24 (1995) 543-5 62Oulpul$

InlroducforyPhase

Ma lure Rebirth

Malure Unce rtainty

Grow th ~ MaturityPhase

F i g . 3 . T h e e f f e c t o f in n o v a t i o n o n t h e p r o d u c t l if e c y c le .

DeclinePhase

Cerlalnt

tion and processing. The performance of suchinnovative networks is enhanced if they can drawon various types of clearing house activities pro-vided by trade associations and similar groups.Government organizations such as MITI in Japancan also perform generalized information ser-vices.

When the user industry is mature and theinnovation is largely autonomous in that it doesnot require drastic changes to the product or theproduction process, then a Marshallian or Third-Italian type of network would be most appropri-ate. These minor, or parametric, changes do notjustify the cost involved in establishing elaborateinformation networks and coordination integra-tion is also unnecessary because the cost to thewould-be users is very low if they are not amongthe first to learn about a particular innovation.

Change along the product life cycle, however,is not necessarily unidirectional (Moenaer et al.,1990). The most interesting case in many ways(and one that receives much attention from La-zonick, Florida and Kenney, and Porter) occurswhen an innovation has a systemic impact on amature product that, as a consequence, requiressubstantial revamping of other aspects of thatproduct or its manufacturing process. When thisoccurs, the path of the user industry is deflectedfrom the usual 'S' curve of the PLC into eithermature uncertainty or mature growth, as in Fig. 3.In both cases, the mature rebirth is returned to a

stage of higher uncertainty similar to that in thegrowth stage of the PLC. 24Examples of these structural or strategic

changes range from the incorporation of micro-components into existing types of machinery tothe adoption of just-in-time manufacturing meth-ods. Because such an innovation requires a totalrethinking of the nature of the product and/orthe manufacturing process, users must have adetailed knowledge of the technology of the inno-vation and of the varieties available. This can bestbe achieved through substantial coordination in-tegration as provided by a vertically integratedChandlerian firm or a Japanes e network, becausethese are the forms of organization that (for aprice) give users access to detailed informationcommensurate with the high importance of theirrequirements.

The choice between Chandlerian or Japanesenetwork organizations will, in turn, be a functionof degree of maturity and hence the extent ofuncertainty prevailing in the industry supplyingthe innovation. If the supplying industry is in the

24 T h e m a j o r d i f f e r e n c e b e t w e e n M a t u r e U n c e r t a i n t y a n dM a t u r e R e b i r t h c e n t e r s o n t h e e l as t ic i ty o f d e m a n d f o r t h ep r o d u c t . W h e n e l a s t i c i t y i s h i g h , a s y s t e m i c i n n o v a t i o n i n am a t u r e p r o d u c t m a y r e s u l t i n a r e n e w e d a c c e l e r a t i o n o fg r o w t h , o r ' r e b i r t h , ' b u t i f d e m a n d i s i n e l a s t ic t h e i n n o v a t i o nw i ll re s u l t o n l y i n g r e a t e r u n c e r t a i n t y . S e e C h e a h a n d R o b e r t -son (1992) .


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P.L. Robertson, R.N. Langlois / Research Policy 2

innovation, networks, and vertical integration

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