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Country-Specific Advantage and International Cooperation

Author(s): Weijian Shan and William Hamilton


Source: Strategic Management Journal, Vol. 12, No. 6 (Sep., 1991), pp. 419-432
Published by: Wiley
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Strategic Management Journal, Vol. 12, 419-432 (1991)

COUNTRY-SPECIFICADVANTAGEAND
COOPERATION
INTERNATIONAL
WEIJIANSHAN and WILLIAMHAMILTON
Department of Management, The Wharton School, University of Pennsylvania,
Philadelphia, Pennsylvania, U.S.A.

This paper tests the hypothesis that country-specific advantage embedded in firms of a
particular nationality is a motivation for international interfirm cooperation. A sample of
domestic and international cooperative relationships formed by Japanese firms in the
commercialization of biotechnology is used to identify factors which differentiate domestic
from foreign partners. The findings support ouir hypothesis that country-specific advantage
is a significant variable in explaining differences between cooperative relationships with
partners of different countries. The results of this study indicate that interfirm cooperation
has implications for the international competitiveness of both firms and nations in high
technology industries.

INTRODUCTION economic development and the living standards


of its people (Cohen, et al., 1984).
As Japanese firms increasingly erode the world- To the degree that its competitive strength
wide competitive edge of U.S. firms in one derives from the comparative advantage of its
industry after another, there is renewed intellec- home country, the national identity of a firm is,
tual interest in the international competitiveness justifiably, of great interest to researchers of
of nations (e.g. Cohen et al., 1984; Kennedy, international competition. Although a firm may
1987; Porter, 1990, Scott and Lodge, 1984). form one or more international cooperative
Some scholars argue, however, that national relationships for economic, strategic and other
competitiveness has become a moot issue as reasons similar to those that drive it to domestic
the citizenships of multinationals blur in an partnerships, an international cooperative venture
increasingly globalized market and as inter- may provide the firm with access to country-
national cooperative relationships transcend specific advantages embedded in its partners.
national boundaries (Ohmae, 1987). While there From this perspective, international cooperative
is no denying that the world market has become relationships may be viewed as a vehicle to tap
more integrated than ever before, national into the comparative advantages of countries.
competitiveness remains a valid research topic Furthermore, to the extent that country-
inasmuch as borders exist and political and specific advantages help explain the formation
economic institutions differ between nation states. of international cooperative relationships, one
In an economically integrated world, the competi- should find a systematic pattern in the forms of
tiveness of a country determines its path of cooperative relationships established with firms
of a particular country where the advantage
resides. The purpose of this paper is to explore
the significance of country-specific advantages
Key words: strategy, international, competitiveness, and other factors in differentiating domestic and
cooperation and biotechnology. international cooperative relationships formed by

0143-2095/91/070419-14$07.00 Received 13 April 1990


?) 1991 by John Wiley & Sons, Ltd. Final revision received 8 March 1991

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420 W. Shan and W. Hamilton

Japanese firms in the commercialization of Multinational corporations are able to circumvent


biotechnology. these costs because of their possession of internal-
The next section reviews the relevant literature ization advantages (Buckley and Casson, 1976;
which motivates the study. This is followed by a Dunning, 1977, 1985; Rugman, 1981, Teece,
discussion of biotechnology commercialization 1986a.)
and a description of the data and methodology The theory of multinational operation and
used in the study. The variables and hypotheses recent studies on the international competi-
to be tested are developed in detail, followed by tiveness of nations also point to another source
a discussion of the results of the empirical of advantage related either to specific locations
analyses. or to the country of origin of the firm possessing
such advantages (Buckley and Casson, 1976;
Casson, 1979; Dunning, 1977, 1985). For one
MOTIVATION OF THE STUDY reason or another, firms of a particular nationality
may have a certain advantage or competitive
There is a growing literature on the causes and edge over firms of other nationalities. These
motivations of interfirm cooperative relation- comparative advantages define the pattern of
ships, defined as the intermediate modes of international production and competitive advan-
organization between the arm's-length spot mar- tages of nations (Dunning, 1979, Porter, 1990).
ket transaction and the complete merger. Several As Dunning (1985:318) explains:
reasons may be offered to explain cooperative
behavior (Kogut, 1988). Firms may establish a Japanesefirmshave a comparativeadvantagein
cooperative relationship because it is the most the foreign productionof textiles and clothing
efficient organization form, in terms of trans- and consumer electronics; U.K. firms in food
and tobacco products;Swedishfirmsin mechan-
action, production and other costs, to achieve ical and electrical engineering; West German
its purposes (e.g. Hennart, 1986; Shan, 1987; firms in chemicals, and U.S. firms in transport
Stuckey, 1983; Williamson, 1983). Cooperative equipment. Such differences as these can be
relationships allow partnering firms to realize explainedonly by an examinationof the charac-
economies of 'synergies' as a result of pooling teristics of the endowmentsof the countries in
whichthe multinationalenterprisesoperate, and
resources, production rationalization, risk especiallythose of the home country, ....
reduction and utilization of assets to the efficient
scale and scope (Contractor and Lorange, 1987;
Harrigan, 1985). Cooperative ventures are also In other words, the international competitive
formed as a strategic response to the convergence advantages of firms in different industries may
of technologies or interdependence among inno- reflect the comparative advantages of nations
vation processes (Gomes-Casseres, 1990; Teece, embedded in them. Similarly, the underlying
1986b). comparative advantages of a nation may provide
Although similar economic and strategic con- its firms with a competitive advantage at certain
siderations motivate firms to form international links of the value-added chain as, for example,
cooperative relationships, the characteristics and in R&D or manufacturing. Moreover, to the
institutions of the foreign market are likely to extent that there exist large institutional differ-
differ from the domestic setting. In his pioneering ences between markets, the competitive advan-
work, Hymer (1976) theorizes that the multi- tages of an indigenous firm may derive from
national phenomenon be explained by firm- its position in the network of organizational
specific advantages. Thus, advantages possessed relationships crucial for the efficient and effective
by multinational firms outweigh the disadvantages operation of a business, from its familiarity
of being non-indigenous. Moreover, market with the local culture, customs and market
imperfection prevents the multinational from characteristics or from simply being an indigenous
transferring its advantages to indigenous firms firm which enjoys preferential treatment by the
through simple market exchanges. Market imper- local government.
fection may exist either in the form of non- The complementarity of country-specific advan-
competitive market structures or in the form of tages embedded in foreign and indigenous firms
transaction costs implications (Casson, 1987). forms the basis for international cooperation

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Country-specific Advantage 421

through which these advantages can be exploited. technology). These and related techniques consti-
It is therefore our central hypothesis in this paper tute the 'new' biotechnology, and make it possible
that country-specific advantages motivate the for the first time to manipulate the inner structure
formation of international cooperative agree- of micro-organisms, thereby allowing the develop-
ments. We feel that this research is worthwhile ment of significant new industrial processes and
because, to the degree that these international products. Therefore, the distinction between the
cooperative relationships facilitate transfers and traditional and the new biotechnologies is as
even migration of country-specific advantages sharp as that between organic chemistry and
across national boundaries, it may provide molecular biology.
important insight into their effect on the inter- This distinction is an important one because
national competitiveness of nations. firms with years of experience with the traditional
If, indeed, country-specific advantages moti- technology may have no competence at all in
vate the formation of cooperative relationships, the new one. Although Japanese firms are
both the form and content of these relationships internationally recognized for their expertise
with firms of a particular nationality should in traditional fermentation technologies, for
reflect the comparative advantage or competitive example, they generally lag behind American
strength of that country. We test this hypothesis firms in biotech-pharmaceutical innovation
in the following sections with a sample of (FDA, 1989; Japanese Working Group on
international and domestic cooperative relation- Biotechnology, 1985). The commercial potential
ships formed by Japanese firms. The statistical of the new biotechnology is being pursued in a
procedure essentially involves testing the signifi- number of industry sectors, including pharmaceu-
cance of the variables that capture country- ticals, argiculture, chemicals, and the food and
specific advantages and differentiate relationships brewery industries.
with partners of different national origins. To To date, the focus of biotechnology commer-
isolate the effect of these variables, we control cialization effort in the United States has been the
for firm-specific attributes and the functionalities development of new therapeutic and diagnostic
of the sample cooperative relationships which products. The clear American advantage in
may also explain the country choice of cooperative biotech-pharmaceutical developments (Miller
partners. and Young; 1989) derives from three principal
sources:

INDUSTRY BACKGROUND a. world leadership in biomedical research


resulting from decades of governmental
The cooperative relationships considered in this support for fundamental research in the
study were formed by Japanese firms in the biological and medical sciences through the
commercialization of biotechnology. Broadly National Institutes of Health, the world's
defined, biotechnology is the industrial appli- pre-eminent biomedical research institution.
cation of biological organisms, systems or pro- Total U.S. public and private expenditures
cesses. By this definition, biotechnology has been for life sciences and biomedical research
used throughout the history of civilization in exceed those of all other nations combined
wineries, bakeries, and more recently in the (Fortune, 1986).
fermentation of antibiotics and in the preparation b. An aggressive entrepreneurial culture, sup-
of amino acids which are important to the modern ported by favorable labor and capital mar-
pharmaceutical, food and brewery industries. The kets, antitrust protection and tax policies.
traditional biotechnology can be described as the This has resulted in hundreds of entrepre-
human effort to select micro-organisms and to neurial biotechnology companies supported
manipulate their environment systematically to by an active venture capital industry in their
achieve some specific purpose. pursuit of commercialization opportunities.
Recent developments in molecular biology c. long-standing leadership in new product
and biochemistry have produced important new innovation in the pharmaceutical industry,
technologies, including genetic engineering the focus of most early biotechnology com-
(recombinant DNA) and cell fusion (hybridoma mercialization efforts (Miller and Young,

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422 W. Shan and W. Hamilton

1989). This leadership position is supported support from established firms for biotechnol-
by high levels of R&D expenditures for ogy-related programs.
biotechnology, roughly three times those
committed to biotechnology in Japan To capitalize on these substantial national
(Fortune, 1986). strengths and to overcome the apparent gaps in
science and technology, the Japanese government
Together these strengths constitute an impres- has actively supported the development and
sive country-specific advantage for American commercialization of biotechnology through the
firms pursuing biotechnology applications in the Research Association for Biotechnology, a coop-
pharmaceutical industry. erative research effort organized by the Ministry
In Japan, the new biotechnology has been of International Trade and Industry (Miller, 1986;
viewed as the last high technology of the twentieth United Nations, 1988.) Japanese firms have also
centry (Office of Technology Assessment, 1984). made extensive use of cooperative agreements
One of Japan's stated strategic objectives is to use with both domestic and foreign partners (Roberts
innovation in biotechnology as the springboard for and Mizouchi, 1989). A report by the UN
launching its domestic pharmaceutical industry Center on Transnational Corporations describes
into a leadership position in world markets. Japanese strategies for biotechnology commer-
Historically, the sucess of the Japanese pharma- cialization:
ceutical industry was based on imported technol-
ogies and products (Yoshikawa, 1989). Unlike Japanese strategiesin biotechnologyhave typi-
other industries where Japanese firms generate cally involved setting up joint ventures and
a large portion of their income from foreign licensingalreadydevelopedtechnologies,as well
as marketing agreements to avoid the time-
markets, exports currently account for only 2 consuming process of starting from scratch. . . At
percent of Japan's pharmaceutical output. Rather the same time these companiesare now initiating
than continue to act as distributors of pharmaceu- in-houseresearchand developmentprogrammes
ticals developed abroad, the goals of major (United Nations, 1988:56).
Japanese pharmaceutical firms are now 'to
develop, manufacture and sell drugs for world- While most Japanese partners seek to bypass
wide markets through our own network' (Business years of research and gain access to new
Week, 1990). Looking ahead, some Japanese technologies or products through agreements
leaders assert that Japan will win the global with foreign partners, some also seek access to
competition in pharmaceuticals as it did in the foreign markets. Many U.S. biotechnology firms,
color TV and semiconductor industries. on the other hand, see such cooperative agree-
Japan is not without clear comparative advan- ments as vehicles to finance expensive and risky
tages to support this competitive reversal: developmental programs and to gain access to
the rapidly growing Japanese market, charac-
a. highly respected strengths in bioprocessing terized, by some, as the world's most promising
technologies, particularly fermentation, market for drugs because of the health-conscious,
which are central to efficient scale-up and aging Japanese population (Economist, 1989).
production of new biotechnology products,
b. a regulatory climate which heavily favors
innovative companies and products in com- DATA AND METHODOLOGY
parison with the U.S. system which facilitates
approvals of 'me-too' products, The cooperative relationship formed by a
c. barriers to foreign entry. Despite efforts to Japanese firm with either another Japanese firm
liberalize the governmental approval process, or a foreign firm is the unit of analysis used in
it remains extremely difficult for most foreign this study. An initial listing of Japanese firms
firms to negotiate the necessary approvals with potential involvement in biotechnology was
and to manage product distribution and sales compiled from two primary sources: Bioscan, a
without a Japanese partner, worldwide commercial directory of biotechnology
d. availability of significant, long-term financial companies, and an extensive research data base

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Country-specific Advantage 423

documenting key events and participants in the Size


evolving biotechnology field which has been
developed and maintained over the past 6 years Differences in firms' capabilities should influence
in support of the Biotechnology Research Project their need and propensity to cooperate with firms
of the Management and Technology Program at of other countries. Multinationals with multiple
the University of Pennsylvania (Hamilton, 1990). facilities across the world have operating flexi-
One of the authors then took this listing to Japan bilities (Kogut, 1990) and 'global scanning capa-
to confirm its accuracy in discussions with several bilities' (Vernon, 1985) that smaller and less
Japanese pharmaceutical companies with active diversified firms do not have. They may also be
biotechnology programs. perceived as presenting a greater risk as a
Data on the biotechnology-related cooperative potential competitor in the world market. Smaller
relationships formed by these companies included and less diversified firms are generally more
product categories, functional foci (research, confined to domestic markets and lack the
development, manufacturing and/or marketing) capabilities to expand internationally by them-
and whether technology transfer or licensing were selves. In general, smaller firms lack the techno-
involved. These data were compiled from the logical capabilities of large firms which lead the
two data bases identified above and were checked biotechnology competition in Japan (United
against a number of published listings of Japanese Nations, 1988:55). As a result, they may find
biotechnology partnerships (Dibner, 1987; international cooperation more attractive as a
Klausner, 1987; Rathmann, 1986; Roberts and means to appropriate value from the country-
Mizouchi, 1989). Firm-specific data were collected specific advantages embedded in foreign firms.
for the sampled firms from three additional
sources: Worldscope: Industrial Company Pro- Hypothesis 1: Smaller Japanese firms are
files, Principal International Businesses, and Japan more likely than larger ones to form cooperative
Company Handbook. relationships with foreign firms.
The central hypothesis of this paper is that
country-specific advantage motivates the forma- The size of the firm can be approximated by
tion of cooperative relationships. The dependent the average sales of the firm during the period
variable in our model is the nationality of the when the cooperative relationship was estab-
partnering firm in a cooperative relationship lished, or by the level of employment (number
formed by a Japanese company. These partners of employees) of the firm. Because sales may
are categorized into three groups: Japanese, fluctuate widely in any given period and because
American and other. Therefore, the resulting Japanese firms are known to have a relatively
statistical model is a multinomial logit analysis stable employment policy, employment level is
where the dependent variable assumes three used here as a measure of firm size. Of course,
categorical values for the nationalities of the there are some potential pitfalls in attempting to
partnering firms in the cooperative relationships define the boundary of a Japanese firm which
formed by Japanese firms. The model sequentially may be a member of a much larger group of
compares Japanese domestic relationships, first, companies, or a keiretsu. Its group affiliation is
with U.S.-Japan relationships, and second, with likely to have some effect on the policy and
Japanese relationships with firms of other coun- behavior of a Japanese firm. While data are not
tries. available to enable us to control for the influence
of group affiliation, this possibility and the
resulting limitation of our approach should be
Firm attributes
recognized.
The cooperative relationships considered here
are firm specific, and firm attributes are likely
Diversification (SIC4 and S1C2)
to influence the choice of cooperative partners.
The effects of firm attributes are incorporated in Numerous studies in the industrial organization
the model as covariates and their hypothesized and strategic management literatures have exam-
relationships are discussed below. ined the effects of diversification on joint venture

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424 W. Shan and W. Hamilton

formation and on corporate performance (e.g. Incumbency


Rumelt, 1974; Shan, 1990; Stopford and Wells,
1972). The prevailing hypothesis suggests that A discontinuous technological change opens up
diversification increases market power and hence opportunities for entrepreneurial firms to enter
the performance of the diversified firm (e.g. the market to develop and exploit the new
Caves, 1981; Miller, 1973). In turn, this suggests technology. When venture capital is available
that the relative advantage of foreign firms is and the environment is conducive to the formation
weaker against more diversified firms than less of startup firms, a major technological change,
diversified ones. In other words, non- or less such as the emergence of silicon technology and
diversified firms may benefit more from a biotechnology, can lead to mass entry of these
cooperative relationship with a foreign firm than firms. In Japan, however, for reasons beyond
a more diversified company. the scope of this paper, new high technology
In the context of the new biotechnology, more entrepreneurial firms are relatively rare. The new
diversified Japanese firms are more likely to entrants in the biotech-pharmaceutical industry
commercialize the technology in industries and in Japan are mostly firms which are well
sectors beyond pharmaceuticals. While American established in other industries. Interestingly,
firms have clearly established a leadership posi- established new entrants account for more than
tion in the biotech-pharmaceutical industry, the half of the member companies in Japan's biotech-
strength of commercializing the new biotechnol- nology industry association (Yoshikawa,
ogy in other industries, such as food and brewery 1989:82).
may reside with Japanese domestic firms. To tap New entrants can and do develop biotechnolog-
into these advantages, therefore, more diversified ical competence in-house. In order to ease the
firms are likely to have a larger number of entry into a new market, however, they may also
domestic cooperative relationships than less cooperate with other firms which possess such
diversified ones. Moreover, Japanese firms are competencies. In fact, as the United Nations
more likely to seek out American firms as (1988) report indicates, the latter seems to be a
international partners because they do possess popular strategy among Japanese firms. A new
the leadership position in the pharmaceutical entrant has the added incentive to cooperate with
area, and such country-specific advantages are those with known technological capabilities. In
not so evident for firms of other countries the biotech-pharmaceutical industry, they are
(Japanese Working Group on Biotechnology, American firms. Therefore, the following hypoth-
1985). esis is formulated:
The preceding arguments with repect to diversi-
fication suggest the following hypothesis: Hypothesis 3: New entrantfirms in the pharm-
aceutical industry are more likely than incum-
Hypothesis 2: The degree of diversification is bent firms to form cooperative relationships
negatively correlated with the propensity to with American firms.
form cooperative relationships with foreign
firms, particularly American firms. A dummy variable is constructed to indicate
incumbency. INCUMBENCY is equal to one if
Two variables are constructed to measure the the Japanese parent firm's business includes
degree of diversification of the sampled firm. either or both of sectors indicated by the three
SIC2 counts the number of industries, as defined digit SIC codes 283 and 512, and zero otherwise.
by the two digit SIC code, in which the sampled The two SIC codes include, respectively, the
firm operates. Because of its broad scope, manufacturing and the wholesale business of
the two-digit level really measures unrelated pharmaceutical products.
diversification, more likely to be beyond what is
meaningful for commercializing biotechnology.
Country-specific advantages
To measure the effect of related diversification,
another variable, SIC4, is constructed as a count To test our central hypothesis, our model includes
of the number of four-digit level industries in two key independent variables. The first, DRUG,
which the firm conducts business. indicates whether or not the sample cooperative

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Country-specific Advantage 425

relationship involves the commercialization of a licensing. Furthermore, 85 percent of these


pharmaceutical product. The second variable, relationships are found to be in the pharmaceu-
TECHNOLOGY, measures if the relationship tical area. If, as we argue, country-specific
entails technology transfer and licensing. advantages motivate international interfirm coop-
It is in the pharmaceutical industry where eration, we should expect cooperative relation-
American firms most clearly lead the world in ships explicitly designed to include transfer of
biotechnology innovations, according to many these advantages to involve partners of different
authoritative reports and studies cited in preced- nationalities. Therefore, the following hypothesis
ing sections. The industries covered by the is formulated:
cooperative relationships in our sample range
from pharmaceuticals, agriculture, veterinary Hypothesis 5: Japanese firms are more likely
products, chemicals, food and brewery and to form cooperative relationships involving
others. The hypothesis of country-specific advan- technology transfer or licensing with foreign
tage as a motivating factor of international firms than with other Japanese firms.
cooperative relationships can be formulated
in more concrete terms in the context of TECHNOLOGY is a dummy variable equal
biotechnology commercialization as the following: to one if the coopeative relationship entails
technology transfer or licensing, and zero other-
Hypothesis 4: It is more likely for a coopera- wise.
tive relationship to govern the commercialization
of a pharmaceutical product if it is formed with
Functional focus of cooperative agreements
an American firm than if it is formed with a
Japanese firm or a firm of another country. The cooperative relationships considered in this
study may involve different functional areas in
DRUG is a dummy variable, equal to one if the commercialization process: research, develop-
the cooperative agreement covers the commer- ment, manufacturing, marketing or combinations
cialization of a pharmaceutical product, and zero of these functions.
if otherwise. The predicted sign for this variable Research and development agreements com-
is positive when comparing Japanese partners monly involve exchange of technical data and
with American partners. information. Other than the concern about the
It might be argued that the pharmaceutical actual and potential costs of transferring these
industry is unique because of well-known regula- intangible assets, the partner with an advantage
tory and other institutional barriers to entry. in innovative capabilities may have a legitimate
Thus, international cooperation is particularly reason to worry about unintended technology
necessary to break into the market. This is not dissemination. A cooperative partner may
only true for foreign firms trying to penetrate become a potential competitor as the field
the Japanese market, but also true for Japanese advances and the world becomes more and more
firms attempting to enter foreign markets. To integrated.
support the hypothesis, the variable of 'DRUG' One unique feature in the high technology
must carry the predicted sign and be significant competition in Japan is a high level of R&D-
for American partners but not for partners of stage cooperation among Japanese firms along
other countries. Otherwise, it will simply confirm with intense competition in product market.
the uniqueness of the pharmaceutical market. The commercialization of biotechnology is no
Moreover, it is necessary to include variables exception. The UN report noted that '[o]ne of
that control for effects of functional foci, such the unique characteristics of the development of
as marketing, which may confound the effect of biotechnology (as well as of the development
'DRUG' on the dependent variable. of other technologies) in Japan is the close
cooperation between companies, . . .' (United
Nations, 1988:56). Japanese firms are also
Technology transfer and licensing
expected to form R&D relationships with foreign
Almost a quarter of the cooperative relationships firms. However, foreign firms with leading
in our sample entail technology transfer and technologies are known to be reluctant to

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426 W. Shan and W. Hamilton

form such relationships for fear of technology Hypothesis 6c: The function of manufacturing
leakage, particularly at the early stage of the is more likely to be governed by a domestic
product life cycle, when the property rights of cooperative relationship than an international one.
the proprietary knowledge cannot be clearly
delineated. Therefore, we probably will' find Hypothesis 6d: The function of marketing is
that research and development relationships more likely to be governed by an international
are more likely to be formed between Japanese cooperative relationship than a domestic one.
firms themselves than between Japanese and
foreign firms. These functions are represented by four dummy
There are relatively few cooperative relation- variables indicating if the particular function is
ships which cover the function of manufacturing. governed by the sample cooperative relationship.
This is also the link in the biotechnology value- It should be noted that these dummy variables
added chain where Japan has a comparative are not mutually exclusive so that multiple
advantage. According to the Japanese Working functions are possible.
Group on Biotechnology (1985:19), '[fjermen-
tation technology in Japan is comparable to that
in Europe, and slightly more advanced than that Timing of relationship formation
in the U.S.' Therefore, we do not expect Japanese
firms to be frequently involved in manufacturing Japanese firms are making a great effort, with
relationships with foreign firms. the encouragement and support of the Ministry
As noted earlier, marketing is a major obstacle of International Trade and Industry and other
for a foreign firm to enter and compete in the Japanese government agencies, to catch up with
Japanese market because of the regulatory and the United States in the commercialization of the
other non-tariff barriers and because of the new biotechnology. The gap is narrowing, as
different institutional characteristics of the measured either by the number of new biotechnol-
Japanese distribution channels. Most American ogy products in the pipeline (FDA, 1989) or by
biotechnology firms lack the multinational capa- the number of biotechnology-related patents filed
bilities to compete in foreign markets and can (Yoshikawa, 1989). This also reflects the natural
benefit greatly from an indigenous cooperative evolution of an emerging technology (Abernathy
partner. European and American multinational and Utterback, 1978; Hamilton, 1990). Over
companies are in a better position because of time, the initial emphasis on scientific research
their established capabilities in the Japanese and product innovation can be expected to give
market. On the other hand, marketing is one way to increased emphasis on process innovation
of the weakest links in the capabilities of and downstream commercialization efforts. Given
Japanese firms to compete in the world market. the superiority of Japanese bioprocessing capabili-
They have relied heavily, if not exclusively, on ties, the attractiveness of cooperative relation-
foreign partners to market their products abroad ships with non-Japanese firms to acquire product
(Economist, 1989). Therefore, a foreign firm is technology can be expected to decline. In general,
more likely to be the partner in a cooperative t.herefore, if the country-specific advantages
relationship that covers marketing. diminish over time, the incentives to form
The preceding discussion suggests the follow- cooperative relationships with foreign firms will
ing: also decrease.

Hypothesis 6a: The function of research in a Hypothesis 7: Over time, the frequency of
cooperative relationship is more likely to be formation of cooperative relationships with
governed by a domestic cooperative relationship foreign firms declines relative to the frequency
than an international one. of formation of cooperative relationships with
domestic firms.
Hypothesis 6b: The function of development is
more likely to be governed by a domestic TIME is the year of formation of the cooperat-
cooperative relationship than an international one. ive relationship.

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Country-specific Advantage 427

RESULTS It is significant for both Japan-U.S. and


Japan-Other comparisons (Columns 1 and 2) in
We estimated two multinomial logit models to both models. This result indicates that technology
take full advantage of available data (Maddala, transfer and licensing is a significantly dis-
1983). Extensive data were compiled on 264 tinguishing feature between international and
Japanese cooperative relationships, but the time domestic cooperative relationships formed by
of formation was available on only 173 of these. Japanese firms.
In both models, the dependent variable assumes The tests of the control variables about the
three values, equal to zero if the nationality of functional types of the cooperative relationships
the partnering firm is Japanese, one if American, have yielded some very interesting results. The
and two if a non-U.S. foreign country. Model I functions of research and manufacturing are
estimates the differentiating factors with a larger insignificant in both models. However, DEVEL-
sample (n = 264) without the time variable. OPMENT is highly significant in both columns
Model II is an expanded version of Model I. It for Model I, providing persuasive evidence that
contains the additional variables, time, and Japanese firms tend to conduct joint development
analyzes a smaller sample (n = 173). Tables 1 and programs with domestic firms (or foreign firms
2 show the descriptive statistics and correlation tend to shy away from such relationships with
matrices for Models I and II, respectively. The Japanese firms). On the other hand, MARKET-
results of the statistical analyses are provided in ING is positively signed and significant, con-
Tables 3 and 4 for Models I and II, respectively. firming that international cooperation is fre-
Our analysis shows that, for the Japan-U.S. quently used to overcome market barriers. It
comparison (Column 1 in both Tables 3 and 4), should be noted that the findings support the
only one firm attribute covariate, SIC4 is hypothesis even when we have controlled for the
significant, although both firm size and the function of marketing.
incumbency dummy adopt hypothesized signs. TIME is negatively signed in Model II for
In contrast, however, none is significant for both Japan-U.S. and Japan-Other comparisons,
Japan-'Other' comparison (Column 2 in both supporting the hypothesis that Japanese firms,
Tables 3 and 4). This is expected because as over time, turn inward for cooperative relation-
a group, 'other' does not possess distinctive ships. However, this variable is shy of significance
advantages over Japanese firms (although they for the Japan-U.S. comparison although highly
possess particular firm-specific advantages). significant for the Japan-Other comparison. The
SIC4 for 'U.S.' is negatively signed, supporting weak result may be due to the fact that the new
our hypothesis that the partnering firms of biotechnology is still in the emergent stage of its
cooperative relationships formed by smaller and evolution.
less diversified Japanese firms are more likely to
be American and less likely to be Japanese.
Similar results are obtained for Model II.
DISCUSSION
The result of SIC2 indicates, however, that
diversification in unrelated industries is not a
differentiating factor. The empirical results support the hypothesis that
In the Japan-U.S. comparison, DRUG is country-specific advantages influence inter-
found to be highly significant in both models national cooperative relationships. In testing
(p < 0.001 in Model I and p < 0.01 in Model this central hypothesis, our analysis has been
II), but is not at all significant in the Japan-'Other' facilitated and strengthened by the clear recog-
comparison in either model (Column 2). This nition that commercialization of the new biotech-
result suggests that Japanese firms tend to nology is a multi-sector phenomenon and that
cooperate significantly more with American firms American leadership in biotech-pharmaceutical
in pharmaceutical-related areas than fellow innovations is undisputed. Therefore, we were
Japanese firms or firms of other nationalities. able to isolate the effect of country-specific
Providing further support to our main hypoth- advantage in motivating the formation of inter-
esis is the result for the variable TECHNOLOGY. national cooperative relationships.

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428 W. Shan and W. Hamilton

11.10.9. 8. 7. 6. 5. 4. 3. 2. 1.
Table 12.11.10.9. 8. 7. 6. 5. 4. 3. 2. 1.
Sample Y
Size 1.
Variable Sample Y Table
DrugSIC2
SIC4 Size 2.
Variable
size: Time DrugSIC2 SIC4
n Research size:
= Marketing n Research
Technology
Incumbency Marketing
Development = Technology
Incumbency
207 Manufacturing Development
173 Manufacturing
Descriptive
Descriptiv

1984.9 8056.1
3.4855
1.5896 Mean
0.17045
0.34091
0.79545
0.38636 0.799243.5303
1.5682
0.55682
0.23864 7310.8
0.84091 Meanstatistics 0.10405
0.46821 0.22543
0.36416 0.81503
0.15029 0.51445 0.88439
statistics

Std
Std 1.8340 1.5870
(full-sized 0.30621
0.50044 0.41908
0.48259
0.35839
0.38940
0.70654
0.50124 0.57913
11539.0
0.37675 1.5499
0.40133
0.74704
0.42706
0.49770 9952.5 Dev. (reduced
0.48784
0.27110
0.47492 0.60202 Dev.

1 1
sample) sample)
-0.181
0.067 -0.181
-0.128 0.156
-0.0280.008
0.026 -0.033
0.040 -0.048
-0.085
0.094 -0.064
-0.222 0.043
0.207
0.040 -0.093
-0.010-0.079

2 2
0.005 0.149 -0.031
-0.104 0.165
-0.1400.027
-0.2080.033
-0.2520.163
0.135
-0.103
-0.022
-0.034 -0.175 0.197
0.100
-0.280

3 3
0.017 0.039
0.020 -0.149 -0.033
0.114
-0.068 0.469
-0.367
0.040
0.017
-0.1640.084
-0.042
-0.012 0.428
-0.434
4
4
-0.075-0.043
-0.062 -0.031
-0.1050.079 -0.320
-0.066
-0.055
-0.017
0.074 0.002
-0.062 -0.353
-0.087
5
5
-0.001 -0.053
0.008
0.142 0.020
0.110 0.282
-0.029
0.121
-0.0590.127 0.034
0.257
6
6 Correlation 0.029
-0.0540.016 -0.091
0.144 0.043 Correlation
0.106 0.101
0.008 0.059
-0.100
7
7
-0.045-0.093
-0.368-0.236
-0.072
-0.033
-0.262 -0.159
-0.290

8
8
-0.015
-0.233
-0.143
0.220
-0.2150.205
-0.096

9
9
-0.0380.018
-0.132
-0.062
0.024

10
10 0.113
0.173
0.169
11
0.090

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Country-specific Advantage 429
Table 3. Results of logit multinomial analysis (full- Table 4. Results of logit multinomial analysis with
sized sample) time variable (reduced-sample)

Variable Japan U.S. Others Variable Japan U.S. Others

Intercept - 0.9965 -0.2561 Intercept -363.692 787.591*


(1.401) (-0.258) (1.505) (2.374)
Size/1000 - -0.2117 -0.1655 Size/1000 - -0.1414 0.0681
(-1.302) (-0.735) (-0.805) (0.295)
SIC4 - -0.4264*** -0.2754 SIC4 - -0.2589* -0.1651
(-3.329) (-1.535) (-1.655) (-0.742)
SIC2 - 0.1978 0.2200 SIC2 - 0.1921 0.2623
(0.817) (0.610) (0.569) (0.523)
Incumbency - -0.5444 0.4936 Incumbency - -0.5089 0.8109
(-1.387) (0.859) (-1.074) (1.112)
Drug - 1.5974* -0.4804 Drug - 1.3972'"' -0.6082
(3.730) (-0.889) (2.583) (-0.842)
Technology 1.7174 1.8660`*` Technology - 1.2779' - 1.7222
(3.282) (2.814) (1.964) (1.940)
Research - 0.5645 0.3044 Research - 0.6953 -0.1443
(1.321) (0.435) (1.181) (-0.115)
Development - - 1. 1129 -1.3286" Development - -0.9752' -0.9070
(-3.137) (-2.280) (-2.157) (-1.258)
Manufacturing - -0.4729 -1.8562 Manufacturing - -0.5150 -1.4370
(-0.837) (-1.593) (-0.829) (-1.202)
Marketing - 0.9216' 1.0977 Marketing - 0.7794' 1.2390*
(2.521) (2.008) (1.699) (1.674)
Time - -0.1828 -0.3973'
Log-likelihood = -201.70
Sample size = 264 (-1.502) (-2.377)
Log-likelihood = -130.29
Sample size = 173
Two-tail tests, t-ratio in parenthesis.
p < 0.10, ** p < 0.05, '?5-' p < 0.01
Two-tail tests, t-ratio in parenthesis.
p < 0. 10, p < 0.05, p < 0.01

It should also be noted that our results refute


the possible contention that significant support cultural, institutional and economic environments
for the central hypothesis may be due to the always influence firms, many advantages and
idiosyncratic nature of international market entry technologies are firm-specific. This may or
barriers of the pharmaceutical industry since no may not reflect the technological level or the
significance was found for differentiating Japanese comparative advantage of the country of its
domestic relationships for those with non-U.S. origin.
foreign partners. Moreover, the finding that However, inasmuch as country-specific advan-
technology transfer and licensing significantly tage is an explanatory variable for the formation
differentiates international cooperative relation- of international cooperative relationships, our
ships from domestic ones lends further support analysis may shed some light on their implications
to the main hypothesis. for the dynamics of competitive advantage of
We found that the comparative advantage nations. An international joint venture may
embedded in firms of a certain nationality is an enable the firm embedded with the comparative
important motivating factor, one that has been advantage to capture more value from its
largely overlooked to date in studies of inter- advantages, be it technology or other assests,
national joint ventures. However, we do not, by because it may find it to be too costly or difficult
any means, suggest that it dominates other to exploit a foreign market. On the other hand,
possible explanatory variables of international the relationship may not only give the other
cooperative relationships, nor that it is a signifi- party a competitive edge in its own market and
cant explanatory variable for all international the right to share the returns for the technology,
joint ventures. Although the context of its it may also provide it with a 'window' to

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430 W. Shan and W. Hamilton

the leading-edge technology (Hamilton, 1985). for joint development projects between domestic
Cooperative relationships, therefore, may serve Japanese firms with the encouragement of the
as a vehicle for 'acquiring a comparative advan- Japanese government, as noted earlier.
tage,' as many suggest that Japanese firms This analysis suggests that many firms are
have been doing throughout the history of driven more by the desire to appropriate the
industrialization (e.g. Reich and Mankin, 1986). maximum value from their technologies than by
A cooperative relationship can be an efficient concerns about the international competitiveness
means to transfer or learn such organizationally of their countries. For example, although RCA
embedded advantages as technologies, know-how probably contributed to the decline of American
and other types of intangibles (Kogut, 1988). Of competitiveness in the color television industry
course, there is a risk that the owner may lose by liberally transferring its technology to Japanese
monopoly control over these assets over time firms and others, it was privately compensated
and create potential competition by fostering the with handsome royalty payments from its foreign
capabilities of the cooperative partner. For licensees. Hence, what is optimal for a firm is
example, cooperative arrangements might have not necessarily optimal for the country in which
been at least partially responsible for the shift the firm is based. In some cases, in fact, the
of competitive advantage from American to opposite might be true.
Japanese firms in the production of color Therefore, our findings have implications for
televisions and mass-produced semiconductor the international competitiveness of countries
chips. A firm must therefore consider the long- and for the formulation of public policies that
term competitive implications as well as the short- address this issue. Inasmuch as private and public
term effects of an international cooperative interests are not necessarily synchronized, public
relationship. policies might be designed to promote and protect
This issue, in fact, comes up frequently international competitive advantages of a country.
in conversations with managers of American Systematic market barriers or other restrictions
biotechnology firms who are concerned about on foreign entry may be a way to effectuate
losing their competitive edge to the Japanese. advances in the level of technological develop-
Our finding suggests that American firms are ment of a country as these measures force foreign
actually quite careful in guarding their technol- firms to share their proprietary technologies with
ogies. They tend to shy away from joint indigenous partners or forego the protected
development or manufacturing relationships market altogether.
which might provide Japanese firms with access While the United States seems to lack policies
to proprietary technology. Their cooperative that coordinate private firms in international
partners are also smaller and less diversified than competition, Japan appears to have perfected
those which are more likely to be potential such policies designed to 'acquire' competitive
competitors outside of the Japanese market. advantages in high technology industries. To-
It is interesting to note that, although foreign gether with governmental support and coordi-
firms are inclined to stay away from development nation, policies encouraging international cooper-
relationships, they seem to be quite willing to ation and transfer of technologies are an integral
engage in cooperative relationships with Japanese part of its high technology development strategies.
firms that involve technology transfer and licens- Such policies as applied to the promotion of its
ing. One plausible interpretation is that while it competitiveness in the biotech-pharmaceutical
is relatively easy to assess the value of a well- industry is best reflected in a Japanese public
defined technology and to protect the property statement that, ironically, emphatically under-
right of its owner through a contractual relation- scores the significance of our study:
ship, it is very difficult to do so if the technology
or knowhow is still in its emergent stage and still [Japanese]universities,pharmaceuticalmanufac-
under development. The lack of protection of turers and companies which are intending to
ill-defined proprietary knowhow by a cooperative enter into pharmaceuticalbusiness (breweries,
chemicalandtextilecompanies,etc.), areactively
relationship that extends into foreign jurisdictions engaging in pharmaceutical R&D with the
might discourage the formation of joint develop- assistanceof MITI, the Science and Technology
ment programs for fear of uncompensated leak- Agency, the Ministry of Health and Welfare
age. Such impediments, however, may be weaker and other public organizations.In most cases,
Japanesefirmshave importedtechnologiesfrom

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Country-specific Advantage 431
American venture businesses such as Genentech Buckley, P. J. and M. C. Casson. The Future of the
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ACKNOWLEDGEMENTS H. V. Wortzel and L. H. Wortzel (eds), Strategic
Management of Multinational Corporations: The
This paper has benefitted from insightful dis- Essentials, John Wiley, New York, 1985,
cussions with Bruce Kogut and helpful comments pp. 317-335.
Economist. 'Japanese drugs: New kid on the block',
from Ned Bowman, Benjamin Gomes-Casseres, May 6, 1989, p. 65.
Harbir Singh and two anonymous reviewers. The FDA. 'Biotech products in Japanese pipeline',
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Hussain for their research assistance. We would Fortune. 'Life sciences', October 13, 1986, pp. 32-34.
also like to gratefully acknowledge the financial Gomes-Casseres, B. 'Technological interdependence
and international R&D networks'. Working Paper,
support for this research from the Huntsman Harvard Business School, 1990.
Center for Global Competition and Leadership Hamilton, W. F. 'Corporate strategies for managing
and from a Citibank Fellowship through the Sol emerging technologies', Technology in Society, 7,
C. Snider Entrepreneurial Center at the Wharton 1985, pp. 197-212.
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strategy', European Journal of Operational
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