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

As Japanese firms increasingly erode the world-
wide competitive edge of U.S. firms in one
industry after another, there is renewed intellec-
tual interest in the international competitiveness
of nations (e.g. Cohen et al., 1984; Kennedy,
1987; Porter, 1990, Scott and Lodge, 1984).
Some scholars argue, however, that national
competitiveness has become a moot issue as
the citizenships of multinationals blur in an
increasingly globalized market and as inter-
national cooperative relationships transcend
national boundaries (Ohmae, 1987). While there
is no denying that the world market has become
more integrated than ever before, national
competitiveness remains a valid research topic
inasmuch as borders exist and political and
economic institutions differ between nation states.
In an economically integrated world, the competi-
tiveness of a country determines its path of
Key words: strategy, international, competitiveness,
cooperation and biotechnology.
of its people (Cohen, et al., 1984).
To the degree that its competitive strength
derives from the comparative advantage of its
home country, the national identity of a firm is,
justifiably, of great interest to researchers of
international competition. Although a firm may
form one or more international cooperative
relationships for economic, strategic and other
reasons similar to those that drive it to domestic
partnerships, an international cooperative venture
may provide the firm with access to country-
specific advantages embedded in its partners.
From this perspective, international cooperative
relationships may be viewed as a vehicle to tap
into the comparative advantages of countries.
Furthermore, to the extent that country-
specific advantages help explain the formation
of international cooperative relationships, one
should find a systematic pattern in the forms 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
and other factors in differentiating domestic and
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
biotechnology.
The next section reviews the relevant literature
which motivates the study. This is followed by a
discussion of biotechnology commercialization
and a description of the data and methodology
used in the study. The variables and hypotheses
to be tested are developed in detail, followed by
a discussion of the results of the empirical
analyses.
MOTIVATION OF THE STUDY
There is a growing literature on the causes and
motivations of interfirm cooperative relation-
ships, defined as the intermediate modes of
organization between the arm's-length spot mar-
ket transaction and the complete merger. Several
reasons may be offered to explain cooperative
behavior (Kogut, 1988). Firms may establish a
cooperative relationship because it is the most
efficient organization form, in terms of trans-
action, production and other costs, to achieve
its purposes (e.g. Hennart, 1986; Shan, 1987;
Stuckey, 1983; Williamson, 1983). Cooperative
relationships allow partnering firms to realize
economies of 'synergies' as a result of pooling
resources, production rationalization, risk
reduction and utilization of assets to the efficient
scale and scope (Contractor and Lorange, 1987;
Harrigan, 1985). Cooperative ventures are also
formed as a strategic response to the convergence
of technologies or interdependence among inno-
vation processes (Gomes-Casseres, 1990; Teece,
1986b).
Although similar economic and strategic con-
siderations motivate firms to form international
cooperative relationships, the characteristics and
institutions of the foreign market are likely to
differ from the domestic setting. In his pioneering
work, Hymer (1976) theorizes that the multi-
national phenomenon be explained by firm-
specific advantages. Thus, advantages possessed
by multinational firms outweigh the disadvantages
of being non-indigenous. Moreover, market
imperfection prevents the multinational from
transferring its advantages to indigenous firms
through simple market exchanges. Market imper-
fection may exist either in the form of non-
competitive market structures or in the form of
transaction costs implications (Casson, 1987).
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Multinational corporations are able to circumvent
these costs because of their possession of internal-
ization advantages (Buckley and Casson, 1976;
Dunning, 1977, 1985; Rugman, 1981, Teece,
1986a.)
The theory of multinational operation and
recent studies on the international competi-
tiveness of nations also point to another source
of advantage related either to specific locations
or to the country of origin of the firm possessing
such advantages (Buckley and Casson, 1976;
Casson, 1979; Dunning, 1977, 1985). For one
reason or another, firms of a particular nationality
may have a certain advantage or competitive
edge over firms of other nationalities. These
comparative advantages define the pattern of
international production and competitive advan-
tages of nations (Dunning, 1979, Porter, 1990).
As Dunning (1985:318) explains:
Japanesefirmshave a comparativeadvantagein
the foreign productionof textiles and clothing
and consumer electronics; U.K. firms in food
and tobacco products;Swedishfirmsin mechan-
ical and electrical engineering; West German
firms in chemicals, and U.S. firms in transport
equipment. Such differences as these can be
explainedonly by an examinationof the charac-
teristics of the endowmentsof the countries in
whichthe multinationalenterprisesoperate, and
especiallythose of the home country, ....
In other words, the international competitive
advantages of firms in different industries may
reflect the comparative advantages of nations
embedded in them. Similarly, the underlying
comparative advantages of a nation may provide
its firms with a competitive advantage at certain
links of the value-added chain as, for example,
in R&D or manufacturing. Moreover, to the
extent that there exist large institutional differ-
ences between markets, the competitive advan-
tages of an indigenous firm may derive from
its position in the network of organizational
relationships crucial for the efficient and effective
operation of a business, from its familiarity
with the local culture, customs and market
characteristics or from simply being an indigenous
firm which enjoys preferential treatment by the
local government.
The complementarity of country-specific advan-
tages embedded in foreign and indigenous firms
forms the basis for international cooperation

through which these advantages can be exploited.
It is therefore our central hypothesis in this paper
that country-specific advantages motivate the
formation of international cooperative agree-
ments. We feel that this research is worthwhile
because, to the degree that these international
cooperative relationships facilitate transfers and
even migration of country-specific advantages
across national boundaries, it may provide
important insight into their effect on the inter-
national competitiveness of nations.
If, indeed, country-specific advantages moti-
vate the formation of cooperative relationships,
both the form and content of these relationships
with firms of a particular nationality should
reflect the comparative advantage or competitive
strength of that country. We test this hypothesis
in the following sections with a sample of
international and domestic cooperative relation-
ships formed by Japanese firms. The statistical
procedure essentially involves testing the signifi-
cance of the variables that capture country-
specific advantages and differentiate relationships
with partners of different national origins. To
isolate the effect of these variables, we control
for firm-specific attributes and the functionalities
of the sample cooperative relationships which
may also explain the country choice of cooperative
partners.
INDUSTRY BACKGROUND
The cooperative relationships considered in this
study were formed by Japanese firms in the
commercialization of biotechnology. Broadly
defined, biotechnology is the industrial appli-
cation of biological organisms, systems or pro-
cesses. By this definition, biotechnology has been
used throughout the history of civilization in
wineries, bakeries, and more recently in the
fermentation of antibiotics and in the preparation
of amino acids which are important to the modern
pharmaceutical, food and brewery industries. The
traditional biotechnology can be described as the
human effort to select micro-organisms and to
manipulate their environment systematically to
achieve some specific purpose.
Recent developments in molecular biology
and biochemistry have produced important new
technologies, including genetic engineering
(recombinant DNA) and cell fusion (hybridoma
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Country-specific Advantage 421
technology). These and related techniques consti-
tute the 'new' biotechnology, and make it possible
for the first time to manipulate the inner structure
of micro-organisms, thereby allowing the develop-
ment of significant new industrial processes and
products. Therefore, the distinction between the
traditional and the new biotechnologies is as
sharp as that between organic chemistry and
molecular biology.
This distinction is an important one because
firms with years of experience with the traditional
technology may have no competence at all in
the new one. Although Japanese firms are
internationally recognized for their expertise
in traditional fermentation technologies, for
example, they generally lag behind American
firms in biotech-pharmaceutical innovation
(FDA, 1989; Japanese Working Group on
Biotechnology, 1985). The commercial potential
of the new biotechnology is being pursued in a
number of industry sectors, including pharmaceu-
ticals, argiculture, chemicals, and the food and
brewery industries.
To date, the focus of biotechnology commer-
cialization effort in the United States has been the
development of new therapeutic and diagnostic
products. The clear American advantage in
biotech-pharmaceutical developments (Miller
and Young; 1989) derives from three principal
sources:
a. world leadership in biomedical research
resulting from decades of governmental
support for fundamental research in the
biological and medical sciences through the
National Institutes of Health, the world's
pre-eminent biomedical research institution.
Total U.S. public and private expenditures
for life sciences and biomedical research
exceed those of all other nations combined
(Fortune, 1986).
b. An aggressive entrepreneurial culture, sup-
ported by favorable labor and capital mar-
kets, antitrust protection and tax policies.
This has resulted in hundreds of entrepre-
neurial biotechnology companies supported
by an active venture capital industry in their
pursuit of commercialization opportunities.
c. long-standing leadership in new product
innovation in the pharmaceutical industry,
the focus of most early biotechnology com-
mercialization efforts (Miller and Young,
422 W. Shan and W. Hamilton
1989). This leadership position is supported
by high levels of R&D expenditures for
biotechnology, roughly three times those
committed to biotechnology in Japan
(Fortune, 1986).
Together these strengths constitute an impres-
sive country-specific advantage for American
firms pursuing biotechnology applications in the
pharmaceutical industry.
In Japan, the new biotechnology has been
viewed as the last high technology of the twentieth
centry (Office of Technology Assessment, 1984).
One of Japan's stated strategic objectives is to use
innovation in biotechnology as the springboard for
launching its domestic pharmaceutical industry
into a leadership position in world markets.
Historically, the sucess of the Japanese pharma-
ceutical industry was based on imported technol-
ogies and products (Yoshikawa, 1989). Unlike
other industries where Japanese firms generate
a large portion of their income from foreign
markets, exports currently account for only 2
percent of Japan's pharmaceutical output. Rather
than continue to act as distributors of pharmaceu-
ticals developed abroad, the goals of major
Japanese pharmaceutical firms are now 'to
develop, manufacture and sell drugs for world-
wide markets through our own network' (Business
Week, 1990). Looking ahead, some Japanese
leaders assert that Japan will win the global
competition in pharmaceuticals as it did in the
color TV and semiconductor industries.
Japan is not without clear comparative advan-
tages to support this competitive reversal:
a. highly respected strengths in bioprocessing
technologies, particularly fermentation,
which are central to efficient scale-up and
production of new biotechnology products,
b. a regulatory climate which heavily favors
innovative companies and products in com-
parison with the U.S. system which facilitates
approvals of 'me-too' products,
c. barriers to foreign entry. Despite efforts to
liberalize the governmental approval process,
it remains extremely difficult for most foreign
firms to negotiate the necessary approvals
and to manage product distribution and sales
without a Japanese partner,
d. availability of significant, long-term financial
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support from established firms for biotechnol-
ogy-related programs.
To capitalize on these substantial national
strengths and to overcome the apparent gaps in
science and technology, the Japanese government
has actively supported the development and
commercialization of biotechnology through the
Research Association for Biotechnology, a coop-
erative research effort organized by the Ministry
of International Trade and Industry (Miller, 1986;
United Nations, 1988.) Japanese firms have also
made extensive use of cooperative agreements
with both domestic and foreign partners (Roberts
and Mizouchi, 1989). A report by the UN
Center on Transnational Corporations describes
Japanese strategies for biotechnology commer-
cialization:
Japanese strategiesin biotechnologyhave typi-
cally involved setting up joint ventures and
licensingalreadydevelopedtechnologies,as well
as marketing agreements to avoid the time-
consuming process of starting from scratch. . . At
the same time these companiesare now initiating
in-houseresearchand developmentprogrammes
(United Nations, 1988:56).
While most Japanese partners seek to bypass
years of research and gain access to new
technologies or products through agreements
with foreign partners, some also seek access to
foreign markets. Many U.S. biotechnology firms,
on the other hand, see such cooperative agree-
ments as vehicles to finance expensive and risky
developmental programs and to gain access to
the rapidly growing Japanese market, charac-
terized, by some, as the world's most promising
market for drugs because of the health-conscious,
aging Japanese population (Economist, 1989).
DATA AND METHODOLOGY
The cooperative relationship formed by a
Japanese firm with either another Japanese firm
or a foreign firm is the unit of analysis used in
this study. An initial listing of Japanese firms
with potential involvement in biotechnology was
compiled from two primary sources: Bioscan, a
worldwide commercial directory of biotechnology
companies, and an extensive research data base
 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.
Rumelt, 1974; Shan, 1990; Stopford and Wells,
1972). The prevailing hypothesis suggests that
diversification increases market power and hence
the performance of the diversified firm (e.g.
Caves, 1981; Miller, 1973). In turn, this suggests
that the relative advantage of foreign firms is
weaker against more diversified firms than less
diversified ones. In other words, non- or less
diversified firms may benefit more from a
cooperative relationship with a foreign firm than
a more diversified company.
In the context of the new biotechnology, more
diversified Japanese firms are more likely to
commercialize the technology in industries and
sectors beyond pharmaceuticals. While American
firms have clearly established a leadership posi-
tion in the biotech-pharmaceutical industry, the
strength of commercializing the new biotechnol-
ogy in other industries, such as food and brewery
may reside with Japanese domestic firms. To tap
into these advantages, therefore, more diversified
firms are likely to have a larger number of
domestic cooperative relationships than less
diversified ones. Moreover, Japanese firms are
more likely to seek out American firms as
international partners because they do possess
the leadership position in the pharmaceutical
area, and such country-specific advantages are
not so evident for firms of other countries
(Japanese Working Group on Biotechnology,
1985).
The preceding arguments with repect to diversi-
fication suggest the following hypothesis:
Hypothesis 2: The degree of diversification is
negatively correlated with the propensity to
form cooperative relationships with foreign
firms, particularly American firms.
Two variables are constructed to measure the
degree of diversification of the sampled firm.
SIC2 counts the number of industries, as defined
by the two digit SIC code, in which the sampled
firm operates. Because of its broad scope,
the two-digit level really measures unrelated
diversification, more likely to be beyond what is
meaningful for commercializing biotechnology.
To measure the effect of related diversification,
another variable, SIC4, is constructed as a count
of the number of four-digit level industries in
which the firm conducts business.
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Incumbency
A discontinuous technological change opens up
opportunities for entrepreneurial firms to enter
the market to develop and exploit the new
technology. When venture capital is available
and the environment is conducive to the formation
of startup firms, a major technological change,
such as the emergence of silicon technology and
biotechnology, can lead to mass entry of these
firms. In Japan, however, for reasons beyond
the scope of this paper, new high technology
entrepreneurial firms are relatively rare. The new
entrants in the biotech-pharmaceutical industry
in Japan are mostly firms which are well
established in other industries. Interestingly,
established new entrants account for more than
half of the member companies in Japan's biotech-
nology industry association (Yoshikawa,
1989:82).
New entrants can and do develop biotechnolog-
ical competence in-house. In order to ease the
entry into a new market, however, they may also
cooperate with other firms which possess such
competencies. In fact, as the United Nations
(1988) report indicates, the latter seems to be a
popular strategy among Japanese firms. A new
entrant has the added incentive to cooperate with
those with known technological capabilities. In
the biotech-pharmaceutical industry, they are
American firms. Therefore, the following hypoth-
esis is formulated:
Hypothesis 3: New entrantfirms in the pharm-
aceutical industry are more likely than incum-
bent firms to form cooperative relationships
with American firms.
A dummy variable is constructed to indicate
incumbency. INCUMBENCY is equal to one if
the Japanese parent firm's business includes
either or both of sectors indicated by the three
digit SIC codes 283 and 512, and zero otherwise.
The two SIC codes include, respectively, the
manufacturing and the wholesale business of
pharmaceutical products.
Country-specific advantages
To test our central hypothesis, our model includes
two key independent variables. The first, DRUG,
indicates whether or not the sample cooperative

relationship involves the commercialization of a
pharmaceutical product. The second variable,
TECHNOLOGY, measures if the relationship
entails technology transfer and licensing.
It is in the pharmaceutical industry where
American firms most clearly lead the world in
biotechnology innovations, according to many
authoritative reports and studies cited in preced-
ing sections. The industries covered by the
cooperative relationships in our sample range
from pharmaceuticals, agriculture, veterinary
products, chemicals, food and brewery and
others. The hypothesis of country-specific advan-
tage as a motivating factor of international
cooperative relationships can be formulated
in more concrete terms in the context of
biotechnology commercialization as the following:
Hypothesis 4: It is more likely for a coopera-
tive relationship to govern the commercialization
of a pharmaceutical product if it is formed with
an American firm than if it is formed with a
Japanese firm or a firm of another country.
DRUG is a dummy variable, equal to one if
the cooperative agreement covers the commer-
cialization of a pharmaceutical product, and zero
if otherwise. The predicted sign for this variable
is positive when comparing Japanese partners
with American partners.
It might be argued that the pharmaceutical
industry is unique because of well-known regula-
tory and other institutional barriers to entry.
Thus, international cooperation is particularly
necessary to break into the market. This is not
only true for foreign firms trying to penetrate
the Japanese market, but also true for Japanese
firms attempting to enter foreign markets. To
support the hypothesis, the variable of 'DRUG'
must carry the predicted sign and be significant
for American partners but not for partners of
other countries. Otherwise, it will simply confirm
the uniqueness of the pharmaceutical market.
Moreover, it is necessary to include variables
that control for effects of functional foci, such
as marketing, which may confound the effect of
'DRUG' on the dependent variable.
Technology transfer and licensing
Almost a quarter of the cooperative relationships
in our sample entail technology transfer and
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Country-specific Advantage 425
licensing. Furthermore, 85 percent of these
relationships are found to be in the pharmaceu-
tical area. If, as we argue, country-specific
advantages motivate international interfirm coop-
eration, we should expect cooperative relation-
ships explicitly designed to include transfer of
these advantages to involve partners of different
nationalities. Therefore, the following hypothesis
is formulated:
Hypothesis 5: Japanese firms are more likely
to form cooperative relationships involving
technology transfer or licensing with foreign
firms than with other Japanese firms.
TECHNOLOGY is a dummy variable equal
to one if the coopeative relationship entails
technology transfer or licensing, and zero other-
wise.
Functional focus of cooperative agreements
The cooperative relationships considered in this
study may involve different functional areas in
the commercialization process: research, develop-
ment, manufacturing, marketing or combinations
of these functions.
Research and development agreements com-
monly involve exchange of technical data and
information. Other than the concern about the
actual and potential costs of transferring these
intangible assets, the partner with an advantage
in innovative capabilities may have a legitimate
reason to worry about unintended technology
dissemination. A cooperative partner may
become a potential competitor as the field
advances and the world becomes more and more
integrated.
One unique feature in the high technology
competition in Japan is a high level of R&D-
stage cooperation among Japanese firms along
with intense competition in product market.
The commercialization of biotechnology is no
exception. The UN report noted that '[o]ne of
the unique characteristics of the development of
biotechnology (as well as of the development
of other technologies) in Japan is the close
cooperation between companies, . . .' (United
Nations, 1988:56). Japanese firms are also
expected to form R&D relationships with foreign
firms. However, foreign firms with leading
technologies are known to be reluctant to
426 W. Shan and W. Hamilton
form such relationships for fear of technology
leakage, particularly at the early stage of the
product life cycle, when the property rights of
the proprietary knowledge cannot be clearly
delineated. Therefore, we probably will' find
that research and development relationships
are more likely to be formed between Japanese
firms themselves than between Japanese and
foreign firms.
There are relatively few cooperative relation-
ships which cover the function of manufacturing.
This is also the link in the biotechnology value-
added chain where Japan has a comparative
advantage. According to the Japanese Working
Group on Biotechnology (1985:19), '[fjermen-
tation technology in Japan is comparable to that
in Europe, and slightly more advanced than that
in the U.S.' Therefore, we do not expect Japanese
firms to be frequently involved in manufacturing
relationships with foreign firms.
As noted earlier, marketing is a major obstacle
for a foreign firm to enter and compete in the
Japanese market because of the regulatory and
other non-tariff barriers and because of the
different institutional characteristics of the
Japanese distribution channels. Most American
biotechnology firms lack the multinational capa-
bilities to compete in foreign markets and can
benefit greatly from an indigenous cooperative
partner. European and American multinational
companies are in a better position because of
their established capabilities in the Japanese
market. On the other hand, marketing is one
of the weakest links in the capabilities of
Japanese firms to compete in the world market.
They have relied heavily, if not exclusively, on
foreign partners to market their products abroad
(Economist, 1989). Therefore, a foreign firm is
more likely to be the partner in a cooperative
relationship that covers marketing.
The preceding discussion suggests the follow-
ing:
Hypothesis 6a: The function of research in a
cooperative relationship is more likely to be
governed by a domestic cooperative relationship
than an international one.
Hypothesis 6b: The function of development is
more likely to be governed by a domestic
cooperative relationship than an international one.
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Hypothesis 6c: The function of manufacturing
is more likely to be governed by a domestic
cooperative relationship than an international one.
Hypothesis 6d: The function of marketing is
more likely to be governed by an international
cooperative relationship than a domestic one.
These functions are represented by four dummy
variables indicating if the particular function is
governed by the sample cooperative relationship.
It should be noted that these dummy variables
are not mutually exclusive so that multiple
functions are possible.
Timing of relationship formation
Japanese firms are making a great effort, with
the encouragement and support of the Ministry
of International Trade and Industry and other
Japanese government agencies, to catch up with
the United States in the commercialization of the
new biotechnology. The gap is narrowing, as
measured either by the number of new biotechnol-
ogy products in the pipeline (FDA, 1989) or by
the number of biotechnology-related patents filed
(Yoshikawa, 1989). This also reflects the natural
evolution of an emerging technology (Abernathy
and Utterback, 1978; Hamilton, 1990). Over
time, the initial emphasis on scientific research
and product innovation can be expected to give
way to increased emphasis on process innovation
and downstream commercialization efforts. Given
the superiority of Japanese bioprocessing capabili-
ties, the attractiveness of cooperative relation-
ships with non-Japanese firms to acquire product
technology can be expected to decline. In general,
t.herefore, if the country-specific advantages
diminish over time, the incentives to form
cooperative relationships with foreign firms will
also decrease.
Hypothesis 7: Over time, the frequency of
formation of cooperative relationships with
foreign firms declines relative to the frequency
of formation of cooperative relationships with
domestic firms.
TIME is the year of formation of the cooperat-
ive relationship.

RESULTS
We estimated two multinomial logit models to
take full advantage of available data (Maddala,
1983). Extensive data were compiled on 264
Japanese cooperative relationships, but the time
of formation was available on only 173 of these.
In both models, the dependent variable assumes
three values, equal to zero if the nationality of
the partnering firm is Japanese, one if American,
and two if a non-U.S. foreign country. Model I
estimates the differentiating factors with a larger
sample (n = 264) without the time variable.
Model II is an expanded version of Model I. It
contains the additional variables, time, and
analyzes a smaller sample (n = 173). Tables 1 and
2 show the descriptive statistics and correlation
matrices for Models I and II, respectively. The
results of the statistical analyses are provided in
Tables 3 and 4 for Models I and II, respectively.
Our analysis shows that, for the Japan-U.S.
comparison (Column 1 in both Tables 3 and 4),
only one firm attribute covariate, SIC4 is
significant, although both firm size and the
incumbency dummy adopt hypothesized signs.
In contrast, however, none is significant for
Japan-'Other' comparison (Column 2 in both
Tables 3 and 4). This is expected because as
a group, 'other' does not possess distinctive
advantages over Japanese firms (although they
possess particular firm-specific advantages).
SIC4 for 'U.S.' is negatively signed, supporting
our hypothesis that the partnering firms of
cooperative relationships formed by smaller and
less diversified Japanese firms are more likely to
be American and less likely to be Japanese.
Similar results are obtained for Model II.
The result of SIC2 indicates, however, that
diversification in unrelated industries is not a
differentiating factor.
In the Japan-U.S. comparison, DRUG is
found to be highly significant in both models
(p < 0.001 in Model I and p < 0.01 in Model
II), but is not at all significant in the Japan-'Other'
comparison in either model (Column 2). This
result suggests that Japanese firms tend to
cooperate significantly more with American firms
in pharmaceutical-related areas than fellow
Japanese firms or firms of other nationalities.
Providing further support to our main hypoth-
esis is the result for the variable TECHNOLOGY.
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Country-specific Advantage 427
It is significant for both Japan-U.S. and
Japan-Other comparisons (Columns 1 and 2) in
both models. This result indicates that technology
transfer and licensing is a significantly dis-
tinguishing feature between international and
domestic cooperative relationships formed by
Japanese firms.
The tests of the control variables about the
functional types of the cooperative relationships
have yielded some very interesting results. The
functions of research and manufacturing are
insignificant in both models. However, DEVEL-
OPMENT is highly significant in both columns
for Model I, providing persuasive evidence that
Japanese firms tend to conduct joint development
programs with domestic firms (or foreign firms
tend to shy away from such relationships with
Japanese firms). On the other hand, MARKET-
ING is positively signed and significant, con-
firming that international cooperation is fre-
quently used to overcome market barriers. It
should be noted that the findings support the
hypothesis even when we have controlled for the
function of marketing.
TIME is negatively signed in Model II for
both Japan-U.S. and Japan-Other comparisons,
supporting the hypothesis that Japanese firms,
over time, turn inward for cooperative relation-
ships. However, this variable is shy of significance
for the Japan-U.S. comparison although highly
significant for the Japan-Other comparison. The
weak result may be due to the fact that the new
biotechnology is still in the emergent stage of its
evolution.
DISCUSSION
The empirical results support the hypothesis that
country-specific advantages influence inter-
national cooperative relationships. In testing
this central hypothesis, our analysis has been
facilitated and strengthened by the clear recog-
nition that commercialization of the new biotech-
nology is a multi-sector phenomenon and that
American leadership in biotech-pharmaceutical
innovations is undisputed. Therefore, we were
able to isolate the effect of country-specific
advantage in motivating the formation of inter-
national cooperative relationships.
 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
for the central hypothesis may be due to the
idiosyncratic nature of international market entry
barriers of the pharmaceutical industry since no
significance was found for differentiating Japanese
domestic relationships for those with non-U.S.
foreign partners. Moreover, the finding that
technology transfer and licensing significantly
differentiates international cooperative relation-
ships from domestic ones lends further support
to the main hypothesis.
We found that the comparative advantage
embedded in firms of a certain nationality is an
important motivating factor, one that has been
largely overlooked to date in studies of inter-
national joint ventures. However, we do not, by
any means, suggest that it dominates other
possible explanatory variables of international
cooperative relationships, nor that it is a signifi-
cant explanatory variable for all international
joint ventures. Although the context of its
cultural, institutional and economic environments
always influence firms, many advantages and
technologies are firm-specific. This may or
may not reflect the technological level or the
comparative advantage of the country of its
origin.
However, inasmuch as country-specific advan-
tage is an explanatory variable for the formation
of international cooperative relationships, our
analysis may shed some light on their implications
for the dynamics of competitive advantage of
nations. An international joint venture may
enable the firm embedded with the comparative
advantage to capture more value from its
advantages, be it technology or other assests,
because it may find it to be too costly or difficult
to exploit a foreign market. On the other hand,
the relationship may not only give the other
party a competitive edge in its own market and
the right to share the returns for the technology,
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).
Cooperative relationships, therefore, may serve
as a vehicle for 'acquiring a comparative advan-
tage,' as many suggest that Japanese firms
have been doing throughout the history of
industrialization (e.g. Reich and Mankin, 1986).
A cooperative relationship can be an efficient
means to transfer or learn such organizationally
embedded advantages as technologies, know-how
and other types of intangibles (Kogut, 1988). Of
course, there is a risk that the owner may lose
monopoly control over these assets over time
and create potential competition by fostering the
capabilities of the cooperative partner. For
example, cooperative arrangements might have
been at least partially responsible for the shift
of competitive advantage from American to
Japanese firms in the production of color
televisions and mass-produced semiconductor
chips. A firm must therefore consider the long-
term competitive implications as well as the short-
term effects of an international cooperative
relationship.
This issue, in fact, comes up frequently
in conversations with managers of American
biotechnology firms who are concerned about
losing their competitive edge to the Japanese.
Our finding suggests that American firms are
actually quite careful in guarding their technol-
ogies. They tend to shy away from joint
development or manufacturing relationships
which might provide Japanese firms with access
to proprietary technology. Their cooperative
partners are also smaller and less diversified than
those which are more likely to be potential
competitors outside of the Japanese market.
It is interesting to note that, although foreign
firms are inclined to stay away from development
relationships, they seem to be quite willing to
engage in cooperative relationships with Japanese
firms that involve technology transfer and licens-
ing. One plausible interpretation is that while it
is relatively easy to assess the value of a well-
defined technology and to protect the property
right of its owner through a contractual relation-
ship, it is very difficult to do so if the technology
or knowhow is still in its emergent stage and still
under development. The lack of protection of
ill-defined proprietary knowhow by a cooperative
relationship that extends into foreign jurisdictions
might discourage the formation of joint develop-
ment programs for fear of uncompensated leak-
age. Such impediments, however, may be weaker
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for joint development projects between domestic
Japanese firms with the encouragement of the
Japanese government, as noted earlier.
This analysis suggests that many firms are
driven more by the desire to appropriate the
maximum value from their technologies than by
concerns about the international competitiveness
of their countries. For example, although RCA
probably contributed to the decline of American
competitiveness in the color television industry
by liberally transferring its technology to Japanese
firms and others, it was privately compensated
with handsome royalty payments from its foreign
licensees. Hence, what is optimal for a firm is
not necessarily optimal for the country in which
the firm is based. In some cases, in fact, the
opposite might be true.
Therefore, our findings have implications for
the international competitiveness of countries
and for the formulation of public policies that
address this issue. Inasmuch as private and public
interests are not necessarily synchronized, public
policies might be designed to promote and protect
international competitive advantages of a country.
Systematic market barriers or other restrictions
on foreign entry may be a way to effectuate
advances in the level of technological develop-
ment of a country as these measures force foreign
firms to share their proprietary technologies with
indigenous partners or forego the protected
market altogether.
While the United States seems to lack policies
that coordinate private firms in international
competition, Japan appears to have perfected
such policies designed to 'acquire' competitive
advantages in high technology industries. To-
gether with governmental support and coordi-
nation, policies encouraging international cooper-
ation and transfer of technologies are an integral
part of its high technology development strategies.
Such policies as applied to the promotion of its
competitiveness in the biotech-pharmaceutical
industry is best reflected in a Japanese public
statement that, ironically, emphatically under-
scores the significance of our study:
[Japanese]universities,pharmaceuticalmanufac-
turers and companies which are intending to
enter into pharmaceuticalbusiness (breweries,
chemicalandtextilecompanies,etc.), areactively
engaging in pharmaceutical R&D with the
assistanceof MITI, the Science and Technology
Agency, the Ministry of Health and Welfare
and other public organizations.In most cases,
Japanesefirmshave importedtechnologiesfrom

American venture businesses such as Genentech
and Genex, or have developed technology jointly
with them. Development of human insulin,
alpha, beta and gamma interferon is under way
using the imported technologies. Recently the
Ministry of Health and Welfare has announced
the yardsticks for licensing production (or
import) of pharmaceuticals and a draft yardsticks
for pharmaceutical production facilities. The
development of new drugs using biotechnology
in Japan is expected to accelerate under these
circumstances (Japanese Working Group on
Biotechnology, 1985:26-27).
The results of our analysis and their implications
for international competition are generalizable to
the extent that such practices and policies are
pursued in other high technology industries. It
seems apparent that international cooperative
relationships have played an important role in
the dissemination of advanced technologies and
the rapid globalization of new industries. How-
ever, to provide conclusive evidence on the effect
of international cooperative relationships on the
future competitiveness of nations, it will clearly
be necessary in the future to examine a larger
cross section of industries and to trace the
longitudinal development of these industries
beyond their emergent stage. The current
research, as a modest step in that direction,
demonstrates the potential fruitfulness of such
an approach.
ACKNOWLEDGEMENTS
This paper has benefitted from insightful dis-
cussions with Bruce Kogut and helpful comments
from Ned Bowman, Benjamin Gomes-Casseres,
Harbir Singh and two anonymous reviewers. The
authors wish to thank Amy Glass and Kashif
Hussain for their research assistance. We would
also like to gratefully acknowledge the financial
support for this research from the Huntsman
Center for Global Competition and Leadership
and from a Citibank Fellowship through the Sol
C. Snider Entrepreneurial Center at the Wharton
School.
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