Competition and organization in technology intensive industries.

One hundred economists from the United States, Canada, and Europe gathered in Cambridge on December 5 and 6 for the recent NBER-Universities Research Conference on technology-intensive industries. NBER Research Associate Shane Greenstein of Northwestern University and Faculty Research Fellow Scott Stern of MIT organized this program:

Ashish Arora, Carnegie Mellon University, Andrea Fosfuri, Universitat Pompeu Fabra, and Alfonso Gambardella, University of Urbino, "Division of Labor and Transmission of Growth"

Discussants: Adam Jaffe, NBER and Brandeis University, and Sam Kortum, NBER and Boston University

Joshua Lerner, NBER and Harvard University, and Robert Merges, Boalt Hall Law School, "The Control of Technology Alliances: an Empirical Analysis of the Biotechnology Industry"

Discussants: David Audretsch, Georgia State University, and Alfonso Gambardella

Bruce Blonigen, University of Oregon, and Chris Taylor, U.S. International Trade Commission, "R and D Activity and Acquisitions in High Technology Industries: Evidence from the U.S. Electronics Industry"

Discussants: Lee Branstetter, NBER and University of California, Davis, and Bronwyn Hall, NBER and University of California, Berkeley 

Eugenio J. Miravete, INSEAD, and Jose C. Pernias, Universitat Jaume I, "Innovation Complementaries and Scale of Production"

Discussants: Rebecca Henderson, NBER and MIT, and Harumi Ito, NBER and Brown University

Eric Brynjolfsson, MIT, and Lorin Hitt, University of Pennsylvania, "Information Technology and Organizational Design: Some Evidence from Micro Data"

Discussants: Susan Athey, NBER and MIT, and Tom Hubbard, NBER and University of California, Los Angeles 

George Deltas and Eleftherios Zacharias, University of Illinois, Urbana-Champaign, "Pricing Dispersion over the Product Cycle: The Transition from the 486 to the Pentium Processor"

Discussants: Iain Cockburn NBER and University of British Columbia, and Nancy Rose, NBER and MIT

Sangin Park, State University of New York at Stony Brook, "Qualitative Analysis of Network Externalities in Competing Technology: the VCR Case"

Discussants: Neil Gandal, Tel Aviv University and Andrea Shepard, NBER and Stanford University

Louis Thomas, University of Pennsylvania, "Adopting Order of New Technologies in Evolving Markets"

Discussants: Steven Berry, NBER and Yale University, and Anita McGahan, Harvard University

Arora, Fosfuri, and Gambardella study how an independent, upstream capital good sector in a technology based industry can act as a mechanism for the transmission of growth across countries. Since the number of specialists is determined by the size of the downstream sector, the growth of the downstream sector in leading countries has beneficial effects for the growth of the downstream sector in follower countries (less developed countries, or LDCs). Using a comprehensive dataset of investments in chemical plants in the developing countries during the 1980s, the authors find that one additional specialized supplier in a given process technology would have increased the expected investment in LDCs by $100 million to $200 million, with the increases greater in more mature technologies, and for larger LDCS.

Lerner and Merges examine the determinants of control rights in technology alliances involving biotechnology firms. They undertake three case studies and a quantitative analysis of 200 alliances. Consistent with the framework they use, the allocation of control rights to the firm performing R and D increases with its financial resources. The empirical evidence is much more ambiguous on the relationship between the stage of the project at the time the alliance is signed and control rights.

Economic analysis of high-technology industries often assumes that firms' abilities to survive depend on their own internal R and D efforts. Blonigen and Taylor argue that high-technology finns may choose to specialize either in this internal growth (through R and D) strategy or in an external growth strategy of acquiring other firms or finns operations. Using a panel of 214 U.S. electronics firms over nine years to test the relationship between R and D intensity and the probability of acquisition, and controlling for traditional determinants of acquisition activity which include financial constraints, they find a strong and significant negative correlation between R and D intensity and the probability of acquisition. This suggests that electronics firms may be specializing in one activity or the other. Their results also suggest that firms with greater intangible assets, higher profitability, and lower debt-to-asset ratios are more likely to acquire.

Miravete and Pernias study the existence of strategic complementarity between product and process innovation for numerous firms in a wide range of industries. They show that general innovative strategies of Spanish firms can be considered mutually complementary and robust to the significant existence of firms unobservable heterogeneity. Their empirical evidence is consistent with small firms having a comparative advantage in successfully implementing flexible manufacturing methods.

Brynjolfsson and Hitt examine the influence of organizational design on the demand for information technology (IT) and the productivity of IT investments using data from approximately 380 U.S. firms. They find greater demand for IT in firms with greater decentralization of decision rights (especially the use of self-managing teams), and greater investments in human capital, including training and screening by education. In addition, the output elasticity of IT is higher in firms that adopt a more decentralized and human capital-intensive work system. This relationship is robust to alternative productivity specifications and measures of work systems. These findings support the idea that organizational practices are important determinants of IT demand and productivity.

Using a high frequency dataset of advertised prices in the personal computer industry, Deltas and Zacharias find, after adjusting for all observable product characteristics, that firms which were late in introducing Pentium-based computers command a higher price premium as compared to early entrants. This is true even among firms which have the same price premium for their 486-processor-based computers. Over time, the difference in the Pentium price premiums of the late versus the early entrants declines to the level of the difference in the corresponding 486 price premiums. One explanation for these results might be that the late entrants reap short-run rents from consumers who are loyal enough to have waited for their entry into the market in order to purchase. This suggests that firm identity matters over and above any other product characteristics in determining consumer willingness to pay for the product.

Park develops a model of consumers' choices among incompatible technologies and producers' pricing in the presence of network externalities. He then applies the model to analyzing the extent to which network externalities and installed bases contributed to de facto standardization of the VIIS format in the U.S. home VCR market. His results imply that: 1) the network advantage of VIIS became increasingly important during 1981-3, and although there was a push of Betamax in 1983, the network advantage was the key reason that VIIS has outsold Betamax since 1986; 2) the expected sales advantage was more important than the installed base advantage in the adoption of the VHS format, however, the installed base advantage became increasingly important as time passed; and 3) the increase in the network advantage of VHS, especially through the accumulation of a larger installed base, was an engine of tipping toward and de facto standardization of the VIIS format.

Thomas empirically examines the order in which firms adopt new technologies in the computer disk drive industry. He finds that large firms and incumbents are more likely to adopt earlier than small ones and new entrants when innovation does not rapidly make obsolete existing technology and products. He also finds, in some cases, that small firms and new entrants adopt earlier than large ones and incumbents when innovation rapidly makes obsolete existing products. These results are consistent with the economics and strategy literatures on innovation.