Formation of the appropriability regime: strategic and practical considerations.

SUMMARY

Facilitated by improved networks and communication, knowledge spills over to competitors more easily than before, thus creating an appropriability problem. Consequently, protection of intangibles calls for new approaches. Companies have various means of protection at their disposal, but creating barriers against imitation also has another side to it; transfer of knowledge in situations requiring knowledge sharing may be unintentionally obstructed. The aim of this study is to increase understanding of how firms can balance knowledge protection and sharing so as to benefit most from their knowledge assets. Thus, knowledge protection is approached through an examination of the appropriability regime of a firm, and its formation among 299 firms.

KEYWORDS

appropriability regime; protection mechanisms; imitation; knowledge sharing; intellectual property; innovation performance

INTRODUCTION

In recent decades the transition from an industrial economy to an information economy has affected the ways in which companies operate and establish competitive advantages. While the industrial economy was to a large extent driven by economies of scale, the information economy has made it natural to put more emphasis on knowledge (Shapiro & Varian 1999; David & Foray 2002). As a result, the importance of intangible weighed against tangible assets has increased (Graham & Mowery 2003; Teece 2000). However, creating and maintaining competitive advantage based on knowledge is also very challenging. The markets have become deregulated, and competition has sharpened as a result of the complex networks and increased channels of communication. One major consequence of the changes, and at the same time a problem related to sustaining competitive advantage, is that the benefits of producing new knowledge and know-how often spill over to the competitors, thus creating an appropriability problem (e.g. Arrow 1962; Scherer 1999; see also Knott et al. 2004 on spillovers). According to evolutionary logic, more productive and more profitable techniques, routines, and capabilities replace less productive ones, firstly because the best-practice firms that use them grow and invest in further innovation, and secondly because the more profitable technologies are imitated and adopted by other companies (Dosi & Nelson 1994; see also Foss 1997). This is especially true with codified knowledge or information that, because of its public-good nature, can be captured and copied relatively easily and cost-effectively (Nelson 1959; Arrow 1962).

The innovator is not completely vulnerable to imitation, however. Companies have various means of protection at their disposal, and by taking advantage of these mechanisms they can make intangibles more non-transferable, and consequently profit from their knowledge assets. The mechanisms make it possible for them to avert or delay imitation of their core intangibles, which enables them to earn (temporary) monopoly rents and other quasi rents. Protecting intellectual assets can be very challenging, however. Economic and technical developments, as well as the internationalization of trade, have changed institutional protection systems (e.g. patent protection) at least to some extent, and have affected the possibilities of concealing knowledge on a more general level, such as in terms of utilizing lead time or practical ways of concealment. For instance, under the growing competitive pressure and harmonization of legislation over national borders, patent protection has been expanding to new areas, such as computer software, and it also has been strengthening (e.g. Chesbrough 2003). The mobility of knowledge has increased as people are moving between firms and even countries more frequently, and as information and communications technologies have changed the ways in which information is acquired and transferred. In particular, the expansion and utilization of global networks such as the Internet have facilitated the flow of information. Increasingly common ways of distributing products via the Internet have decreased firms' ability to fight piracy and copying, and lead-time advantage is thus shortening.

Although some of the changes have improved the possibilities of firms to keep their knowledge assets proprietary, it still is much easier to protect tangible resources and property in a more concrete form. In the case of intangibles, there are many factors that make them flow out of the company. Besides, the effects of protecting intangibles or those of increased knowledge flows are not always unambiguous, and the changes have also affected companies' chances of appropriation. In fact, protection may not be necessary in the first place. According to the Open Innovation Model, for example, control over intellectual property may not be that important, but the capability to utilize both internal and external sources of ideas and paths to market is (Chesbrough 2003). Protection may even end up being harmful: there are many stories about patent disputes ruining a company's reputation, and about intra-firm secrecy deteriorating employee loyalty and motivation (Hannah 2005). Consequently, the goal should not be the maximization of protection, but rather the maximization of expected net profits from knowledge assets (Shapiro & Varian 1999)--in other words, maximizing the efficiency of appropriability regime in the competitive sense. Accordingly, it is important to know how the appropriability regime forms and what kind of factors lie behind the possibilities to make it most efficient considering the company's competitive advantage and position.

STRIVING FOR MARKET IMPERFECTIONS TO GAIN COMPETITIVE ADVANTAGE

The changes that companies have faced in their business environment have been clearly reflected in the theoretical developments. Efforts have been made in the field of economics-based strategy research to understand how competitive advantage can be achieved and sustained on the firm level, as well as why and how companies end up performing differently even in the same industry when facing quite similar opportunities and threats. The Resource Based View (e.g. Penrose 1959; Wernerfelt 1984) focuses on isolation mechanisms (see Rumelt 1984) that can be founded on valuable, rare, inimitable, and non-substitutable resources, for example (see Barney 1991 on these VRIN attributes). Concentration on a company's resource bundle and its positions compared to its competitor's resource base thus gives a good start in the search for different ways of creating barriers against imitation. However, protecting knowledge assets and resources requires careful management, and it has to be done according to emerging opportunities and threats (see Teece 2000). Thus the Dynamic Capabilities View (e.g. Teece et al. 1997; Christensen 1997; Eisenhardt & Martin 2000) is better equipped than the more static Resource Based View to describe and explain the dynamic strategies that companies utilize in changing situations. Furthermore, the Knowledge Based View (e.g. Kogut & Zander 1992, 1996; Grant 1996, 1997) also has some concepts built into it that enable closer and more precise examination of ways of protecting intellectual assets. The premise of idiosyncratic, tacit and inimitable knowledge as a main source of competitive advantage is particularly relevant.

The common denominator of the above views is in creating market imperfections in order to gain competitive advantage. This can be achieved by utilizing different isolation mechanisms, such as those protecting knowledge assets from imitation. Indeed, previous research has identified several means of protection that enable a company to prevent, or at least delay, duplication of its most important intellectual assets, which in turn makes it possible to earn (temporary) monopoly rents, and also ancillary profits (such as licensing or franchising revenues):

* Intellectual property rights (IPRs), especially patents, copyright, and trade secrets have been among the most studied mechanisms (e.g. Jain 1996; Arundel & Kabla 1998; Arundel 2001; Pitkethly 2001; Knight 2001; Kelley & Rice 2002; Cohen et al. 2002; Gallini & Schotchmer 2002; Hannah 2005).

* The tacit nature of knowledge (Polanyi 1966; Lippman & Rumelt 1982; Nelson & Winter 1982; Dierickx & Cool 1989; Barney 1991; Zander & Kogut 1995; Teece 1988; 1998; Saviotti 1998) is of great importance, although the focus of research has not necessarily been on appropriation in every case.

* Lead-time (e.g. Levin et al. 1987; Lieberman & Montgomery 1988; Schoonhoven et al. 1990; Mueller 1997; Makadok 1998; Coerderoy & Durand 2004; Carow et al. 2004) has often been of intellectual interest as well.

* Other protection mechanisms can be found in the vast literature on human resource management (HRM) and contracts (e.g. Rousseau & Wade-Benzoni 1994; Baughn et al. 1997; Liebeskind 1997; Boxall 1998), as well as in the discussion on practical and technical means of concealment (e.g. Davis 2001; Hannah 2005).