Rival cooperative strategy and U.S. technology policy: an assessment.

Over the last decade, declining international trade barriers and the establishment of inexpensive, worldwide electronic communications have brought about the true dawning of the global marketplace. For many firms, this new operating environment has engendered a cooperative strategy leading to the formation of domestic and international strategic alliances.

A cooperative strategy is the attempt by organizations to realize their objectives through cooperation with other organizations rather than in competition with them. (1) The process focuses on acquiring the benefits that can be gained through managing cooperation. (2) Likewise, strategic alliances are voluntary arrangements between firms involving exchange, sharing, or co-development of products, technologies, or services. (3) The alliances can occur as a result of a wide range of motives and goals, take a variety of forms, and occur across vertical and horizontal boundaries. (4)

One striking example of cooperative strategy was aggressively practiced by the American Telephone & Telegraph Company (AT&T). Before its divestiture in 1996, AT&T formed over 400 alliances from 1990 through 1995. (5) Consultants at Booz, Allen, & Hamilton, an international management consulting firm, estimate that from 1995 through 1997 over 32,000 global alliances were formed. (6) Strategic alliances, accounting for 18 percent of the revenue of America's largest corporations, take many structural forms, including joint ventures, minority equity partnerships, contractual agreements, and nonbinding verbal agreements. (7) The most recent trend among strategic alliances tends toward purchasing or marketing collaborations, co-manufacturing projects, or research and development (R&D) agreements--none of which involve equity arrangements. (8)

Rivals Combine Talent

Although the vast majority of these alliances occur between and among firms that are not direct competitors, some are formed among rivals or potential rivals. The U.S. antitrust laws, specifically Sections 1 & 2 of the Sherman Act (1890), Section 7 of the Clayton Act (1914), and Section 5 of the Federal Trade Commission Act (1914), allow for the Federal Trade Commission (FTC), the U.S. Department of Justice (DOJ), Antitrust Section, and private parties to legally challenge agreements that substantially lessen competition or tend to create a monopoly. (9)

Historically, these laws have been applied to mergers and acquisitions among competitors or potential competitors, although both cartels (per se illegal) and joint ventures ("rule of reason" analysis) have also been addressed. (10) The status of other governance structures, specifically rival collaborative relationships not involving equity participation, are now part of an ongoing antitrust policy debate.

It is axiomatic that maintaining American competitiveness in a global economy is crucial to the nation's economic prosperity. For U.S. corporations, the ability to compete internationally often depends on a cooperative strategy involving traditional domestic competitors collaborating for the purpose of penetrating larger global markets.

The present status of U.S. antitrust policy toward rival joint ventures was developed as a result of the strong influence of the nation's evolving technology policy. Further refinements in U.S. antitrust law addressing other forms of cooperative strategy will be significantly influenced by the same technology policy. A brief review of the effect that U.S. technology policy has had on American antitrust law and rival joint ventures will provide a historical perspective for the present competition policy debate addressing strategic rival alliances.

Technology Policy vs. Antitrust Law

The initial public policy effort to address antitrust concerns of domestic rival collaboration appeared early in the administration of President Jimmy Carter. (11) Charged by Mr. Carter with creating a consensus blueprint for a modern U.S. technology policy, the U.S. Department of Commerce launched the Domestic Policy Review of Industrial Innovation (DPRI) initiative in the spring of 1978. (12)

To implement the DPRI, an advisory committee was appointed consisting of government, business, labor, academic, and public representatives. (13) On October 31, 1979, President Carter announced the DPRI committee recommendations, one of which focused on the perceived misinterpretation of Section 7 of the Clayton Act. (14) Consequently, the advisory committee requested clarification of U.S. antitrust policy concerning research and development (R&D) joint ventures among domestic competitors.

The Clayton Act prohibits most forms of joint ventures among competitors. As defined, a joint venture is a new corporate entity established by two or more business organizations that pool resources for the purpose of developing a new product or service. Equity ownership of the joint venture is shared by the participating organizations.

The potential advantages of a joint venture to a firm are numerous: they promote synergy by pooling their distinctive competencies or assets; reduce the problems of managing interdependencies with the parent company; offer an environment conducive to the development of new products while attaining economies of scale and scope in production, procurement, and/or logistics; or pool capital and share risks where the project is costly or the likelihood of success is small because of uncertain demand or technology. (15)

Strong business, academic, and government support for encouraging R&D joint ventures among domestic competitors led the U.S. Congress to pass the National Cooperative Research Act (NCRA) of 1984. The NCRA offered protection against treble damages awarded in any public or private antitrust suit that might be filed challenging a DOJ/FTC registered R&D joint venture. (16) If antitrust violations were found against a registered entity, only actual damages could be awarded. (17) The NCRA also directed a court to "rule of reason" evaluation rather than a "per se" interpretation in determining whether a registered R&D joint venture was anti-competitive. (18) Reflecting the realities of increasingly global markets, judicial factors to be considered in the analysis included the effects on competition in properly defined, relevant geographic and product markets. (19)

The Clinton Vision

In the late 1980s, the President's Commission on Industrial Competitiveness, the Business Roundtable, and the MIT Commission on Industrial Productivity each published national competitiveness reports. (20) These reports identified the antitrust exclusion of production joint ventures in the NCRA as a global competitive barrier for American firms. In the wake of these national competitiveness reports, President Bill Clinton on February 22, 1993, unveiled his vision of a national technology policy that was intended to ensure America's global technological leadership in the 21st century. (21) The U.S. government's role in this technology policy emphasizes the elimination of unnecessary legal, regulatory, and economic barriers to the development and commercialization of new technologies; actively assesses the impact of proposed laws and regulations on U.S. competitiveness; and encourages the development of new policies that foster innovation. (22)

Underlying the Administration's technology policy is a key principle that identifys the primary role of the Federal government in technology policy: that of creating a business environment in which the innovative and competitive efforts of the private sector can flourish. (23) Following intense lobbying by business, academic, and government supporters, President Clinton on June 10, 1993, signed the National Cooperative Production Amendments into law thereby re-designating the NCRA as the National Cooperative Research and Production Act (NCRPA) of 1993. (24) The NCRPA has two major technology policy goals: first, to increase the number of R&D and production joint ventures entered into by U.S. firms, and second, to increase the global competitiveness of the United States in key technology areas of research, development, and production. (25) A component of the Administration's national technology policy, the 1993 amendments, extend the antitrust policy changes of single damages and the rule of reason standard in the NCRA to DOJIFTC registered production joint ventures (who must also have participated in registered R&D joint venture activity) and reflect congressional concern that domestic antitrust abuses of the act be closely monitored by the DOJ and reported to the U.S. Congress.

The FTC and Antitrust Treatment of Joint Ventures

In response to the increasing globalization of the marketplace, the FTC released a long awaited report, Anticipating the 21st Century: Competition Policy in the New High-Tech Global Marketplace on June 3, 1996. One chapter of the report addresses the issue of antitrust treatment of rival joint ventures. The report concludes that the NCRA and the NCRPA have had limited success. The consensus among experts is that these legislative initiatives did not generate the expected results--increased rival R&D joint venture and, particularly, rival R&D and production joint venture registration activity. (26) Recent research shows mixed support for this conclusion.

Albert N. Link, an economist at the University of North Carolina at Greensboro, evaluated the 453 R&D filings registered with the DOJ from calendar year 1985 through calendar year 1994. (27) For the years 1986 through 1994 (1985 was excluded because of the possibility of "pent-up" demand), Link found the number of annual registrations for R&D activity shows a statistically significant linear pattern of growth in DOJ filings over the years.

The evidence points to the overwhelming majority of the R&D joint ventures (78.1 percent) concentrating in the telecommunications (20.8 percent), electronics (16.6 percent), transportation (14.1 percent), oil and gas (9.1 percent), chemical (9.1 percent), and petroleum (8.2 percent) industries (industry classification by two-digit SIC code). Link also found that 59 percent of the registrations are classified as process-oriented in nature, 36 percent as product-oriented, and 5 percent are mixed. Professor Link concludes "that the firms are forming collaborative research alliances and are choosing their research partners as part of an overall corporate research strategy."

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