Introduction „The difference between developed and less developed countries lies not just in that the more developed countries have more resources. It is not just a matter of the larger scale of economic activity. Economic organization is crucial. Economic organization affects the social absorption capability of a society; it affects its ability to deploy resources efficiently, and it affects is ability to innovate, to adopt newer, improved technologies, to produce products that were not produced –at least within the country – previously.“ (Stiglitz 1991:29) Theoretical Framework Why Innovating Firms Seek to Cooperate with Input Suppliers and Product Users? What is the Economic Rationale behind the Choice of Different Modes of Vertical R&D Cooperation? What is the Impact of Vertical R&D Cooperation on Firm Innovation?

Innovation through Vertical Relations between Firms, Suppliers and Customers: Lessons from Germany Najib Harabi, Professor of Economics, Solothurn University of Applied Sciences, Switzerland

Contents Introduction Theoretical Framework An Empirical Investigation of German Firms Discussion of Results and Concluding Comments

Theoretical Framework Why Innovating Firms Seek to Cooperate with Input Suppliers and Product Users? What is the Economic Rationale behind the Choice of Different Modes of Vertical R&D Cooperation? What is the Impact of Vertical R&D Cooperation on Firm Innovation?

Relevant Theories Question 1 Question 2 Question 3 Transaction costs theory Game theory Transaction costs theory Property rights theory Appreciative and formal theories of innovation

Benefits and Costs of VR&DC Enhancement of technological capabilities Solving the appropriability problem reducing uncertainties about market demand High transaction costs (information and coordination costs)

An Empirical Investigation of German Firms Data Results –Overall Results –Inter-industry differences –Vertical relations between firms, suppliers and customers: the patterns

Data Survey: Mannheim Innovation Panel (MIP) 1993&1994 and other waves Sample Frame: Firms Response Rate: 25%

Overall Results The phenomenon of vertical relations between innovating (especially R&D performing) firms, suppliers and customers is widespread in German industry (84% of all firms surveyed).

Overall Results II The most cited mode of these cooperative arrangements was informal exchange of technical knowledge (over 65% of all respondents), followed by joint development teams (around 25%) and contractual R&D cooperation (20%). The least cited mode of cooperation was order to customer, followed by joint ventures.

Inter-industry differences The occurrence and importance of cooperative agreements between innovating firms, input suppliers and innovation users vary from one industry to another, depending on the industry characteristics.

Vertical relations between firms, suppliers and customers: the patterns The various modes of cooperative arrangements between innovating firms, customers and suppliers can be reduced to two subgroups: (1) formal modes of cooperation and (2) informal exchange of technical knowledge. Informal exchange of technical knowledge is more important for innovating firms than formal modes of R&D-cooperation.

Discussion and Comments The results emphasize the central role of formal and informal interactions between agents operating at different stages of the innovative chain Informal modes of cooperation can be seen as a source of positive externalities between firms and as trust-building steps towards more formal modes of cooperation.

Comments In the area of formal cooperative agreements, public policy can affect microeconomic decisions concerning two major issues: first can vertical relations between innovation producers, users and suppliers be formed at all, and second, are the right kinds of vertical relations formed. Three sets of public policies can be brought to bear on both of these issues: anti-trust (or merger) policy, public procurement policies and regional policy.

Comments In short, this empirical exercise has demonstrated how markets are interrelated, and the development of product and process innovations involves not just activities in single firms, but the activities of chains of vertically linked suppliers and users. Policy makers can partly shape these vertical R&D linkages in their efforts to stimulate innovation and economic growth.

Introduction „The difference between developed and less developed countries lies not just in that the more developed countries have more resources. It is not just a matter of the larger scale of economic activity. Economic organization is crucial. Economic organization affects the social absorption capability of a society; it affects its ability to deploy resources efficiently, and it affects is ability to innovate, to adopt newer, improved technologies, to produce products that were not produced –at least within the country – previously.“ (Stiglitz 1991:29) Theoretical Framework Why Innovating Firms Seek to Cooperate with Input Suppliers and Product Users? What is the Economic Rationale behind the Choice of Different Modes of Vertical R&D Cooperation? What is the Impact of Vertical R&D Cooperation on Firm Innovation?

End Thank you for your attention!