Competition and Innovation Efficiency

The complexity of the innovations process and the diverse forms it can take raise two critical issues for the modern technology-intensive firms. It raises the development costs both internally and externally, internally because the firms may not have all the necessary assets or strongholds and externally because the firms may lack the opportunities for appropriating the intra-industry R&D knowledge capital. Secondly the technology strategy and its economic aspects, for example, how to choose between fixed and flexible technology, have strongly influenced the risk in organizational environment. To reduce these twin costs, that is, the cost of development and the cost of risk and uncertainty, the incentives for collaboration and/or networking in R&D have increased significantly. The theorists have argued that if competitors are not allowed to collaborate in R&D, then they may not invest enough because of the free rider problem. Collaboration and/or cooperation in R&D may also lead to collaboration on the product and marketing side, thus affecting the entry-exit dynamics, for example, it may prevent potential entry by outsiders, because of the scale effects of pooled knowledge capital. Policymakers at the state level have increasingly been aware of these circumstances and recognized the fact that most firms do not have all the necessary assets, both physical and human for developing latest technologies and staying on the edge of the dynamic cost frontier based on innovation.