lecture 4 Flashcards
Three OE theories you have already studied in FIS
Information economics (info theory)
Transaction cost economics (TCE)
Principal-agent framework
organizational economics
is a branch of economics that focuses on the structure and behavior of organizations. It examines how firms and other institutions make decisions and how their structures affect their performance
This theoretical view helps us understand ITM-related problems for firms and how they can cope with these problems
Strategic concerns for managing technology and innovation stem from the fact that ITM activities are principally based on knowledge- and information -assets
Not that knowledge and information assets are difficult to quantify, specify and exchange, even as it presents risks of opportunity loss for businesses (small and large) this leads to the problem of non-verifiablility and non-observability, as well as non-contractibility of any business deals in this context
Information economics (info theory)
firms (both small and large) face informational risks dealing with their employees (internal) as well as transacting with external parties (such as suppliers of inputs and resources, customers and other intermediaries)
Information risks manifest in two principal ways (info theory)
Misrepresentation of information (hidden information)
Misrepresentation of actions (hidden action)
Hidden information risks - or the adverse selection risks
Implication: these risks impede firms ability to secure resources and strike business partnerships (e.g. R&D contracts, technology manufacturing, marketing, et. cetera)
Hidden action problem relates to moral hazard in any exchange relationship
implication: Firms inability to verify and observe the actions and contributions of their employees, external contractors and so forth
applications of information economics to ITM context
Firms will seek to reduce hidden information risks for outsiders (resource holders like investors and partners)
How? by engaging in costly signaling that helps them distinguish the underlying quality of their technology or activities (which are typically non-verifiable, non-measurable, and non-observable)
FIrms also seek to mitiage hidden action problems- through incentives and careful contract design (via insertion of various contract clauses to deter moral hazard)
Transaction cost economics (TCE)
transaction cost economics focuses on the challenges and costs associated with making any business transactions. These costs can include things like the time and effort to search for information, negotiate prices, and enforce contracts
Transaction cost economics emphasizes the role of institutions, such as contracts, organizations and markets in reducing transaction costs. Institutions help to structure and facilitate economiic exchanges
TCE concerns with the decision context of do-it-myself v. Buy-from-others
Firms must decide whether to produce goods or sevices in house (make) or to outsource or purchase them from another firm (buy). Transaction cost economics helps firms make this decision by analyzing which option minimizes transaction costs
what are transaction costs
The costs incurred when making an economic exchange. They include costs of gathering information, negotiating, making decisions and enforcing contracts
TCE focuses on transactions and asks
does the transaction involve asset-specificity - as in, how specialized an asset is to a particular transaction or firm. Higher asset specificity can lead to higher transaction costs because it limits the assets use in other transactions
It also focuses on transaction-specific uncertainty - in terms of behavioral uncertainty, technological, and market
These three distinct forms of uncertainty are quite common in the context of innovation and technology management (for both small and large firms)
Nature of uncertainty
Technical uncertainty = high
Market uncertainty = low/med
Perform applied R&D; the future of the firm is key focus (usualy adapting to uncertain market dynamics due to limited technical option)
Nature of uncertainty
Technical uncertainty = high
Market uncertainty = high
stepping into future - what are the new ways of addressing old problems; Search of new technology; new products; new customer functional value et cetera
Nature of uncertainty
Technical uncertainty = med
Market uncertainty = med
Requires cooperative engagement wherin firms can build an ecosystem of products and services (platform launches and usually includes complementors)
Nature of uncertainty
Technical uncertainty low
Market uncertainty = low
Enhancements more like tweaks to the existing product/service
Nature of uncertainty
Technical uncertainty = med
Market uncertainty = high
Search for new market opportunities - experimentation with customer and markets
What do these three theories mean for doing ITM in a global context
Small firms
Small firms try to go global (more so, in the digital age)
These days we are witnessing several born globals - spotify is a classic example
Bron global - a small firm simultaneous internationalization into multiple countries from its founding stage
Often leverage advancements in technology, such as the internet and digital communication, to operate and compete on a global scale
The ideas from organizational economics can help us analyze and understand how small firms can overcome these challenges and yet innovate and survive competition from other firms (small and large)
What do these three theories mean for doing ITM in a global context
Large firms
Mainly MNC firms - classic example is microsoft
As we have learned in lecture 3, large firms face adaptation problems and face challenges coping with technological change and global competition
The ideas from organizational economics can help us analyze and understand how large firms can overcome these challenges and yet innovate and compete globally (with both large and small firms)
Key insitutions
legal institutions
-Courts and business law
IP laws
Contract enforcement
Social institutions
Inter-country laws and relations
-INternational laws (e.g. World trade org)
-Bilateral and multi lateral treaties and friendships (e.g. EU-china trade links)
Understanding intellectual property (IP) assets
Publicness: Mostly public if revealed; others can access and use
Depreciation: doesnt wear out but loses value rapidly
Transfer costs: hard to determine: increases with tacit protion
Property rights: limited (patents, trade secrets, copyrights and trademark)
Enforcement: relatively difficult
legal forms of intellectural property
patents
Trade secrets
Trademarks
Copyrights
Patents
Legal rights to exclude others
Granted based on nventive step (non-obviousness), and industrial application
Protect an invention
But also costly to obtain and protect from imitation
High enforcement costs
Trade secrets
right to make, use, and sell secret, as well as protect against misuse
Confidentaial, proprietary information - costly to maintain (protect)
High enforcement costs
Trademarks
forbid against misuse of brand, misrepresent source
Protects goodwill - costly to maintain
Moderate enforcement costs
Copyrights
right to reproduce, distribute, and use for further work
Protects ideas and artwork (e.g. software) not costly to maintain (protect)
Institutions for financing innovations
personal financing; family and friends (small firms)
Angel, VC financing, and crowd financing (smalll firms)
Debt financing (both types fo firms)
Equity financing (ditto)
Government financing (via subsidies and grants, but these also as an equity investor)
Each option had its advantages and disadvantages
The most preferred is that which balances risk, incentives and access to innovation resources
Institutions for innovation
1) regulatory institutions
2) normative institutions and values (e.g. competition and cooperation)
3) Cognitive and cultural institutions (e.g. behavioural aspects)
Main industry level forces shaping innovation
Factor conditions
Competitive intensity in focal industry
Demand conditions
Related and supporting industries/complementors
Firms seeking international expansion strategies to commercialize their innovations or locate their value chain activities for innovation (such as R&D, manufacturing, et cetera) examine these conditions
Main industry-level forces shaping innovation
Factor conditions
1) a nations endowements in terms of natural, human, and other resources
2) universities, S&T centers of excellence
Main industry-level forces shaping innovation
Demand conditions
1) specific characteristics of demand in a firms domestic market
2) Market size, sophistication, specialized demand et cetera
Main industry-level forces shaping innovation
Competitive rivalry and intensity
1) firm networks and rivalry
2) innovation intensity among firms
3) Highly competitive environments tend to stimulate firms to outperform others
Main industry-level forces shaping innovation
Related and supporting industry
1) supporting services, design, distribution and suppliers for other activities in the value chain
2) complementarity
3) leadership in related and supporting industries can also foster world-class competitors in downstream industry
