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No. 3: The Role of R&D Consortia in Technology Development

by Vinod Kumar, Research Centre for Technology Management, Carleton University, and Sunder Magun, Centre for Trade Policy and Law, University of Ottawa and Carleton University, under contract to Industry Canada, February 1995


Summary

Technology consortia are technology alliances among business firms, universities and governments. They are formed to share increasingly rising costs and risks associated with undertaking basic or precompetitive research and development (R&D). The alliances are both vertical and horizontal and can include both domestic and foreign companies. In most cases, they are found across such high-tech industries as electronics, computer, aerospace and pharmaceutical sectors. Technical alliances have become an important part of the corporate competitive strategies of high-tech industry leaders such as IBM, Hewlett-Packard, Northern Telecom and Texas Instruments. Technology consortia are also found in traditional industries such as the textile and automobile sectors.

This study analyzes the role of R&D consortia in technology development. We have primarily focussed on the growth of technology consortia in the United States, the participation of Canadian companies in those consortia, and the institutional barriers to Canadian membership in American R&D alliances.

In business literature, there is no formal definition of a technology consortium. Various authors have used different definitions in their research. We have adopted the following definition: a consortium is a co-operative research effort among business firms, governments and universities, that helps the participating companies maintain leadership or gain a competitive edge over their international competitors in a particular industry. A technology consortium is a stronger alliance than a trade association, yet more loosely coupled than some other forms of joint ventures. A technology consortium includes direct competitors whereas most other corporate alliances do not. Moreover, an R&D consortium often has lower equity and other inputs from each member than is the case in other alliances.

The literature on technology consortia suggests that the motives for establishing them vary widely. Each member perceives their benefits in a different way. In general, a member company considers one or more of three strategic objectives when it joins in co-operative research:

  • horizontal diversification into new product lines;
  • backward and forward vertical integration; and
  • leapfrog competition within existing product lines.

Some companies emphasize other advantages of consortia such as minimizing the cost of developing new technologies by reducing unnecessary duplication of research efforts, sharing the risks of undertaking R&D, getting immediate access to new technologies, new markets and cheap production sources, and making otherwise big and complex research projects possible.

Many technology alliances are cross border and established by multinational enterprises that are based in the Triad-the European Community, Japan and the United States. They are mostly observed in core or strategic technologies: information technologies, biotechnology and advanced industrial materials. Japan and the European Community have longer experience with technology alliances while the United States and Canada are new to this form of industrial organization. Japan improved the international competitiveness of its semiconductors by establishing the consortium of semiconductor producers while the European Community improved its computer industry by forming the consortium of computer manufacturers. In the United States, large increases in the growth of technology consortia, mostly horizontal, occurred only after 1984 when Congress implemented the National Cooperative Research Act (NCRA). This law allows American firms in the same industry to establish consortia that conduct precompetitive R&D.

The general factors driving the growth of R&D consortia are the globalization of the world economy, technology trends and the greater role of government in shaping a nation's comparative advantage. The global marketplace has now become much more interdependent, and international linkages among countries, or among global firms based in different countries, have increased over the last four decades. Multinational enterprises act as a prime agent of globalization. They organize their operations from manufacturing and sourcing, through marketing and sales, to R&D, on a worldwide scale. By rationalizing their operational activities worldwide, global firms benefit from economies of scale and scope in R&D and production operations. Moreover, the generation of new technologies is much more expensive at the frontier. This is attributable to shorter product life cycles and the fusion of various technologies; thus, a cross-fertilization of several technical and scientific disciplines is required to advance technologies. The increasingly rising cost of undertaking R&D and the need for complementary specialized skills to generate new technologies have encouraged international networking among multinational enterprises, such as cross-border R&D consortia.

Finally, it is generally recognized now in advanced countries that a nation's comparative advantage is determined more by active industrial, and/or technology, policies rather than by factor endowments. Both Japan and the European Community, for example, have used active industrial policies to improve the international competitiveness of their strategic industries such as the semiconductor industry and the commercial aircraft industry. Now, both the United States and Canada are encouraging the formation of technology consortia through their new or expanded technology programs, such as the U.S. Commerce Department's Advanced Technology Program (ATP) and the Strategic Technologies Program (STP) administered by Industry Canada.

After the implementation of the NCRA, technology consortia have increased substantially in the United States. There are now about 350 technology consortia involving about 1200 American and 50 foreign firms. As indicated above, they predominate in high-tech industries. The Microelectronics and Computer Technology Corporation (MCC), the Semiconductor Research Corporation (SRC) and the Software Productivity Consortium (SPC) are examples of co-operative research ventures that involve companies in similar markets.

To prepare the profile of U.S. R&D consortia we conducted a telephone survey of 15 leading American consortia and interviewed technology policy analysts in Washington, DC. Our findings included:

  • Nine out of 10 consortia are initiated by the private sector in the United States; only one out of ten consortia is initiated by the government.
  • The primary goal of most consortia appears to be precompetitive research, and the secondary goal is product development.
  • Eighty percent of U.S. consortia have less than 100 members.
  • The funding for technology consortia is mostly provided by government-industry shared programs; only four in 10 consortia are funded solely by the private sector.

Over the next decade or so, the number of government-funded co-operative R&D projects will grow very rapidly in the United States. Canadian companies are wondering whether they will be allowed to participate in these consortia. This question is very important in the light of our history of close economic relations with the United States and our desire to keep channels open to new technologies from all sources. Canada is concerned with the growth of protectionism in the United States as evidenced by some barriers to technology sharing between Canada and the United States. For example, Canada was surprised that it was not invited to participate in the Super Car consortium even though Canadian and American automobile industries are very closely integrated.

Canadian companies do participate in American R&D consortia although the participation is relatively small. Our sample survey indicated that only one out of 60 consortia members is a Canadian firm. More important, except in particular circumstances, Canadian firms are not allowed to participate in large consortia funded by the U.S. federal government. Canada, for instance, is restricted from participation in co-operative R&D projects supported by the National Institute of Standards and Technology's Advanced Technology Program and the Semiconductor Manufacturing Technology (SEMATECH). If the Collins and Manton restrictive amendments had been accepted by the U.S. Congress and included in the National Competitiveness Act 1993, Canadian companies would have been completely barred from participation in federally funded technology consortia. Canada is quite concerned about the development of a protectionist sentiment since federally funded consortia will proliferate under the Clinton Administration, which has planned to increase significantly the number of technology consortia under the two expanded technology programs-the Advanced Technology Program and the Advanced Research Project Agency. Some technology policy experts in Washington DC believe that the doors are almost closed to Canadian companies wanting to participate in these programs. The Clinton Administration has adopted a new technology policy that will encourage co-operative R&D to improve economic performance of American industries and thus their competitiveness in the global marketplace. We expect that the U.S. government will become increasingly more protectionist and that it will ask for reciprocal relations when sharing new technologies with other nations in the future.

In our interviews with consortia and government officials, three more barriers to Canadian participation in American consortia were indicated. First, there is a standoff on an umbrella intellectual property agreement between Canada and the United States. The U.S. government wants to sign a bilateral agreement that sets out general guidelines about sharing the intellectual property results from collaborative research. Second, it appears that Canadian companies are less interested in American consortia because they do very "advanced R&D" which Canadian firms find difficult to translate into products quickly. Canadians are more interested in applied research with quicker commercial results. Third, Canadian companies find that membership fees of American technology consortia are too high. For instance, SEMATECH requires a minimum annual fee of $1 million, and full participation could cost the member as much as $25 million.

In March 1994, Industry Canada consulted with the Canadian research community by holding two workshops, one in Toronto and the other in Montréal. The participants were from Canadian companies, research institutes and universities. At the workshops, the discussions focussed on three broad themes:

  • the reasons why the Canadian firms' participation in foreign technology consortia, especially the American ones, is low;
  • the barriers, legal or institutional, Canadian companies face in participating in foreign technology consortia; and
  • the role the government should play in promoting technology consortia.

Several participants at the workshops indicated that Canadian participation is low only in precompetitive technology consortia. This is mainly attributable to the fact that Canada does not have the culture of doing precompetitive R&D. However, Canadian companies are often small and medium-sized enterprises that specialize in market niches. They form technology alliances to undertake "near-market" or applied research and market alliances to compete effectively in the global marketplace.

It was generally agreed at the workshops that there are real barriers to Canadian participation in American, European and Japanese technology consortia. Barriers are even stronger in Europe and Japan than in the United States where barriers are not insurmountable. If Canadian companies or American subsidiaries operating in Canada have expertise in some technology and possess strong R&D infrastructure, they can be invited to join in government-funded technology consortia in the United States. For example, Northern Telecom has strong R&D capability and is playing an active role in a number of U.S. consortia. Similarly, Pratt and Whitney Canada possesses expertise in the manufacturing of small aircraft engines and has been invited to participate in technology consortia funded by the U.S. government.

Some participants suggested that Canada does not have specific programs for encouraging technology consortia. Before worrying about Canadian participation in foreign consortia, Canada should first gain experience and credibility in building technology consortia of domestic firms. The few domestic technology consortia we do have are not operating very well. Their focus is on short-term gains and on near-market rather than precompetitive research. Consortia members often cannot decide what technologies should be developed through joint research. Therefore, the Canadian government can play an important role by designing new policy initiatives that will promote joint precompetitive research among domestic firms.

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