OPEN INNOVATION AND NANOTECHNOLOGY - AN OPPORTUNITY FOR TRADITIONAL INDUSTRIES Tuomo Nikulainen M. Sc. in Economics Etlatieto Ltd. / ETLA (The Research Institute of the Finnish Economy) Lönnrotinkatu 4 B, 00120 Helsinki, Finland 11.4.2008 TABLE OF CONTENTS Abstract 1 1. INTRODUCTION 2 2. LIFE CYCLES AND R&D COLLABORATION 4 2.1. Industry life cycles 4 2.2. Technology life cycles 4 2.3. R&D collaboration and absorptive capacity 5 3. THE FINNISH PULP AND PAPER INDUSTRY 7 3.1. Technological change in the paper and pulp industry 8 3.2. Nanotechnology and pulp and paper industry 10 4. DATA AND RESULTS 12 4.1. Technology life cycles 12 4.2. R&D collaboration 13 4.3. Challenges in adopting nanotechnology 16 5. CONCLUSIONS 19 References 21 APPENDIX I – Detailed technology classifications 1 Abstract This paper focuses on assessing modes of R&D collaboration and technological lifecycles in the Finnish pulp and paper industry. This traditional and mature industry is currently going through changes due to market and technological developments. By observing industrial and technological lifecycles, this paper aims to establish to what extent these changes affect the R&D collaboration networks in the industry. The paper also provides insight how the incumbents in this industry change their innovation activities in the face of new science-based technology – nanotechnology. The quantitative and qualitative results suggest that the Finnish pulp and paper industry is adapting to the changing innovation environment by increasing in-ternal R&D investments, and extending and diversifying their R&D collaboration networks. The results also indicate that nanotechnology is seen as a potential new source of business for the pulp and paper industry, but requires investments to absorptive capacity in order to take advantage of new technologies. 2 1. INTRODUCTION Every industry goes through a life cycle starting from the emergence phase and eventually reaches stabiliza-tion stage where the markets are dominated by few companies. Coinciding with this evolution, which is often cited as the industry life cycle, is the technological change that affects the industry. These technological developments and their cyclical nature are referred to as technology life cycles, which have a significant impact on the different stages of industry life cycles. When an industry reaches its stabilization stage and the industry becomes more mature, the innovative capabilities of the incumbent companies start to play an important role. Mature industry can benefit from the oligopolistic market situation for a while, but eventually new technologies start to substitute the existing technologies due to the competence destroying nature of the new innovations. Thus the incumbents survive through their complementary assets or by adapting the new technologies in their own products and processes. One potential solution is the adaption of new technologies by diversifying the innovative activities in the industry. The Finnish pulp and paper (henceforth P&P) industry is a good example of a sector that has undergone the whole industry life cycle and is currently in the stabilization stage. In addition, the industry is a phase of technology life cycle where the existing technologies develop incrementally and new more radical technologies are seen as a source of new potentially radical product and process innovations. Although the new emerging technologies are seen as potential source of industrial renewal for the P&P industry, the ability of the incumbents to take advantage of these technological developments is still unclear. One of the potential new science-based technologies is nanotechnology, which can both provide incremental solutions in short-term and more radical innovations in long-term for the P&P industry. This study contributes to the existing knowledge of industrial and technological life cycles by observing the changes in R&D collaboration networks in different stages of technology life cycles in a sector specific context and focusing on a traditional and mature industry. The existing literature on R&D collaboration focuses mostly on high-tech industries and fails to introduce heterogeneity across different sectors. This paper brings forth the discussion of sectoral differences in R&D collaboration by using a traditional ‘low-tech’ industry as an example. In addition the emergence nanotechnology, which is highly relevant for the P&P industry, is analyzed by discussing what kind of specific challenges nanotechnology brings to this industry in utilizing the R&D efforts conducted outside of the company – most notable in the public R&D sector. The main research question in this paper focuses on the changes in the P&P industry towards more open R&D collaboration. Moreover, the current paper aims to address changes in technology life cycles over time in the industry, nature of the external R&D collaborations, modes of responses to potential technological changes, and new challenges that nanotechnology brings to the technology transfer from academia to the P&P industry. This paper is organized as follows: Section 2 provides the analytical framework by discussing the industry and technology life cycles, and R&D collaboration; in Section 3 the Finnish pulp and paper industry is presented to highlight the links between industry and technology life cycles, and to review the current developments in the markets and in the related technologies - especially the connection between paper 3 and pulp industry and nanotechnology are discussed; in Section 4 data used in the analysis and the results are presented; and in Section 5 conclusions are drawn. 4 2. LIFE CYCLES AND R&D COLLABORATION The theoretical framework of the present paper draws upon comes from different, although related, streams of literature. Industry life cycle is a concept which links the intensity of competition in a particular industry with the time since the breakthrough innovation that made that market possible. This cycle is often connected to technological life cycle which describes the maturity of the technologies employed by the industry. These life cycles are related to R&D collaboration networks as companies organize their innovative active differently in each stage of industry and technology life cycle. Building on conceptual work of the connection between life cycles and R&D collaboration (Beije and Dittrich 2007), the discussion below will focus more on mature industries where the technology life cycles play an important role in industrial renewal. 2.1. Industry life cycles The discussion of industry life cycles links the competition dynamics of an industry with the temporal as-pects starting from the emergence of market creating innovation (Gort and Klepper 1982; Klepper 1996, 1997). Typically an industry life cycle passes through five distinct stages: 1) a dormant stage with low numbers of competitors enjoying monopoly profits; 2) an emergence stage with high entry and low exit from the market; 3) a high turnover stage with many companies entering the market and leaving it; 4) a volatile stage with mass exit via e.g. mergers and bankruptcies; and 5) a stabilization stage during which a stable oligopoly emerges. The different stages of industry life cycle are associated with the technological life cycles that affect the product and process innovations relevant for the industry. Although technological life cycles play an important role in evolution of an industry there are other factors that may launch industry lifecycle include, such as government intervention (e.g. deregulation), and liberalisation of external trade (Gort and Klepper 1982). In this paper the focus is on the late stages of industrial life cycle where the oligopolistic incumbents are threatened by exogenous elements such as globalization and technological change. 2.2. Technology life cycles Technology adoption is the most common phenomenon driving the evolution of industries along the different phases of industry life cycle. Usually a technology life cycle passes through four different stages: 1) a R&D phase with high investments in exploration and where the prospects of failure are high; 2) an ascent phase with technology beginning to gather strength through wider adoption; 3) a maturity phase with dominant design and high revenues; and 4) a decline with reducing gains and utility of the technology due to a new technological life cycle. An end of a technology life cycle can impact an industry to an extend that the industry either goes to a new stage of industry life cycle or creates totally new industry life cycle. The reason for the potentially revolutionary impact to industry stems from the technology in question. The nature of innovation is an important question for incumbents in the potential application industry (Teece 1986). Innovations can be divided into incremental and radical innovations. Incremental innovation builds on existing knowledge and relies 5 on existing competences. Hence incumbent companies are quick to adapt such innovations. On the other hand radical innovations, which build on new knowledge, can sometimes be viewed as competence-destroying innovations (Tushman and Anderson 1986). For these types of innovations incumbents might have difficulty utilising the full potential of these new technologies as they might fail to have suitable knowledge in-house to take advantage of the technological opportunities. Thus depending on the nature of the technology in question the existing literature takes the view that the role of incumbent companies depends on its complementary assets (e.g. Teece 1986; Mitchell 1989, 1991; Tripsas 1997; Hill and Rothaermel 2003; Teece 2006). Later in this paper the different technology life cycles affecting P&P industry are presented. 2.3. R&D collaboration and absorptive capacity The recently coined term ‘open innovation’ embodies many of the R&D collaboration related aspects to be discussed in this paper. Discussion of open innovation can be seen as a synthesis of research on external R&D collaboration and organization of R&D activities within companies. It is a business model where the key notion is to create value through innovation and capture a portion of that value (Chesbrough 2003; Chesbrough et al. 2006; Chesbrough 2007). Although open innovation is a business model which takes a more holistic view on corporate activities such as role of R&D collaboration, corporate venturing and use of IPR‘s to generate additional revenue, the current paper focuses mostly on the first topic. The other aspects of open innovation are left outside the main research scope of this paper, but are discussed briefly to provide overall picture of the relevance of open innovation in the Finnish P&P industry. In the existing literature on open innovation and R&D collaboration the focus has been more on industries with high R&D intensity. These studies have overshadowed the more traditional industries where R&D intensity is often low. Therefore it would be useful to discuss the differences of open innovation in different sectors in different stages of industry and technology life cycles. Beije and Dittrich (2007) divide the different modes of R&D collaboration by taking into account the sectoral and cyclical differences (see also Pavitt 1984; Audretsch and Feldman 1996). Beije and Dittrich (2007) discuss the different stages of technology life cycles and R&D collaboration as follows: 1) an exploration phase with various modes of collaboration to co-develop and gain access to potential new technologies; 2) a fluid phase with collaboration aimed towards specific application areas; 3) a transitional phase with emergence of dominant designs and standards; and 4) a specific phase with variety of collaborative modes. During the emergence of a new technology (exploration phase and fluid phase) the incumbents collaborate through various modes of to co- develop or get access to technology. Once the potential technologies are identified, the incumbents collaborate to enter specific regions with own technology or to co- develop ‘extra’ designs. When the industry specificities are taken into account, the potential actions of the incumbents are more detailed. In a single product industry, such as P&P, the incumbents’ access the new technologies through the most advanced suppliers of the ‘old’ dominant design. In addition, they co-development various designs, depending on the breadth of the supply network (in addition to other alliances). Beije and Dittrich (2007) also take into account the different types of technologies in question, and this aspect will be discussed in greater detail when the P&P industry related technologies are discussed. 6 Before going into the discussion of the P&P industry and the role of R&D collaboration in its innovative process, it is useful to take a glance why companies engage in this type of activity. R&D related co-operation outside the company boundaries can be divided into two types: exploitation and exploration (March 1991). Exploitation is co-operation where a company aims to acquire knowledge that is use in its existing operations. Thus it is drawing on a similar knowledge base that the company has and hence this knowledge is more easily adapted to the existing R&D activities. Exploration is based on scanning the environment for new potential technological solutions that might have significance for the company, but direct link to existing operations is looser than in the exploitation type of co-operation. This discussion of exploitation versus exploration is very closely linked to the discussion of the role of incumbent’s complementary assets in technology life cycles. There is also empirical evidence of the optimal form of collaborating in R&D (Laursen and Salter 2006). They observed that the use of different sources of knowledge and importance of these sources in order to analyze how open innovation and open search strategies, in terms of depth and breath, are affecting innovative performance. They found that searching widely and deeply is curvilinearly (taking an inverted U-shape) related to performance. This finding indicates that very low or very high involvement in R&D collaboration fails to yield results that can be achieved by finding the right balance between the depth and the breath of collaboration. The discussion of R&D collaboration is also related to the ability of companies to use the information acquired from the collaboration. The term ‘absorptive capacity’ has been coined to illustrate the capabilities of companies in the acquisition and utilisation of external knowledge (Cohen and Levinthal 1989). It measures a company’s ability to value, assimilate and apply new knowledge. Absorptive capacity is one of the reasons companies invest in internal R&D instead of simply buying the results (e.g. patents) (Cohen and Levinthal 1990). To enhance internal absorptive capacity, companies resort to a variety of activities. As the incumbent identifies an interesting new technology and begins to explore its potential uses in-house, the project management aspect within companies comes into play. The main problem in finding the right projects which yield to most value are difficult to identify. The discussion of false positives and false negatives becomes important (Chesbrough 2004). As company tries to identify the most important projects it might reject useful ideas or proceed with ideas that eventually yield to direct benefit to the company. This increases the significance of in-house competences in identifying ‘right’ projects. Another aspect that has an impact on using external sources of knowledge is the ‘not invented here’ - syndrome (Katz and Allen 1985; Rosenberg and Steinmueller 1988). By reviewing some of the relevant contributions in the literature, this paper provides the framework where the Finnish P&P industry is analyzed. Before going into the discussion of data and results, it is useful to review the Finnish P&P industry in more detail. In the following section the significance of Finnish P&P industry in Finland is discussed, as well as the currently market situation and the role of technological change within the industry. 7 3. THE FINNISH PULP AND PAPER INDUSTRY The P&P industry was the first pillar of the Finnish economy since the late nineteenth century and its development highlights the progression of the Finnish economy from the resource- and investment-driven stages, to the knowledge-driven stage. 1 The current development in the industry started through a phase of technological and productivity gains in the 1970s, which was investment driven that resulted in massive capital investments to spur productivity in existing P&P segments and directed the attention toward higher value-added products to gain new markets. Currently the P&P industry is in the phase of consolidation and globalization which are marked by rapid internationalization and globalization of production activities. Nowadays the Finnish P&P industry is well developed and coherent industrial cluster around the core product groups of high-grade pulp and paper products. The overall contribution of the P&P industry to the Finnish economy has been and is still significant. In the 1980’s the P&P industry accounted from around 30% of exports from Finland, a level that was maintained until the mid 1990’s when the emerging ICT sector in Finland started to grow. Today the P&P industry accounts to around 15% of exports. The rapid internationalization and globalization has had, especially in the most recent, a significant impact on the P&P industry globally. The newly industrialized countries (such as China, India and Latin America) have entered the global competition with new raw material qualities and cheaper production costs, which coupled with the negative changes in demand structure in the current main markets, pose challenges for the existing structure of the global P&P industry. Additional challenges come from the increasing awareness of sustainability issues, the need for environmental control in P&P production and closer integration with the EU, which made some of the national policy instruments (e.g. devaluation of currency) obsolete. The entry of new countries into the already intensive competition requires the old established incumbents to development and produce of new specialty products. This requires close collaboration with customers abroad and thus provides additional challenges for the production activities in Finland. This is evident from the recent investment activities as the Finnish P&P industry has invested recently mostly in developing countries (e.g. China and Latin America) which are seen as major emerging markets. If the evolution of the Finnish P&P industry (or even the global P&P industry) is compared to the different stages of industry life cycles, it is evident that the industry is in a stabilization stage. There are few almost oligopolistic companies and while there are changes in the market structure, the major actors have fairly strong position. Although the market situation is somewhat stable, the emergence of new competitors from new countries and the technological changes that are taking place suggest that there is a real potential for a new industrial life cycle. This is true especially in the current main markets where demand is declining is some of the core P&P products. The technological developments affecting the industry, through which productivity gains and product diversification are hoped to emerge, are posing new challenges and opportunities for the industry. The technological development in ICT, 1 A more detailed description of the history of the Finnish forest industry can be found in Paija & Palmberg, 2006 (In Dahlman, Routti & Ylä-Anttila (Eds.), “Finland as a Knowledge Economy - Elements of Success and Lessons Learned”, Ch. 6.) 8 biotechnology, nanotechnology and changes in environmental regulation are the main areas that have an impact on the P&P industry. The R&D efforts have been typically collaborative among main Finnish P&P conglomerates (i.e. Stora-Enso, UPM- Kymmene, M-Real and Myllykoski), machinery and equipment suppliers, universities and research institutes. This paper aims to understand how these larger conglomerates in this industry cope with the changes in this fairly close-knit R&D environment. Thus, in the following the innovative active of the Finnish P&P industry is reviewed in greater detail. 3.1. Technological change in the paper and pulp industry The core of the knowledge base and technologies employed in the Finnish P&P industry are related to process engineering and mechanical engineering. Process engineering plays a role in the pulp production and in paper coatings. Mechanical engineering is important in the process of turning the pulp in to paper (and also turning wood into pulp), but some of the development work related to paper machines is conducted by suppliers. The in-house knowledge of the incumbents has increased due to close co-operation with suppliers and thus the knowledge base is very strong in these two areas. The relevant technologies have naturally evolved over time, but this industry has escaped any competence destroying innovations for decades. The inputs of production have not changed significantly, while the incremental development has been more frequent in the machinery side. The engineering knowledge in paper and pulp, related process engineering and mechanical engineering has been and is among the best in the world in Finland, as the core products in this industry have not changed dramatically. Hence the knowledge base and technologies employed by the industry are highly focused in a narrow range of areas. The concentrated knowledge base potentially creates a problem, when the demand for the existing products starts to diminish. With declining demand for existing products companies usually try find new markets or to introducing new products to the existing markets. In the latter case the change in product portfolio requires new skills often outside the established companies. Thus if companies wish to enter new product markets, they need to acquire or co-operate with partners who possess the necessary skills for the development of the new products. The actors in the Finnish paper and pulp industry related system of innovation can be divided into four different groups: established conglomerates (incumbents), suppliers (incumbents in chemistry and paper machine engineering), research institutes and universities. The incumbents in this industry are Stora-Enso, UPM-Kymmene, M-Real and Myllykoski. All of them are either top ten companies in global P&P markets or have significant market shares in certain submarkets. The other important industries for the P&P industry are the suppliers of machinery and chemicals, which are one of the traditional sources of innovation in P&P. Thus, when considering the innovative active of the sector the role of suppliers should be taken into account. It should be noted that much of the R&D stemming from the related industries is often incremental by nature, but they also might provide a pathway for introduction of more radical innovations. Research institutes have a very important role in the innovation activities of the Finnish P&P industry. There are two public and one private research institutes, which [...]... of nanotechnology - A comparative analysis of university and company researchers." The Journal of Technology Transfer, forthcoming Palmberg, C and T Nikulainen (2006) "Industrial Renewal and Growth through Nanotechnology ? - An Overview with Focus on Finland." 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