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Knowhow trading as economic exchange
155
Knowhow trading as economic exchange Anne P. CARTER Department
of Economics, Brandeis University,
Waltham, MA 02254, U.S.A.
Final version received July 1988
Knowhow trading is the informal exchange of practical technical knowledge between pairs of engineers and other technicians in different firms. This paper explains the advantages and disadvantages of this particular mode of knowledge sharing from an economic perspective. Under a knowhow trading regime long-term, self-selected partners barter knowledge ex post, i.e., they exchange information already known to one of them. The paper explains why barter is better suited to the exchange of ideas than to the exchange of conventional goods and points out advantages of ex post knowledge sharing between firms whose priorities differ. It is generally cheaper to acquire knowhow through exchanges than to “reinvent the wheel” but sharing knowhow can cut into the firm’s competitive advantage. Pairwise exchanges limit, although they do not eliminate, the firm’s loss of competitive advantage when it shares technical knowledge. Because knowhow trading is informal and “off the books” such trading is difficult for the firm to evaluate and to manage. Similarly, since it eludes the traditional measures of economic activity, knowhow trading is difficult to document and integrate into studies of the general economy.
1. Background In a recent issue of this journal Eric von Hippel [8] called attention to a previously unrecognized vehicle for the diffusion of technology that he calls informal knowhow trading. Knowhow trading is technical assistance that engineers and other technically oriented personnel exchange with peers in other firms. The unpretentious term “ knowhow” emphasizes the practical as contrasted with the formal or theoretical aspects of a technology that might appropriately be treated in professional journals. Knowhow encompasses a wide range of practices including chemical, mechanical or organizational means of implementing or expediting a process, improving quality, meeting safety
Research Policy 18 (1989) 155-163 North-Holland
0048-7333/89/$3.50
and environmental standards, choosing equipment, using it efficiently or keeping useful records. Knowhow may be conveyed in a variety of ways -by simple verbal suggestions, by conversations followed by a series of questions and answers, by plant visits, by offering training to key personnel or even by sharing computer programs. Sectors where knowhow trading has been observed thus far include steel minimills, waferboard and aerospace. Long-term pairwise trading relationships between peers are formed and mutual trust and understanding built up over time. No money changes hands, nor are formal records kept. Instead colleagues ask each other for very specific technical information. Technical assistance comes with the obligation to reciprocate later on. Often knowhow traders represent competing or potentially competing firms. Traders may refuse to transmit information that they judge to be “of great competitive value” or otherwise confidential to the firm. Firms vary in their attitudes toward knowhow trading. Von Hippel finds that the practice is apparently uncommon in some sectors like biological enzyme manufacturing and the manufacture of powdered metal parts. With the exception of setting broad guidelines that permit, encourage or discourage knowhow trading, management delegates the knowhow trading function to engineers and other technically oriented personnel. Research in this area is just beginning. We do not yet know how long or how widely this practice has prevailed nor how rapidly it is growing. Along with purely academic interest, widespread concern with industrial competitiveness justifies study of its potential role in effecting technological improvement. Von Hippel views knowhow trading as “cooperation among competitors” and shows that such cooperative behavior is often rational in the
0 1989, Elsevier Science Publishers B.V. (North-Holland)
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A. P. Carfer / Knowhow trading as ecmmnzc exchange
framework of a generalized prisoner’s dilemma. While his argument is convincing it does not explain why knowhow trading has been relatively robust in the domain of interfirm technical cooperation where alliances have typically been fragile and limited. This paper probes a little further into the economic incentives that motivate the sharing of technical information. It explores the special economic properties of trade in information, as contrasted with trade in goods, that justify labeling it “cooperation” and analyzes the economic conditions under which the benefits of sharing information will exceed its costs. These explorations highlight features of knowhow trading that contribute to its success as a particular institutional form of information sharing. Two lines of argument are developed. In section 2, some fundamental differences between exchanges of information and of conventional goods are pointed out. Traders of information do not generally “lose” the information that they exchange and therefore the incentive to exchange can be very strong. Disincentives to trading information lie in “competitive backlash”, the profiteroding effect of sharing technical information with competitors. In section 3, knowhow trading is considered as a particular mode of cooperation in a general framework for evaluating the tradeoffs of information sharing among competitors. Section 4 cites some limitations of knowhow trading that warrant further study.
2. Knowhow trading as informational barter As the information economy evolves it becomes clear that institutions of property and exchange that function well in the world of goods may not suit the world of ideas [1,3,5,6]. Much of our information stock is viewed as a free good by our society and legal experts are still struggling to accommodate ideas of intellectual property in a framework adapted primarily to real property. purveyors of Writers, publishers, consultants, software find it necessary to cope with the “leakiness” of information in an economic milieu best suited to exchanges of goods. Knowhow trading is a very special form of exchange. In the tradition of the market economy, knowhow traders treat information not as a free good but as an exchangeable asset. However, where
most goods are sold for money, knowhow trading is essentially barter. In this respect, knowhow trading is different from some other forms of industrial information sharing, particularly patent licensing and collaborative research. Barter makes it possible to avoid the often difficult problem of assigning money values to information. That barter serves the purposes of intellectual exchange well depends on fundamental differences between exchange of goods and of information. 2.1. Disadvantages
of barter for trade of goods
In developing the theory of exchange, economists used trade in goods as prototypes. Thus Adam Smith used the example of trading beaver for deer to explain relative values. Ricardo centered his analysis of comparative advantage on the exchange of grain and wine. In a world of commodity exchange, barter has distinct disadvantages that must be overcome if trade is to flourish. These disadvantages center around the need for purchasers and sellers to be “matched” before satisfactory bargains can be struck. In particular, buyers and sellers must be paired with respect to (1) the kinds of goods they wish to trade; (2) the volumes of those goods; and (3) the times at which they are prepared to offer and receive them. Use of money as a medium of exchange facilitates the establishment of markets where individuals can buy or sell a given commodity without having to seek out partners whose offers exactly match their needs. In a money-mediated system I can expect to sell my car to A and use the money to purchase food, clothing, or anything else I may wish to buy from B, C or D now or at some later date. “Multilateral” trade replaces the “bilateral” mode that is characteristic of barter. 2.2. Fundamental differences between goods and exchanges of information
exchanges
of
That barter flourishes in the sphere of knowhow trading suggests that its disadvantages are less compelling in this area, and indeed they are. Some of the reasons are rooted in fundamental differences between exchanges of goods and of information. Others follow from specific features of the knowhow trading arrangement as distinguished from other modes of exchanging information.
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Exchanges of information differ from exchanges of conventional goods in two closely related respects: First, information that is transferred to another individual isn’t “given away”. Unless some special arrangement is made to deny further use to the original possessor, information sales involve sharing rather than transfer in the conventional sense used for goods. The initial stocks of two ordinary goods, i.e., n of 1 and m of 2, will always equal the sum of the final holdings of the two traders. Trade serves only to change the proportions of each good held by A and by B. In contrast, trade in technical information can increase the sum of holdings in the system. Thus A and B could continue to exchange up to the point where both parties held identical stocks of knowhow, i.e., where each item of knowhow is held by both parties. Each individual would then hold a stock of knowhow equal to the initial holdings of the entire system. Summing across the two individuals yields holdings for the pair equal to twice the sum of initial holdings. For exchange among larger groups similar generalizations hold: for each ordinary good, the sum of post-trade holdings by all traders equals the sum of initial stocks of that good. For information, the post-trade sum of holdings by all traders can be up to t times the initial stocks where t is the number of traders. Second, information “duplicates” are of no value. For informational exchange to make sense, “n units of 1” should be interpreted to mean “n different items of information in category 1”. Since information isn’t destroyed by use, duplicates are superfluous. While traders of information do not lose their knowhow when they give it away, they cannot increase it by acquiring duplicates. In contrast, traders in ordinary goods may benefit from acquiring more units of a good that was represented in their initial holdings. For example, a country that has enough wheat on hand to feed 75 percent of its population may benefit from trading some of its petroleum for additional wheat. On the other hand, someone who has already learned how to concentrate orange juice by a particular method has little use for repeated information that is identical to what he already knows. This property reflects unlimited economies of scale in the use of information mentioned earlier. Information is not “ used up”, as raw materials are, in the production process. It can be applied again and again.
Because the transfer of any given item of information between two parties is a unique event, rather than the repeated one that would characterize sales of goods, market price equilibrium cannot be reached through trial and error. It is certainly possible to gauge the cost of research required to solve a given technical problem or to impute a value to it based on expected cost saving or revenue enhancement. Managers who make frequent decisions about the acquisition of technology undoubtedly acquire skill in assigning such values. However, as in the case of works of art or custom services, valuation cannot be referred to the objective standards of an organized market and valuation is approximate. 2.3. Equivalence information
is not required for exchanges
of
Fortunately, accurate assignment of values to information is not a precondition of informational exchange. In exchanges of goods, the trader must make sure that the value of goods he receives is at least as great as the value of those that he must give up. But the trader of information retains the information that he trades; he needn’t give it up when he gives it away. Therefore he will benefit from any exchange, so long as the information to be acquired adds something to what he already knows. Schrader, in a preliminary survey of knowhow trading among steel minimill engineers [7], reaches the tentative conclusion that most traders believe that the total value of information given and received between trading partners tends to even out over the long run. This would suggest that rough equivalence in exchange, while not a necessary condition, is generally expected. There is no evidence, however, that any attempt is made literally to impute money values to knowhow. Given that the amount of time and energy that a given individual has available for trading is limited each is likely to try to maximize the useful yield of his trading. Would-be traders develop networks of colleagues and get to know potential partners through professional organizations and informal referrals. Cumulative experience provides a basis for judging individual partners’ contributions. Each trader might, given reasonable knowledge of his peers, favor partners that promise the most useful information in return for his own.
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A.P. Currer / Knowhow trading as economic exchange
Thus strong contributors might consent to trade only with others of high potential, leaving those of lesser reputation to pair off at their own levels. However, even though trading may be more rewarding if partners are chosen so as to exchange information of comparable worth, unequal exchange can still be more advantageous than none to both parties. In sum, incentives to exchange information are strong because neither party to such an exchange stands to lose. But don’t they? In a commercial context, where the economic benefit of technical information depends on the quasi-monopolistic position that it confers on an innovator, exchangers of information do incur costs. The cost to the trader of information is not the loss of the information itself, but rather “competitive backlash”, profits that are sacrificed when the monopolistic position of the innovator is diluted by sharing. To quantify the tradeoffs approximate values must be attributed to the factors involved.
Others like the patent system and the transfer of technology through equipment suppliers constitute ex post information exchange. Ex ante collaboration is essential when no single firm has access to the financial or intellectual resources necessary to support one or more important and/or ambitious projects. But such arrangements are fragile because research priorities of participating firms generally differ. In addition, the transfer of technology from the engineers in other firms or in joint research laboratories often proves difficult unless care is taken to involve potential users in the development effort. fix post exchange has the advantage that participants are free to target specific technical information in accordance with their individual priorities. To the extent that engineers are able to solve the problems for which they are expert and to trade with others with different expertise, ex post exchange encourages efficient specialization. 3.1. Tradeoffs when k firms share ~nforrn~t~~n costs
3. Tradeoffs of information sharing: Advantages of a knowhow trading regime Knowhow trading is only one of many alternative modes of sharing technical information. Technology is also transferred through the patent and research agreelicensing system, collaborative ments, transfer of personnel from firm to firm, packaging of technical information with new equipment and other inputs that they purchase, consultants and educational programs, and through “reverse engineering”. Clearly, different arrangements are appropriate to different technical and economic circumstances. Knowhow trading is not a direct substitute for consortia to sponsor basic research or to tackte large technical problems. lt can be an attractive alternative to hiring outside consultants or to dedicating the time of engineers to solving problems whose solutions are known in other plants. This section explains some of the strengths of knowhow trading as compared with other modes. These strengths lie in the fact that knowhow trading is pairwise, that it is based on long term relationships and that exchange is e.r post. Among the various modes of information sharing some, such as research consortia, are agreements to share research costs and findings ex cute.
ex ante
Through cooperative research or knowledge sharing agreements firms can avoid the duplicative costs of pursuing parallel technical search. On the other hand, sharing technical information with competitors cuts into the quasi-monopolistic profit margins associated with unique access to a given technology. Essentially, the decision whether to share technical information involves evaluating the tradeoff between savings due to shared search costs and the concomitant “competitive backlash”, dilution of the rents of innovation when others gain access to the new technique. To pursue this analysis requires the assumption that the relevant factors can be quantified. This tradeoff is captured in an equation of the sort used by Katz [4] in analyzing the ex unte incentives for investing in cooperative research. For a group of k identical firms it will pay to invest an additional dollar in shared research toward a new cost-saving technology provided that dl”,‘dt
= #c’(z) v;r - +‘c’( Z) y,‘( k - 1) cost competitive saving backlash -
l/k >O research cost
(1)
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A.P. Carter / Knowhow trading as economic exchange
Where V’ is profits of firm i; V,’ is influence of cost change in i on i’s profits; V,’ is influence of cost change in j on i’s profits; z is expenditure on acquiring shared information such as pooled research costs; c is unit production cost of the firm (assumed same for all firms); k is number of firms in pooling agreement; and +‘, 9’ is technology absorption coefficient: the proportion of the potential benefit of new technical information that the firm can actually use. Additional expenditure on shared information will increase profits if consequent savings in cost (first term) outweigh the combined effects of competitive backlash (second term) and research outlay (third term). For each in a given group of k firms it will pay to incur additional shared research costs when anticipated cost savings outweigh the sum of out-of-pocket research outlays plus competitive backlash, i.e., when the first term is large as compared with the second two.
sively higher levels of backlash exerted per competitor. As the number of firms increases, BO.. . B3 increase arithmetically while l/k decreases as a decreasing rate. Thus, as k increases, the disadvantage represented by the competitive backlash term tends to be magnified steadily by the increased breadth of competitive pressure. At the same time the burden of research costs is reduced with each additional member but the decrease is less than proportionate. The optimal number of firms in a sharing group (k) is that which minimizes the sum of out-of-pocket research costs plus competitive backlash. Figure 1 indicates that the optimal size of the sharing group is smaller the greater the per firm backlash. In situations where competitive backlash is judged to be significant or decisionmakers are cautious in evaluating its prospects, pairwise cooperation will be more advantageous than cost sharing among larger groups. 3.3. Gauging competition
3.2. How k affects the balance of cost sharing and competitive backlash Figure 1 illustrates how the balance of cost sharing and competitive backlash varies with the number of sharing firms. The rays marked BO _. . B3 represent total competitive backlash facing the decision making firm. BO.. .B3 represent succes-
6,1/k
2
'i \ I
l-
l/k 0
Fig. 1. Variation k.
1
of shared
2
3
cost and competitive
k
backlash
with
and competitive
backlash
For simplicity of exposition eq. (1) assumes an industry with identical firms in which information sharers are also competitors. In reality the relation between information sharing and competition will be much more complex and subject to change with the economic environment. Often firms use different technologies to produce competing products. Thus steel, plywood, plastics, ceramics, nonferrous metals and concrete compete in overlapping product markets and their prices are interdependent. At the same time they use different technologies and would not be likely to trade knowhow or share a cooperative research agenda. In this competitive context, producers of a single material may find advantage in helping each other to increase their shared market at the expense of others. Thus certain waferboard makers cited their interest in maintaining the reputation of waferboard as a reliable building material to explain their readiness to share knowhow [2]. Analogously, producers may compete in a product market against foreign firms that operate under very different cost conditions and who for political, cultural or economic reasons do not share technical information with domestic firms. This is not to suggest that information sharing communities do not cross national boundaries or that there can be no competitive backlash from abroad. Foreign firms may be viewed as “outsiders” in
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A.P. Carter / Knowhow trading as economic exchange
some instances and members of “ the industry” in others. Competition in the domestic product market may discourage technology sharing. On the other hand, heightened competition from substitute products or from abroad can increase the advantage of cooperation by reducing I$’ within the information sharing community. ’ Von Hippel points out that domestic firms may give greater weight to their competitive juxtaposition at one time than another. For example, aerospace firms are reported to desist from knowhow trading in anticipation of their direct competition for a particular defense contract and resume once the award is made. Thus the perspective of the potential sharers is an important influence on their behavior. In sum, the term 5’ that represents firm i’s sensitivity to cost reduction in i will depend on the importance of j in the configuration of all other firms that constitute i’s competition. This sensitivity is likely to vary with the particular technology that is being transferred and with many features of the economic environment. 3.4. Tradeoffs
under conditions of knowhow
trading
Knowhow trading involves a special form of cooperation in that it is pairwise (k = 2) ex post, and based on long term relationships. This suggests modification of eq. (1) as follows: dV’/dz’=
c’(z’)T/;’ c’(z’)v,’ > 0 . : cog competitive savmg backlash
where z’ is “volume” of knowhow traded. Three major differences from the general ante case should be noted:
(2)
ex
(1) Since knowhow trading is pairwise, k = 2 and (k - l), the term that multiplies competitive backlash is equal to one, i.e., as small as it can be without eliminating sharing altogether.
(2) Since information is exchanged ex post, the last term in the tradeoff expression is equal to zero: Partners incur no out-of-pocket cost in acquiring additional knowhow through trading. With no out-of-pocket costs to share, pairwise exchange is always preferable to sharing among larger cooperative groups because the former involves less competitive backlash. Von Hippel points out that most of the knowhow that is exchanged could, alternatively, have been acquired directly through the expenditure of engineering time and effort. Essentially, traders face a series of “make-or-trade” decisions about how to acquire knowhow. Presumably the option of knowhow trading encourages engineers to specialize in those problems that they are most adept at solving and to take advantage of the benefits of specialization through trade. Out-ofpocket cost is realistically treated as zero because the number of engineers involved in trading or searching is probably determined by management independently of the trading option. (3) Normally careful selection of partners and the formation of long-term exchange relationships brings about very effective transfer of technical information. Furthermore, knowhow traders request only those items of information that they can actually use. Thus, in a knowhow trading regime it is reasonable to expect values of +’ and $J close to one. In sum, knowhow trading works in such a way that some major deterrents to the sharing of technical knowledge are minimized. Since trade is ex post traders are likely to consider the costs of search for new methods as sunk; hence out-ofpocket costs of trading are zero. In pair-wise trading the scope of competitive backlash is limited to a single firm. Finally, each partner can select knowhow on the basis of his own priorities and long-term trading relationships favor efficiency of information transfer. 3.5. Knowhow
’ An anonymous referee suggests that such considerations were important in leading to extensive information exchanges among Japanese firms in textiles and elsewhere at an earlier stage in the history of Japanese industrialization. He also points to evidence that firms in the American electronics industries have been freer in the exchange of useful information among themselves because of a desire to survive the Japanese competitive onslaught.
trading as “atomistic
cooperation”
Incentives for pairwise knowhow trading are in many instances analogous to incentives for price takers under conditions of atomistic competition. Each trader releases only limited parcels of knowhow to a single partner in any given exchange. Realistically, the firm sees each transac-
A.P. Caner / Knowhow trading as economic exchange
tion as negligibly small in relation to the market forces that govern the sale of its product. Of course, if many firms simultaneously participate in knowhow trading, the net result may be substantial industrywide improvements in efficiency and under competitive conditions these may lead to significant price reductions. Furthermore, if many firms are gaining in efficiency through the benefits of pairwise trading, those who fail to take advantage of such opportunities will fall behind competitively. Thus atomistic cooperation between pairs may improve the profitability of participants temporarily but, as in the case of an industrywide collaborative research agreement, participants may be forced by competition to pass on their savings to consumers. On the other hand a trader cannot unilaterally improve his position by refusing to trade. His abstinence does not control the behavior of other trading pairs and hence it does not remove the competitive pressure that may come from the improved performance of those who do take advantage of the benefits of information sharing.
4. Subjects for further study The foregoing discussion was concerned with showing why informal knowhow trading is a robust institution that is well adapted to the special requirements of informational exchange. As was suggested above, it suits some technical tasks better than others. It does not obviate the need to pool resources when no individual firm is prepared to bear the cost of “big ticket” research. While it keeps transactions costs very low, it does not provide a stream of royalty payments. This final section calls attention to two particular problems that may limit the app~~abi~ty of knowhow trading under some circumstances. These deserve further study. 4.1. Decentralization knowhow trading
and
the
management
of
Only personnel directly concerned with the specific problems of production have the experience to judge their technical needs, the expertise to absorb the incoming information and the collegial relations that would make knowhow trading possible. Furthermore, only experienced technical
161
personnel are in a position to evaluate the relative costs of internal search for solution to a particular problem as compared with acquiring external information. At the same time, these particular specialists may not understand the firm’s competitive circumstances in depth. They may not have the perspective needed to assess the effects of acquiring new technology, or of sharing present technology with trading partners, on the firm’s competitive position. While they are expert in technological priorities, they are not necessarily well informed about competitive backlash. In practice, the flexibility and focus of knowhow trading may come at the expense of integrated managerial control because no one is in an ideal position to appraise the tradeoffs represented in eq. (2). Of course, knowhow trading is not the only function that is delegated to specialists. Indeed it would be impossible for an organization of even very modest size to operate without significant delegation of authority. Further, any decentralization brings some potential disjunction between the central objectives of management and the interests of the particular group or individual to whom authority is delegated. Despite strong analogies between the delegation of authority for production decisions and for knowhow trading, there are some systematic differences that might be troublesome. Most operations that relate directly to production can be judged in terms of adherence to budget guidelines or in terms of expenses incurred as compared with revenues generated. Knowhow trading is outside of budget controls because trading activities are not quantified. The production manager who wastes materials or hires too many workers is faulted with high costs; the sales department that tries to make too many visits exhausts its budget. In contrast, the knowhow trader has no budget guidelines that govern the amount of information he may release. Nor does he have a line for recording valuable knowhow received to his credit. A specialist who is overgenerous with technical info~ation may be unnoticed for a long time because it may be difficult to attribute competitive pressures to the transfers of technology that he made. It is would be even more difficult for nontechnical management to judge whether important opportunities to acquire state of the art technology through trading were overlooked. Since money values are not assigned to the technological
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A. P. Carter / Knowhow trading as economic exchange
information given and received there is no direct way of appraising an individual’s trading behavior in terms of a “bottom line” signal. Thus the knowhow trader escapes the discipline, or foregoes the security, of explicit budgetary or accounting controls with respect to his trading activity. Ultimately, of course, effective knowhow trading should lead to economies in the production sphere. Without an estimate of the costs associated with these economies it is not easy to rate the judgment of the trader or the productivity of his exchanges. Since knowhow traders must proceed with significant autonomy some agency problems are likely. To what extent do the personal incentives that motivate the actual traders coincide with the best interests of the firm? Certainly there will be large areas of intersection. Employees want the financial and professional recognition within the organization that comes when they upgrade technoiogy and improve productive performance. Possible sources of conflict lie in the employee’s loyalty to and aspirations in his broader professional community, analogous to the academic “invisible colleges”, in his interests in professional advancement even in another company and in the conservative bias involved in avoiding any trades that might generate managerial criticism and thus threaten autonomy. 4.2. Pairwise
or multilateral
trade in knowhow?
A major disadvantage of barter in general is that it limits opportu~ties for multilateral trade. This could be a deficiency in knowhow trading too. It is easy to envisage a situation where A has information of high priority to B but not vice versa. Under such conditions it would be theoretically efficient for B to supply knowhow to C who, in turn, supplies A with the info~ation he wants. Here a network would allow for a more elaborate technical specialization than exchange limited to pairs. In theory there is no reason why knowhow trading in kind should not be extended to multilateral networks of three or more. We do not yet know whether the level of communication and of trust among traders in industrial knowhow is sufficient to permit multilateral trading or whether pairwise matching of interests will be a precondition for technical exchange in most instances. Further research is required to find out whether
collegial interactions among technical personnel in industry are similar to interactions in academic “invisible colleges” or whether they are more restrictive. Von Hippd emphasizes ’ that many knowhow traders cannot afford to risk implementation of new practices that they don’t understand thoroughly, since the costs of disrupting the orderly productive flow would be great. This would suggest that knowhow traders cannot specialize narrowly. They must be well informed about all aspects of the technologies they use. This would also suggest that knowhow transmitted from a third party who is not well known to the trader might involve unacceptable risk. To the extent that this is so, the pairwise character of barter makes it all the more suitable for knowhow trading.
5. Conclusion Given the pace of technological change today, investment in developing and improving methods of production must be seen as a central factor affecting economic performance. However, economists find it difficult to measure the volume of investment in change itself. Outside of a few very limited proxies such as employment of scientists and engineers, expenditures on research and development and payments for royalties and licensing fees, investment in change is not satisfactorily measured on a national, or even on a firm-wide scale. Study of knowhow trading illuminates some of the general problems economists face in valuing technical problem-solving as economic activity. Barter may be an ideal form of informational exchange but it leaves no paper trail to inform research or even management. Information sharing can greatly increase the effective use and thus the potential value of a given investment in technology. But the sharing activity is not captured as a transaction in the firm’s financial records and therefore it is not reported as economic activity in the standard economic statistics. These problems are far from trivial in our attempts to understand the diffusion of technical knowledge.
* Informal
conversation,
August
1987.
A.P. Carter / Knowhow trading as economic exchange
References
Ul Kenneth J. Arrow, Economic Welfare and the Allocation
of Resources for Invention, in: Universities-National Bureau of Economic Research, The Rate and Direction of Economic Activity (Princeton University Press, Princeton, 1962) pp. 609-625. Behavior related to PI Alan E. Drane, Hide/Trade/Reveal Manufacturing Process Know-How, unpublished Master’s thesis in the Management of Technology, Massachusetts Institute of Technology, 1985. I31 Charles J. Hitch, The Character of Research and Deuelopment in a Competitiue Economy (The Rand Corporation, May 1958). Research and 141 Michael Katz, An Analysis of Cooperative
[5]
[6]
[7]
[8]
163
Development, Rand Journal of Economics 17 (1986) 527-543. Fritz Machlup, The Production and Use of Knowledge rn the Unrted States (Princeton University Press, Princeton, (1962) ch. 2. Richard R. Nelson, The Simple Economics of Basic Scientific Research, Journal of Political Economy 67 (1959) 297-306. Stefan Schrader, Informal Transfer of Techmcal Information between Companies: Framework and Empirical Analysis into Engineers’ Decisrons. Munich University Working Paper (January 1988). Eric von Hippel, Cooperation between Rivals: Informal Knowhow Trading, Research Policy 16 (1987) 291-302.
Knowhow trading as economic exchange Anne P. CARTER Department
of Economics, Brandeis University,
Waltham, MA 02254, U.S.A.
Final version received July 1988
Knowhow trading is the informal exchange of practical technical knowledge between pairs of engineers and other technicians in different firms. This paper explains the advantages and disadvantages of this particular mode of knowledge sharing from an economic perspective. Under a knowhow trading regime long-term, self-selected partners barter knowledge ex post, i.e., they exchange information already known to one of them. The paper explains why barter is better suited to the exchange of ideas than to the exchange of conventional goods and points out advantages of ex post knowledge sharing between firms whose priorities differ. It is generally cheaper to acquire knowhow through exchanges than to “reinvent the wheel” but sharing knowhow can cut into the firm’s competitive advantage. Pairwise exchanges limit, although they do not eliminate, the firm’s loss of competitive advantage when it shares technical knowledge. Because knowhow trading is informal and “off the books” such trading is difficult for the firm to evaluate and to manage. Similarly, since it eludes the traditional measures of economic activity, knowhow trading is difficult to document and integrate into studies of the general economy.
1. Background In a recent issue of this journal Eric von Hippel [8] called attention to a previously unrecognized vehicle for the diffusion of technology that he calls informal knowhow trading. Knowhow trading is technical assistance that engineers and other technically oriented personnel exchange with peers in other firms. The unpretentious term “ knowhow” emphasizes the practical as contrasted with the formal or theoretical aspects of a technology that might appropriately be treated in professional journals. Knowhow encompasses a wide range of practices including chemical, mechanical or organizational means of implementing or expediting a process, improving quality, meeting safety
Research Policy 18 (1989) 155-163 North-Holland
0048-7333/89/$3.50
and environmental standards, choosing equipment, using it efficiently or keeping useful records. Knowhow may be conveyed in a variety of ways -by simple verbal suggestions, by conversations followed by a series of questions and answers, by plant visits, by offering training to key personnel or even by sharing computer programs. Sectors where knowhow trading has been observed thus far include steel minimills, waferboard and aerospace. Long-term pairwise trading relationships between peers are formed and mutual trust and understanding built up over time. No money changes hands, nor are formal records kept. Instead colleagues ask each other for very specific technical information. Technical assistance comes with the obligation to reciprocate later on. Often knowhow traders represent competing or potentially competing firms. Traders may refuse to transmit information that they judge to be “of great competitive value” or otherwise confidential to the firm. Firms vary in their attitudes toward knowhow trading. Von Hippel finds that the practice is apparently uncommon in some sectors like biological enzyme manufacturing and the manufacture of powdered metal parts. With the exception of setting broad guidelines that permit, encourage or discourage knowhow trading, management delegates the knowhow trading function to engineers and other technically oriented personnel. Research in this area is just beginning. We do not yet know how long or how widely this practice has prevailed nor how rapidly it is growing. Along with purely academic interest, widespread concern with industrial competitiveness justifies study of its potential role in effecting technological improvement. Von Hippel views knowhow trading as “cooperation among competitors” and shows that such cooperative behavior is often rational in the
0 1989, Elsevier Science Publishers B.V. (North-Holland)
156
A. P. Carfer / Knowhow trading as ecmmnzc exchange
framework of a generalized prisoner’s dilemma. While his argument is convincing it does not explain why knowhow trading has been relatively robust in the domain of interfirm technical cooperation where alliances have typically been fragile and limited. This paper probes a little further into the economic incentives that motivate the sharing of technical information. It explores the special economic properties of trade in information, as contrasted with trade in goods, that justify labeling it “cooperation” and analyzes the economic conditions under which the benefits of sharing information will exceed its costs. These explorations highlight features of knowhow trading that contribute to its success as a particular institutional form of information sharing. Two lines of argument are developed. In section 2, some fundamental differences between exchanges of information and of conventional goods are pointed out. Traders of information do not generally “lose” the information that they exchange and therefore the incentive to exchange can be very strong. Disincentives to trading information lie in “competitive backlash”, the profiteroding effect of sharing technical information with competitors. In section 3, knowhow trading is considered as a particular mode of cooperation in a general framework for evaluating the tradeoffs of information sharing among competitors. Section 4 cites some limitations of knowhow trading that warrant further study.
2. Knowhow trading as informational barter As the information economy evolves it becomes clear that institutions of property and exchange that function well in the world of goods may not suit the world of ideas [1,3,5,6]. Much of our information stock is viewed as a free good by our society and legal experts are still struggling to accommodate ideas of intellectual property in a framework adapted primarily to real property. purveyors of Writers, publishers, consultants, software find it necessary to cope with the “leakiness” of information in an economic milieu best suited to exchanges of goods. Knowhow trading is a very special form of exchange. In the tradition of the market economy, knowhow traders treat information not as a free good but as an exchangeable asset. However, where
most goods are sold for money, knowhow trading is essentially barter. In this respect, knowhow trading is different from some other forms of industrial information sharing, particularly patent licensing and collaborative research. Barter makes it possible to avoid the often difficult problem of assigning money values to information. That barter serves the purposes of intellectual exchange well depends on fundamental differences between exchange of goods and of information. 2.1. Disadvantages
of barter for trade of goods
In developing the theory of exchange, economists used trade in goods as prototypes. Thus Adam Smith used the example of trading beaver for deer to explain relative values. Ricardo centered his analysis of comparative advantage on the exchange of grain and wine. In a world of commodity exchange, barter has distinct disadvantages that must be overcome if trade is to flourish. These disadvantages center around the need for purchasers and sellers to be “matched” before satisfactory bargains can be struck. In particular, buyers and sellers must be paired with respect to (1) the kinds of goods they wish to trade; (2) the volumes of those goods; and (3) the times at which they are prepared to offer and receive them. Use of money as a medium of exchange facilitates the establishment of markets where individuals can buy or sell a given commodity without having to seek out partners whose offers exactly match their needs. In a money-mediated system I can expect to sell my car to A and use the money to purchase food, clothing, or anything else I may wish to buy from B, C or D now or at some later date. “Multilateral” trade replaces the “bilateral” mode that is characteristic of barter. 2.2. Fundamental differences between goods and exchanges of information
exchanges
of
That barter flourishes in the sphere of knowhow trading suggests that its disadvantages are less compelling in this area, and indeed they are. Some of the reasons are rooted in fundamental differences between exchanges of goods and of information. Others follow from specific features of the knowhow trading arrangement as distinguished from other modes of exchanging information.
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Exchanges of information differ from exchanges of conventional goods in two closely related respects: First, information that is transferred to another individual isn’t “given away”. Unless some special arrangement is made to deny further use to the original possessor, information sales involve sharing rather than transfer in the conventional sense used for goods. The initial stocks of two ordinary goods, i.e., n of 1 and m of 2, will always equal the sum of the final holdings of the two traders. Trade serves only to change the proportions of each good held by A and by B. In contrast, trade in technical information can increase the sum of holdings in the system. Thus A and B could continue to exchange up to the point where both parties held identical stocks of knowhow, i.e., where each item of knowhow is held by both parties. Each individual would then hold a stock of knowhow equal to the initial holdings of the entire system. Summing across the two individuals yields holdings for the pair equal to twice the sum of initial holdings. For exchange among larger groups similar generalizations hold: for each ordinary good, the sum of post-trade holdings by all traders equals the sum of initial stocks of that good. For information, the post-trade sum of holdings by all traders can be up to t times the initial stocks where t is the number of traders. Second, information “duplicates” are of no value. For informational exchange to make sense, “n units of 1” should be interpreted to mean “n different items of information in category 1”. Since information isn’t destroyed by use, duplicates are superfluous. While traders of information do not lose their knowhow when they give it away, they cannot increase it by acquiring duplicates. In contrast, traders in ordinary goods may benefit from acquiring more units of a good that was represented in their initial holdings. For example, a country that has enough wheat on hand to feed 75 percent of its population may benefit from trading some of its petroleum for additional wheat. On the other hand, someone who has already learned how to concentrate orange juice by a particular method has little use for repeated information that is identical to what he already knows. This property reflects unlimited economies of scale in the use of information mentioned earlier. Information is not “ used up”, as raw materials are, in the production process. It can be applied again and again.
Because the transfer of any given item of information between two parties is a unique event, rather than the repeated one that would characterize sales of goods, market price equilibrium cannot be reached through trial and error. It is certainly possible to gauge the cost of research required to solve a given technical problem or to impute a value to it based on expected cost saving or revenue enhancement. Managers who make frequent decisions about the acquisition of technology undoubtedly acquire skill in assigning such values. However, as in the case of works of art or custom services, valuation cannot be referred to the objective standards of an organized market and valuation is approximate. 2.3. Equivalence information
is not required for exchanges
of
Fortunately, accurate assignment of values to information is not a precondition of informational exchange. In exchanges of goods, the trader must make sure that the value of goods he receives is at least as great as the value of those that he must give up. But the trader of information retains the information that he trades; he needn’t give it up when he gives it away. Therefore he will benefit from any exchange, so long as the information to be acquired adds something to what he already knows. Schrader, in a preliminary survey of knowhow trading among steel minimill engineers [7], reaches the tentative conclusion that most traders believe that the total value of information given and received between trading partners tends to even out over the long run. This would suggest that rough equivalence in exchange, while not a necessary condition, is generally expected. There is no evidence, however, that any attempt is made literally to impute money values to knowhow. Given that the amount of time and energy that a given individual has available for trading is limited each is likely to try to maximize the useful yield of his trading. Would-be traders develop networks of colleagues and get to know potential partners through professional organizations and informal referrals. Cumulative experience provides a basis for judging individual partners’ contributions. Each trader might, given reasonable knowledge of his peers, favor partners that promise the most useful information in return for his own.
158
A.P. Currer / Knowhow trading as economic exchange
Thus strong contributors might consent to trade only with others of high potential, leaving those of lesser reputation to pair off at their own levels. However, even though trading may be more rewarding if partners are chosen so as to exchange information of comparable worth, unequal exchange can still be more advantageous than none to both parties. In sum, incentives to exchange information are strong because neither party to such an exchange stands to lose. But don’t they? In a commercial context, where the economic benefit of technical information depends on the quasi-monopolistic position that it confers on an innovator, exchangers of information do incur costs. The cost to the trader of information is not the loss of the information itself, but rather “competitive backlash”, profits that are sacrificed when the monopolistic position of the innovator is diluted by sharing. To quantify the tradeoffs approximate values must be attributed to the factors involved.
Others like the patent system and the transfer of technology through equipment suppliers constitute ex post information exchange. Ex ante collaboration is essential when no single firm has access to the financial or intellectual resources necessary to support one or more important and/or ambitious projects. But such arrangements are fragile because research priorities of participating firms generally differ. In addition, the transfer of technology from the engineers in other firms or in joint research laboratories often proves difficult unless care is taken to involve potential users in the development effort. fix post exchange has the advantage that participants are free to target specific technical information in accordance with their individual priorities. To the extent that engineers are able to solve the problems for which they are expert and to trade with others with different expertise, ex post exchange encourages efficient specialization. 3.1. Tradeoffs when k firms share ~nforrn~t~~n costs
3. Tradeoffs of information sharing: Advantages of a knowhow trading regime Knowhow trading is only one of many alternative modes of sharing technical information. Technology is also transferred through the patent and research agreelicensing system, collaborative ments, transfer of personnel from firm to firm, packaging of technical information with new equipment and other inputs that they purchase, consultants and educational programs, and through “reverse engineering”. Clearly, different arrangements are appropriate to different technical and economic circumstances. Knowhow trading is not a direct substitute for consortia to sponsor basic research or to tackte large technical problems. lt can be an attractive alternative to hiring outside consultants or to dedicating the time of engineers to solving problems whose solutions are known in other plants. This section explains some of the strengths of knowhow trading as compared with other modes. These strengths lie in the fact that knowhow trading is pairwise, that it is based on long term relationships and that exchange is e.r post. Among the various modes of information sharing some, such as research consortia, are agreements to share research costs and findings ex cute.
ex ante
Through cooperative research or knowledge sharing agreements firms can avoid the duplicative costs of pursuing parallel technical search. On the other hand, sharing technical information with competitors cuts into the quasi-monopolistic profit margins associated with unique access to a given technology. Essentially, the decision whether to share technical information involves evaluating the tradeoff between savings due to shared search costs and the concomitant “competitive backlash”, dilution of the rents of innovation when others gain access to the new technique. To pursue this analysis requires the assumption that the relevant factors can be quantified. This tradeoff is captured in an equation of the sort used by Katz [4] in analyzing the ex unte incentives for investing in cooperative research. For a group of k identical firms it will pay to invest an additional dollar in shared research toward a new cost-saving technology provided that dl”,‘dt
= #c’(z) v;r - +‘c’( Z) y,‘( k - 1) cost competitive saving backlash -
l/k >O research cost
(1)
159
A.P. Carter / Knowhow trading as economic exchange
Where V’ is profits of firm i; V,’ is influence of cost change in i on i’s profits; V,’ is influence of cost change in j on i’s profits; z is expenditure on acquiring shared information such as pooled research costs; c is unit production cost of the firm (assumed same for all firms); k is number of firms in pooling agreement; and +‘, 9’ is technology absorption coefficient: the proportion of the potential benefit of new technical information that the firm can actually use. Additional expenditure on shared information will increase profits if consequent savings in cost (first term) outweigh the combined effects of competitive backlash (second term) and research outlay (third term). For each in a given group of k firms it will pay to incur additional shared research costs when anticipated cost savings outweigh the sum of out-of-pocket research outlays plus competitive backlash, i.e., when the first term is large as compared with the second two.
sively higher levels of backlash exerted per competitor. As the number of firms increases, BO.. . B3 increase arithmetically while l/k decreases as a decreasing rate. Thus, as k increases, the disadvantage represented by the competitive backlash term tends to be magnified steadily by the increased breadth of competitive pressure. At the same time the burden of research costs is reduced with each additional member but the decrease is less than proportionate. The optimal number of firms in a sharing group (k) is that which minimizes the sum of out-of-pocket research costs plus competitive backlash. Figure 1 indicates that the optimal size of the sharing group is smaller the greater the per firm backlash. In situations where competitive backlash is judged to be significant or decisionmakers are cautious in evaluating its prospects, pairwise cooperation will be more advantageous than cost sharing among larger groups. 3.3. Gauging competition
3.2. How k affects the balance of cost sharing and competitive backlash Figure 1 illustrates how the balance of cost sharing and competitive backlash varies with the number of sharing firms. The rays marked BO _. . B3 represent total competitive backlash facing the decision making firm. BO.. .B3 represent succes-
6,1/k
2
'i \ I
l-
l/k 0
Fig. 1. Variation k.
1
of shared
2
3
cost and competitive
k
backlash
with
and competitive
backlash
For simplicity of exposition eq. (1) assumes an industry with identical firms in which information sharers are also competitors. In reality the relation between information sharing and competition will be much more complex and subject to change with the economic environment. Often firms use different technologies to produce competing products. Thus steel, plywood, plastics, ceramics, nonferrous metals and concrete compete in overlapping product markets and their prices are interdependent. At the same time they use different technologies and would not be likely to trade knowhow or share a cooperative research agenda. In this competitive context, producers of a single material may find advantage in helping each other to increase their shared market at the expense of others. Thus certain waferboard makers cited their interest in maintaining the reputation of waferboard as a reliable building material to explain their readiness to share knowhow [2]. Analogously, producers may compete in a product market against foreign firms that operate under very different cost conditions and who for political, cultural or economic reasons do not share technical information with domestic firms. This is not to suggest that information sharing communities do not cross national boundaries or that there can be no competitive backlash from abroad. Foreign firms may be viewed as “outsiders” in
160
A.P. Carter / Knowhow trading as economic exchange
some instances and members of “ the industry” in others. Competition in the domestic product market may discourage technology sharing. On the other hand, heightened competition from substitute products or from abroad can increase the advantage of cooperation by reducing I$’ within the information sharing community. ’ Von Hippel points out that domestic firms may give greater weight to their competitive juxtaposition at one time than another. For example, aerospace firms are reported to desist from knowhow trading in anticipation of their direct competition for a particular defense contract and resume once the award is made. Thus the perspective of the potential sharers is an important influence on their behavior. In sum, the term 5’ that represents firm i’s sensitivity to cost reduction in i will depend on the importance of j in the configuration of all other firms that constitute i’s competition. This sensitivity is likely to vary with the particular technology that is being transferred and with many features of the economic environment. 3.4. Tradeoffs
under conditions of knowhow
trading
Knowhow trading involves a special form of cooperation in that it is pairwise (k = 2) ex post, and based on long term relationships. This suggests modification of eq. (1) as follows: dV’/dz’=
c’(z’)T/;’ c’(z’)v,’ > 0 . : cog competitive savmg backlash
where z’ is “volume” of knowhow traded. Three major differences from the general ante case should be noted:
(2)
ex
(1) Since knowhow trading is pairwise, k = 2 and (k - l), the term that multiplies competitive backlash is equal to one, i.e., as small as it can be without eliminating sharing altogether.
(2) Since information is exchanged ex post, the last term in the tradeoff expression is equal to zero: Partners incur no out-of-pocket cost in acquiring additional knowhow through trading. With no out-of-pocket costs to share, pairwise exchange is always preferable to sharing among larger cooperative groups because the former involves less competitive backlash. Von Hippel points out that most of the knowhow that is exchanged could, alternatively, have been acquired directly through the expenditure of engineering time and effort. Essentially, traders face a series of “make-or-trade” decisions about how to acquire knowhow. Presumably the option of knowhow trading encourages engineers to specialize in those problems that they are most adept at solving and to take advantage of the benefits of specialization through trade. Out-ofpocket cost is realistically treated as zero because the number of engineers involved in trading or searching is probably determined by management independently of the trading option. (3) Normally careful selection of partners and the formation of long-term exchange relationships brings about very effective transfer of technical information. Furthermore, knowhow traders request only those items of information that they can actually use. Thus, in a knowhow trading regime it is reasonable to expect values of +’ and $J close to one. In sum, knowhow trading works in such a way that some major deterrents to the sharing of technical knowledge are minimized. Since trade is ex post traders are likely to consider the costs of search for new methods as sunk; hence out-ofpocket costs of trading are zero. In pair-wise trading the scope of competitive backlash is limited to a single firm. Finally, each partner can select knowhow on the basis of his own priorities and long-term trading relationships favor efficiency of information transfer. 3.5. Knowhow
’ An anonymous referee suggests that such considerations were important in leading to extensive information exchanges among Japanese firms in textiles and elsewhere at an earlier stage in the history of Japanese industrialization. He also points to evidence that firms in the American electronics industries have been freer in the exchange of useful information among themselves because of a desire to survive the Japanese competitive onslaught.
trading as “atomistic
cooperation”
Incentives for pairwise knowhow trading are in many instances analogous to incentives for price takers under conditions of atomistic competition. Each trader releases only limited parcels of knowhow to a single partner in any given exchange. Realistically, the firm sees each transac-
A.P. Caner / Knowhow trading as economic exchange
tion as negligibly small in relation to the market forces that govern the sale of its product. Of course, if many firms simultaneously participate in knowhow trading, the net result may be substantial industrywide improvements in efficiency and under competitive conditions these may lead to significant price reductions. Furthermore, if many firms are gaining in efficiency through the benefits of pairwise trading, those who fail to take advantage of such opportunities will fall behind competitively. Thus atomistic cooperation between pairs may improve the profitability of participants temporarily but, as in the case of an industrywide collaborative research agreement, participants may be forced by competition to pass on their savings to consumers. On the other hand a trader cannot unilaterally improve his position by refusing to trade. His abstinence does not control the behavior of other trading pairs and hence it does not remove the competitive pressure that may come from the improved performance of those who do take advantage of the benefits of information sharing.
4. Subjects for further study The foregoing discussion was concerned with showing why informal knowhow trading is a robust institution that is well adapted to the special requirements of informational exchange. As was suggested above, it suits some technical tasks better than others. It does not obviate the need to pool resources when no individual firm is prepared to bear the cost of “big ticket” research. While it keeps transactions costs very low, it does not provide a stream of royalty payments. This final section calls attention to two particular problems that may limit the app~~abi~ty of knowhow trading under some circumstances. These deserve further study. 4.1. Decentralization knowhow trading
and
the
management
of
Only personnel directly concerned with the specific problems of production have the experience to judge their technical needs, the expertise to absorb the incoming information and the collegial relations that would make knowhow trading possible. Furthermore, only experienced technical
161
personnel are in a position to evaluate the relative costs of internal search for solution to a particular problem as compared with acquiring external information. At the same time, these particular specialists may not understand the firm’s competitive circumstances in depth. They may not have the perspective needed to assess the effects of acquiring new technology, or of sharing present technology with trading partners, on the firm’s competitive position. While they are expert in technological priorities, they are not necessarily well informed about competitive backlash. In practice, the flexibility and focus of knowhow trading may come at the expense of integrated managerial control because no one is in an ideal position to appraise the tradeoffs represented in eq. (2). Of course, knowhow trading is not the only function that is delegated to specialists. Indeed it would be impossible for an organization of even very modest size to operate without significant delegation of authority. Further, any decentralization brings some potential disjunction between the central objectives of management and the interests of the particular group or individual to whom authority is delegated. Despite strong analogies between the delegation of authority for production decisions and for knowhow trading, there are some systematic differences that might be troublesome. Most operations that relate directly to production can be judged in terms of adherence to budget guidelines or in terms of expenses incurred as compared with revenues generated. Knowhow trading is outside of budget controls because trading activities are not quantified. The production manager who wastes materials or hires too many workers is faulted with high costs; the sales department that tries to make too many visits exhausts its budget. In contrast, the knowhow trader has no budget guidelines that govern the amount of information he may release. Nor does he have a line for recording valuable knowhow received to his credit. A specialist who is overgenerous with technical info~ation may be unnoticed for a long time because it may be difficult to attribute competitive pressures to the transfers of technology that he made. It is would be even more difficult for nontechnical management to judge whether important opportunities to acquire state of the art technology through trading were overlooked. Since money values are not assigned to the technological
162
A. P. Carter / Knowhow trading as economic exchange
information given and received there is no direct way of appraising an individual’s trading behavior in terms of a “bottom line” signal. Thus the knowhow trader escapes the discipline, or foregoes the security, of explicit budgetary or accounting controls with respect to his trading activity. Ultimately, of course, effective knowhow trading should lead to economies in the production sphere. Without an estimate of the costs associated with these economies it is not easy to rate the judgment of the trader or the productivity of his exchanges. Since knowhow traders must proceed with significant autonomy some agency problems are likely. To what extent do the personal incentives that motivate the actual traders coincide with the best interests of the firm? Certainly there will be large areas of intersection. Employees want the financial and professional recognition within the organization that comes when they upgrade technoiogy and improve productive performance. Possible sources of conflict lie in the employee’s loyalty to and aspirations in his broader professional community, analogous to the academic “invisible colleges”, in his interests in professional advancement even in another company and in the conservative bias involved in avoiding any trades that might generate managerial criticism and thus threaten autonomy. 4.2. Pairwise
or multilateral
trade in knowhow?
A major disadvantage of barter in general is that it limits opportu~ties for multilateral trade. This could be a deficiency in knowhow trading too. It is easy to envisage a situation where A has information of high priority to B but not vice versa. Under such conditions it would be theoretically efficient for B to supply knowhow to C who, in turn, supplies A with the info~ation he wants. Here a network would allow for a more elaborate technical specialization than exchange limited to pairs. In theory there is no reason why knowhow trading in kind should not be extended to multilateral networks of three or more. We do not yet know whether the level of communication and of trust among traders in industrial knowhow is sufficient to permit multilateral trading or whether pairwise matching of interests will be a precondition for technical exchange in most instances. Further research is required to find out whether
collegial interactions among technical personnel in industry are similar to interactions in academic “invisible colleges” or whether they are more restrictive. Von Hippd emphasizes ’ that many knowhow traders cannot afford to risk implementation of new practices that they don’t understand thoroughly, since the costs of disrupting the orderly productive flow would be great. This would suggest that knowhow traders cannot specialize narrowly. They must be well informed about all aspects of the technologies they use. This would also suggest that knowhow transmitted from a third party who is not well known to the trader might involve unacceptable risk. To the extent that this is so, the pairwise character of barter makes it all the more suitable for knowhow trading.
5. Conclusion Given the pace of technological change today, investment in developing and improving methods of production must be seen as a central factor affecting economic performance. However, economists find it difficult to measure the volume of investment in change itself. Outside of a few very limited proxies such as employment of scientists and engineers, expenditures on research and development and payments for royalties and licensing fees, investment in change is not satisfactorily measured on a national, or even on a firm-wide scale. Study of knowhow trading illuminates some of the general problems economists face in valuing technical problem-solving as economic activity. Barter may be an ideal form of informational exchange but it leaves no paper trail to inform research or even management. Information sharing can greatly increase the effective use and thus the potential value of a given investment in technology. But the sharing activity is not captured as a transaction in the firm’s financial records and therefore it is not reported as economic activity in the standard economic statistics. These problems are far from trivial in our attempts to understand the diffusion of technical knowledge.
* Informal
conversation,
August
1987.
A.P. Carter / Knowhow trading as economic exchange
References
Ul Kenneth J. Arrow, Economic Welfare and the Allocation
of Resources for Invention, in: Universities-National Bureau of Economic Research, The Rate and Direction of Economic Activity (Princeton University Press, Princeton, 1962) pp. 609-625. Behavior related to PI Alan E. Drane, Hide/Trade/Reveal Manufacturing Process Know-How, unpublished Master’s thesis in the Management of Technology, Massachusetts Institute of Technology, 1985. I31 Charles J. Hitch, The Character of Research and Deuelopment in a Competitiue Economy (The Rand Corporation, May 1958). Research and 141 Michael Katz, An Analysis of Cooperative
[5]
[6]
[7]
[8]
163
Development, Rand Journal of Economics 17 (1986) 527-543. Fritz Machlup, The Production and Use of Knowledge rn the Unrted States (Princeton University Press, Princeton, (1962) ch. 2. Richard R. Nelson, The Simple Economics of Basic Scientific Research, Journal of Political Economy 67 (1959) 297-306. Stefan Schrader, Informal Transfer of Techmcal Information between Companies: Framework and Empirical Analysis into Engineers’ Decisrons. Munich University Working Paper (January 1988). Eric von Hippel, Cooperation between Rivals: Informal Knowhow Trading, Research Policy 16 (1987) 291-302.