Journal of Economic Behavior and Organization 18 (1992) l-25.

North-Holland

Competition, cooperation, and innovation

Organizational arrangements for. regimes of rapid
technological progress

David J. Teece*
Walter A. Haas School oJ Business, University of California at Berkeley, Berkeley, CA 94720,
USA

Received September 1989, final version received May 1990

Discussions of the link between firm size and innovation are outmoded because the boundaries
of the firm have become fuzzy in recent decades. Strategic alliances - constellations of bilateral
agreements among lirms - are increasingly necessary to support innovative activities. Such
alliances can facilitate complex coordination beyond what the price system can accomplish,
while avoiding the dysfunctional properties sometimes associated with hierarchy. Antitrust law
and competition policy need to recognize that these new organizational forms are often the
functional antithesis of cartels, though they may have certain structural similarities. A more
complete understanding of bilateral contracts and agreements ought to reveal when and how
cooperation can support rather than impede innovation and competition.

1. Introduction
Competition is essential to the innovation process and to capitalist
economic development more generally. But so is cooperation. The challenge
to policy analysts and to managers is to find the right balance of competition
and cooperation, and the appropriate institutional structures within which
competition and cooperation ought to take place.
Unfortunately, the economics textbooks tell us virtually nothing about
these issues. While there is usually some consideration given to the import of
monopoly and competition on incentives to innovate, it is almost always
implicitly assumed that the price mechanism can effect whatever coordination
the economic system requires for rapid technological progress. Typically
there is no discussion of how interlirm agreements, vertical and horizontal,
can help the process. If interfirm agreements are discussed, it is almost

*I am grateful to Thomas Jorde and two anonymous referees for their helpful insights. I am
also indebted to Michael Gerlach for assistance in understanding the differences in industrial
organization between the United States and Japan. Patrizia Zagnoli and Oliver Williamson
provided insights into the theory and practice of strategic alliances. An earlier version of this
paper was published in Japanese in Business Review, Hitotsubashi University, March 1989.

0167-2681/92/$05.00 0 1992-Elsevier Science Publishers B.V. All rights reserved

2 D.J. Teece, Competition, cooperation, and innovation

always in the context of cartel theory. It is not surprising, therefore, that the
economics textbooks, at least those used in the United States, do not convey
a sense that inter-firm cooperation is either desirable or a subject worthy of
study.
This is despite the fact that economists have always recognized the central
importance of technological innovation to economic growth and welfare, and
to capitalism. Adam Smith’s Weulr~ of Nations plunges immediately into
discussions of ‘improvements in machinery,’ and Karl Marx’s model of the
capitalist economy ascribes a central role to technological innovation in
capital goods. Nor did Alfred Marshall hesitate to describe knowledge as the
chief engine of progress in the economy. Paul Samuelson, in his principals
text, has always acknowledged the importance of technological change, but
then proceeded like all the other leading texts to largely ignore it, causing
Stiglitz (1987) in the ~roo~~~gs Papers to recently lament that ‘while it is the
dynamic properties of capitalism . . . that constitute the basis of our
confidence in its superiority to other forms of economic organization, the
theory - at least the version we teach our students - is based on a model
that assumes an unchanging technology.’ When technology is taken into
account, the profession at large, according to Rosenberg (1982), has treated it
as events transpiring inside a black box, and has ‘adhered rather strictly to a
self-imposed ordinance not to inquire too seriously into what transpires
inside that box.’
Therefore, it is not surprising that the economics profession is relatively
silent on matters of innovation policy and technology strategy, and on
matters of economic organization and innovation more generally.’ A large
but unsatisfactory literature exists in industrial organization on the relation-
ship between market structure and innovation, and between firm size and
innovation, but both the theoretical and empirical literature are almost
completely silent on inter-firm and intrafirm organizational issues.’ When
these issues have been addressed, it is without much of a theoretical
foundation. Analysts and policy makers have tended to stress the values of
pluralism and rivalry as the best organizational arrangement to promote
innovation. While these are important values, they are not the only ones.
Moreover, with increased global competition, such values are now adequa-

‘In a recent paper, Dasgupta (1988) set out ‘to study the sorts of social institutions which can,
at least in principle, sustain an efticient level of inventive and innovative activity’ (p. 2). This led
him to consider what he called the Samuelsonian contrivance, Pigovian subsidies, and Lindahl
property rights. The operationality of these mechanisms is remarkably obscure. Dasgupta’s
gallant efforts notwithstanding, it would appear that there is ample room in the literature for
new approaches. More compelling treatments of other relevant organizational issues can be
found in the economic and business history literature. See, for instance, Mowery and Rosenberg
(1989).
‘For an excellent survey, see F.M. Scherer (1970).
 D.J. Teece, Competition, cooperation, and innovation 3

tely represented in the global system, and in national economies open to

international trade and investment.
This paper does not question the value of rivalry and pluralism; rather, it
asks whether in the United States such values ought to be balanced at the
margin by a recognition of the importance of coordination, accomplished via
non-market forms of cooperation, to a well-functioning national system of
innovation. In what follows, the relationship between technical innovation
and aspects of industrial organization other than market structure and firm
size are examined. In particular, in section 3, the role of cooperative
agreements (national and international) among firms are examined for their
impact on innovation. Implications for business organization, for corporate
strategy, and for public policy are derived.
The basic conclusion of the paper is that complex forms of cooperation are
usually necessary to promote competition, particularly when industries are
fragmented. Very few firms can successfully ‘go it alone’ any more. Co-
operation in turn frequently requires interfirm agreements and alliances. In
this regard, the Japanese form of industrial organization, with complex
interfirm relationships, may have distinct advantages. European and Ameri-
can firms are now only beginning to learn how to effectively cooperate in
order to compete. Antitrust authorities in Europe appear increasingly willing
to let them try;3 unfortunately, antitrust policy in the United States remains
uncertain and ambiguous.4

2. Innovation and competition

Ever since Schumpeter (1942, p. 106) advanced the hypothesis that ‘the
large scale establishment or unit of control . . . has come to be the most
powerful engine of . . . progress,’ and that ‘perfect competition looks inferior,
and has no title to being set up as a model of ideal efficiency’, economists
have been ambivalent as to what role market structure and competition play
in the innovation process. This ambivalence is particularly pronounced with
respect to theoretical discussions. Tensions in the theoretical literature are
very briefly noted below. It is also contended that Schumpeter and others did
not frame the debate very well for today’s circumstances, as the unit of
analysis Schumpeter used - the firm - is an increasingly fuzzy concept. One
reason is that cooperative interfirm agreements are so pervasive among firms

3European companies, and particularly German companies, have a long tradition of

cooperation in innovation from the beginning of the development of modern science-based
industries in the early years of the 20th century. Europe had no antitrust tradition, not even the
common law tenets concerning combinations in restraint of trade. Antitrust came only after
World War II. Accordingly, Europe has had little difficulty in creating close interfirm
cooperative agreements.
4For a discussion of the antitrust treatment of cooperative agreements in Japan, Europe, and
the United States, see Jorde and Teece (1989, 1990).
4 D.J. Teece, Competition, cooperation, and innovation

in advanced industrial countries that firm boundaries are often very difficult
to define in a meaningful way. Accordingly, section 3 will discuss the
coordination requirements of innovation and outline the various
organizational alternatives by which they can be achieved. Implications for
corporate strategy and public policy are then derived.
Schumpeter’s claim that large firms were necessary to promote innovation
has fostered exploration of the links between innovative performance and
market structure. Schumpeter linked firm size and innovation for three
distinct reasons. First, he contended that only large firms could afford the
cost of R&D programs. Second, large, diversified firms could absorb failures
by innovating across broad broad technological fronts. Third, firms needed
some element of market control to reap the rewards of innovation.
The Schumpeterian legacy has spurred discussion of the link between firm
size and innovation, and between market structure and innovation. Section
2.1 suggests that this discussion is inconclusive; section 2.2 indicates that it is
also outmoded. Schumpeter did not frame the firm size hypothesis in a way
that is particularly relevant today, as the boundaries of the firm can no
longer be assessed independent of the cooperative relationships which
particular innovating firms may have forged. Indeed, this paper posits that
the firm’s ability to forge cooperative relationships can in many instances
substitute for more comprehensive forms of integration. Put differently, in
some circumstances cooperative agreements can enable smaller firms to
emulate many of the functional aspects of large integrated enterprises,
without suffering possible dysfunctions sometimes associated with large size.
These points are now briefly explored.

2.1. Firm size, market concentration and innovation

As a theoretical matter, economic models of the innovation process are

decidedly non-robust, showing that competition can lead to too much or too
little R&D investment.5 In fragmented market structures, several kinds of
market failures are commonly recognized. First, if firms are unable to exclude
other firms from using technology they have developed, there is the classic
‘free rider’ problem. Even if patents prevent direct mimicking, there is likely
to be a technological ‘neighborhood’ illuminated by the innovation that is
not foreclosed by the patent, so the externality problem remains, though in a
different form. The second problem is what is sometimes referred to as
‘overbidding’. This arises in the early development phase as competitors are
stimulated to invest for the potential rewards that will go to the patent
winner. Incentives to be the first to invent, or to be first to get to the patent
oflice, may induce too many firms to try to invent early. In such a

‘For a useful survey, see Baldwin and Scott (1987)

 D.J. Teece, Competjt~on, cooperatjon, and innovarian S

competitive race, too many resources may get applied too early. One
consequence may be that firms drop out of the industry after the patent race
is over but before the serious development work begins. A misallocation of
resources is the unfortunate consequence.
A monopolized industry avoids both the free rider and the patent race
problem. Moreover, the knowledge externalities that come from successful
exploration of uncharted technological areas are internalized. Economies of
scale and scope may also be available. But the cost is the output restriction
that the monopolist will supposedly engineer. This in turn cuts R&D
investments. The results, as Nelson and Winter (1982, p. 289) explain, is that
‘it is hard to say whether there would be more or less R&D undertaken in
the monopolized case than in the competitive case’. However, Nelson and
Winter surmise that the balance probably tips against the monopolist,
because in a centralized R&D regime which monopoly would entail, the
diversity of approaches characteristic of competition would probably fall, as
managers adopt simplified decision making styles, In short, the theoretical
literature identifies a wide range of possible outcomes, and accordingly
provides little guide to policy.

As a practical matter, the economists’ debate seems highly stylized and out
of touch with global realities. Neither perfect competition nor complete
monopoly is observable or realistically attainable in any industry today.
Moreover, to abstract from industrial structure in such narrow terms is to
miss key elements of industrial organization.
First, the boundaries of the firm are extremely difficult to delineate,
particularly when there are complex alliance structures in place. In Japan, for
instance, Gerlach (1988) notes that alliances are ‘neither formal organizations
with clearly defined, hierarchical structures, nor impersonal, decentralized
markets. Business alliances operate instead in extended networks of relation-
ships between companies, organized around identifiable groups, and bound
together in durable relationships which are based on long-term reciprocity’.
Much of the complexity and subtlety of these arrangements is missed by
analysts who narrowly focus on legal titles and the structure of property
rights, narrowly defined. Even worse, since the most familiar model that
economists have of cooperative behavior is that of the cartel, many scholars
have missed the efficiency inducing characteristics of alliance structures in
Japan and elsewhere. Indeed, Caves and Uekusa (1976, p. 158) appear to
push alliances into the straightjacket of cartel theory when they contend that
‘Japanese industries are prone to collusive arrangements but are also rich in
structural incentives for the conspirators to cheat. The net outcome for the
gap between actual and ideal industrial output is thus hard to predict, but
6 D.J. Teem, Competition, cooperation, and innovation

we do expect increased distortions from sporadic price discrimination,

reciprocity, and the diversion of rivalry into uncontrolled nonprice forms’.
Alliances are a form of contractual relationship, but they are much more
than a legal contract. Alliance partners are not faceless entities operating at
arms-length in Walrasian markets. Rather, exchange among alliance partners
(at least in Japan) can be characterized, according to Gerlach (1988) by: (1)
an emphasis on relational rather than transactional exchange, wherein the
focus is toward the actors participating in rather than being the objects of
exchange; (2) a state of continuous indebtedness and mutual obligation
between the parties; and (3) the implicit negotiations of a socially significant
order through symbolic activities and ceremonies. Alliances are defined by
interests among specific subsets of firms that are familiar with each other
through historical association, rather than immediate task requirements.
The alliance structure in Japan appears to have enabled smaller Japanese
firms to attain the degree of functional integration found within some large
integrated American enterprises, but with less in the way of common
ownership of the parts. Subcontractors, trading companies, and distributors
take on for the firm functions often done internally in the United States.
While many American firms, particularly those in high technology industries,
rely on outside suppliers and distributors to a similar degree, the level of
functional integration attained with these relationships in the United States is
markedly lower. In Japan, the appropriate Western image is perhaps neither
that of the ‘visible hand’ nor the ‘invisible hand’ but of the continuous
handshake.6 Japaneses corporate strategy is therefore formulated to a
considerable extent by maneuvering within alliance relationships, by indus-
trial visions worked out among firms, and also by the broader industrial
policies set by government.
Where the law permits, alliance and consortia structures are increasingly
coming to characterize aspects of European and American business. Though
more transactional and less relational than alliances in Japan, these struc-
tures nevertheless involve high levels of cooperation, particularly for new
product development and commercialization. So pervasive have these rela-
tionships become that one can no longer fruitfully explore industrial
organization questions in the neoclassical tradition. Discussions of firm size
which do not take cooperative agreements into account seriously mischarac-
terize the nature of the business firm. Discussions of product market
structure that do not take the market for know-how into account are also
likely to mischaracterize the nature of competition faced by a firm in a fast-
paced industry. In the remainder of this paper, cooperative agreements are
explored more fully. The next section discusses both the importance of

‘See Gerlach (1992, p. 2).

 D.J. Teece, Competition, cooperation, and innovation 7

coordination for the innovation process and the organizational mechanisms

available to effect it.

3. Innovation, coordination and cooperation

The contention advanced in this paper is that the intensely competitive

environment in which high-tech firms find themselves, coupled with the
global dispersion of productive-technical competence, often requires complex
forms of cooperation among competing firms. This paper stresses the need
for both ‘operational’ and ‘strategic’ coordination to develop and profitably
commercialize new technology.

3.1. The global dispersion of competence

Global industrial competence became widely dispersed within a century of

the industrial revolution. The predominant method of organizing these
competences was first the factory. As Chandler (1977) so ably describes, the
transportation and telecommunications revolution facilitated the rise of the
modern (vertically) integrated corporation. The vertically integrated enter-
prise, beginning around 1900, internalized R&D activities [Mowery and
Rosenberg (1989)]. U.S. industrial R&D emerged a private-sector affair, with
R&D closely tied to the large enterprise through in-house labs. By 1945, the
United States had an industrial structure dominated by large industrial
enterprises, with a research system appended to it. American firms became
dominant across a broad front of technologies.
The decades of the 1970s and 1980s saw the manifestation of three trends,
two of which have been in progress since 1945: (1) a catching up of Europe
and Japan with the United States, and the greater dispersion of technological
and organizational resources which has accompanied it; (2) enhanced global
competition through a gradual liberalization of trading and investment
regimes; and (3) the growth in venture capital, from the late 1960s in the
United States, and in Europe and Japan in the 1980s. The growth of venture
capital has provided, at least in the United States, a second avenue for
developing new technologies - namely, the ‘start-up’ firm.
A consequence of these trends is that industrial competence is now more
widely dispersed, both organizationally and geographically. Couple this with
the generic nature of many new technologies - like microelectronics and
biotechnology - and one recognizes that the competitive challenges asso-
ciated with developing and commercializing innovation are very consider-
able. That is not to say that in earlier periods - such as the second half of
the 19th century - technology capacity was not geographically dispersed.
However, global communications were such that the distinction between
local and global was economically much sharper than it is today; the ability
8 D.J. Teece, Competition, cooperation, and innovation

of firms to quickly assemble and efficiently operate complex forms of

interfirm agreements was severely limited. The capacity to organize and
operate complex and geographically dispersed organizational forms is now
widely available; with enhanced competition, the need to select efficient
structures is even more pressing.

3.2. The need for operational coordination

Innovation is a special kind of economic activity, with very special kinds

of informational and coordination requirements. This subsection examines
these requirements, without addressing the question of whether they are
organized most appropriately by markets, hierarchies, alliances or other
organizational forms.

I. Accessing complementary assets. Innovative new products and processes

will not yield value unless they are commercialized. It is during commercial-
ization that the greatest organizational challenges arise and where the bulk
of the resource commitment occurs. The profitable commercialization of
technology requires timely access to complementary assets on competitive
terms. Thus an innovating firm or consortium that has developed the core
technology needed for a new product or process with good commercializa-
tion prospects has taken only the first step. It must then secure access to
complementary technologies and complementary assets on favorable terms in
order to successfully commercialize the product or process.7
Assets such as marketing, competitive manufacturing, reputation, and
after-sales support are almost always needed. The range of complementary
assets that are necessary is indicated in fig. 1. These assets need not bear a
relationship to the innovating unit that is either strictly vertical or
horizontal.* Moreover, these assets will often need to be specialized to the
innovation. For example, the commercialization of a new drug is likely to
require the dissemination of information over a specialized information
channel. In some cases, the complementary assets may be the other parts of a
system. For instance, computer hardware may require the development of
specialized software both for the operating system and for applications.
The interdependence between the innovation and the relevant comple-
mentary assets can, of course, vary tremendously. At one extreme, the
complementary assets may be virtually generic, have many potential sup-
pliers, and be relatively unimportant when compared with the technological
breakthrough represented by the innovation. At the other end, successful
commercialization of the innovation may depend crtitically on a bottleneck

‘See Teece (1986).

‘Vertical relations are upstream or downstream. Horizontal relationships involve firms
competing for the same customers in the same market.
 D.J. Teece, Competition, cooperation, and innovation 9

Fig. 1. Representative complementary assets needed to commercialize technological know-how.

asset that has only one possible supplier. Between these two extremes there is
the possibility of ‘cospecialization’ - where the innovation and the assets
depend on each other. An example of this would be containerized shipping,
which requires specialized trucks and terminals that can work only in
conjunction with each other.

2. Coupling developer to users and suppliers. A salient aspect of innovation

is that it requires a close coupling of the developer of the new technology to
the user. Commercially successful innovations require linking scientific,
engineering, entrepreneurial and management skills with an intimate under-
standing of user needs. Indeed, in some fields, such as scientific instruments,
it is often the user that stimulates innovation and comes up with a new
product concept or product prototype which is passed back upstream for
further development work. Hence, innovation requires considerable vertical
interaction and communication flows. Moreover, these flows must occur
expeditiously. With uncertainty, learning, and short product life cycles, there
must be organizational systems in place to facilitate timely feedback, mid-
course correction, redesign, and rapid commercialization. The necessary
linkages and feedbacks are summarized in fig. 2.
Kline and Rosenberg (1986) have described the process as ‘chain linked’.
Their characterization recognizes aspects of a linear model - such as a flow
of activity through design to development production and marketing - but
also recognizes constant feedback between and among ‘stages’. Moreover,
‘the linkage from science to innovation is not solely or even preponderantly
10 D.J. Teece, Competition, cooperation, and innovation

AND 0R XDETAILED
POTENTIAL 1 PRODUCE t DESIGN
1 ANALYTIC 1AND

Fig. 2. Model showing flow paths of information and cooperation.

Symbols used on arrows:

C = central-chain-of-innovation
f =feedback loops
F = particularly important feedback

K-R: Links through knowledge to research and return paths. If problem solved at node K, link
3 to R not activated. Return from research (link 4) is problematic - therefore dashed line.
D: Direct link to and from research from problems in invention and design.
I: Support of scientific research by instruments, machines, tools, and procedures of tech-
nology.
s: Support of research in sciences underlying product area to gain information directly and
by monitoring outside work. The information obtained may apply anywhere along the
chain.
Source: Kline and Rosenberg (1986).

at the beginning of typical innovations, but rather extends all through the
process . . . science can visualized as lying alongside development processes, to
be used when needed’.
The correct identification of needs is critical to the profitable expenditure
of R&D dollars. R&D personnel must thus be closely connected to the
market and to marketing personnel. R&D managers must have one foot in
the lab and one in the marketplace. Knowing what to develop and design,
rather than just how to do it, is absolutely essential for commercial success.
Developing this understanding involves a complex interplay between science
and engineering, manufacturing, and marketing in order to specify product
functions and features. It is not just a matter of identifying user needs and
assessing engineering feasibility. One must also separate those user needs
which are being met by competition and those which are not, This may not
 D.J. Teece, Competition, cooperation, and innovation 11

become clear until the product is introduced, in which case the ability to
redesign quickly and efficiently may be of the utmost importance. In short,
commercialization is an extremely important ingredient to successful
innovation.
This model recognizes the existence and exercise of tight linkages and
feedback mechanisms which must operate quickly and efficiently. These
linkages must exist within the firm, among firms, and between firms and
other organizations, such as universities. Of course, the positioning of the
firm’s boundaries, for example, its level of vertical integration, determines in
part whether the required interactions are intratirm or interfirm.
Thus no matter how innovation proceeds, it is likely to require access to
capabilities which lie beyond the initiating or driving entity. These capabili-
ties may lie in universities, other parts of the enterprise, or in other
unaffiliated enterprises. The role of some of these key organizational units is
now explored. We will examine both the development and the commercial-
ization of new technology.
In a series of important pieces, von Hippel (1977, 1988) has presented
evidence that, in some industries in the United States, industrial products
judged by users to offer them a significant performance improvement are
usually conceived and prototyped by users, not by the manufacturers. The
manufacturers’ role in the innovation process in these industries is to become
aware of the user innovation and its value, and then to manufacture a
commercial version of the device for sale to user firms. This pattern of
innovation involving vertical cooperation is contrary to the usual assumption
that product manufacturers are responsible for the innovation process from
finding to filling the need. Successful management of the process requires that
product engineering skills (rather than R&D skills) be resident in the
manufacturer, and that manufacturers search to identify user solutions rather
than user needs.’ A further implication is that there may be a symbiotic
vertical relationship between users and equipment manufacturers that
depends upon social and geographical proximity.
Balancing the role that users play in stimulating innovation upstream is
the role that suppliers play in stimulating downstream innovation. A good
deal of the innovation in the automobile industry, including fuel injection,
alternators, and power steering, has its origins in upstream component
suppliers. lo The challenge then becomes how to ‘design in’ the new
components, and possibly how to avoid sole source dependency on the part
of the automotive companies. As discussed below, deep and enduring
relationships need to be established between component developer-

‘Note that user innovation requires two kinds of technology transfer: first from user to
manufacturer, and then from manufacturer to the developer-user and other users.
“‘For example, Bendix and Bosch developed fuel injection and Motorola the alternator.
12 D.J. Teece, Competition, cooperation, and innovation

manufacturer and supplier to ensure adoption and diffusion of the

technology.
A related set of vertical relationships involving innovation has been
remarked upon by Rosenberg (1972) in his treatise on technology and
American economic growth. The machine tool industry in the 19th century
played a unique role both in the initial solution of technical problems in user
industries, such as railroad locomotive manufacture. Rosenberg’s description
seems to suggest that the users played some role in the development of new
equipment. He notes that before 1820 in the United States, one could not
identify a distinct set of firms who were specialists in the design and
manufacturer of machinery. Machines were either produced by users or by
firms engaged in the production of metal or wooden products.” Machinery-
producing firms were thus first observed as adjuncts to textile factories.
However, once established, these firms played an important role as the
transmission center in the diffusion of new technology.”

3. Coupling to competitors. Successful new product and new process devel-

opment innovation often requires horizontal as well as vertical cooperation.
Horizontal linkages can assist in the definition of technical standards for
systemic innovation. Horizontal linkages can also assist firms to overcome
the appropriability (spillover) problems because the set of firms receiving the
benefits is likely to include a greater portion of firms which have incurred
R&D costs. The effect of greater appropriability is to encourage greater
investment in new technology.’ 3 In addition, collaborative research reduces
needless duplication of effort. r4 Independent research activities often proceed
down identical or near-identical technological paths. This is often wasteful
and can be minimized if research plans are coordinated.”
Furthermore, innovation and commercialization of new products and
processes are often high cost activities. The scale and scope of assets needed
will often lie beyond the capabilities of a single firm. Thus, cooperation -
both horizontal and vertical - may be the only viable means for moving
forward. In addition, cooperation will also reduce wasteful duplicate expendi-
tures on research and development. Innovation also entails significant risk.
While successful innovation and its financial rewards are often highly visible,
behind the scenes there are usually many failed efforts and unproductive
paths. ‘Dry holes’ and ‘blind alleys’ are commonplace. Risk can be diversified
and spread through cooperation. Indeed, when risk is particularly high

“See Rosenberg (1972, p. 98-99).

“Ibid., p. 102.
13This has been shown empirically by Levin and Reiss (1984).
“‘See David (1985, p. 42).
ISNeedless to say, uncertainty often requires that multiple (but not identical) technological
paths be pursued simultaneously. See, for example, Nelson (1984, chapter 2).
 D.J. Teece, Competition, cooperation, and innovation 13

because the technology being pursued is both expensive and undeveloped,

cooperation may be the only way that firms will undertake the needed effort.
Until very recently, it has been fashionable in the United States to argue
that diversity is the leitmotif of successful innovation. Unquestionably, a
system of innovation that converges on just one view of possibilities is likely
to close off productive avenues of inquiry. However, in a private enterprise
economy without some horizontal coordination and communication, there is
no guarantee that the level of diversity obtained is ideal. If firms are able to
coordinate their research programs to some degree, uneconomic duplication
in some instances can be minimized without the industry converging on a
single technological approach.

4. Connections among technologies.“j Another dimension of coordination is

that which must take place among various technologies. Particular techno-
logical advances seldom stand alone. They usually are connected both to (a)
prior developments in the same technology, and (b) to complementary or
facilitating advances in related technologies. In addition, a generic technology
may be capable of (c) a wide variety of end-product applications. Each is
discussed in turn, along with related reasons for cooperation.”

a. Connections to prior technologies. Many technologies evolve in an evolu-

tionary fashion, with today’s round of R&D activities building on yester-
day’s, which in turn builds on the day before’s. Thus, with respect to memory
devices, advance is cumulative along a particular technological trajectory,
from 1 K to 4 K to 64K to 256 K to 1 megabyte and so on, up to the
theoretical limits of a particular technology. Similarly, in the aircraft
industry, the DC-3 improved upon the DC-2, and subsequent aircraft built
on what was learned with the DC-3. Hence, whether an enterprise is able to
participate in one technology often depends on whether it participated in the
earlier generation. If it did not, and the technologies in questions have path
dependencies, then in order to enter at a subsequent stage the enterprise in
question will have to link up, in some fashion, with enterprises familiar with
the prior art. Relatedly, experience and competence in a particular techno-
logical regime may count for little, and may in fact be a handicap, when a
significant shift in technological regime occurs. A regime shift signals
opportunities for new entrants; but to engage these opportunities, new
entrants may need to link up with incumbent firms who may not have the
relevant new technology, but do in fact have complementary capacities, such
as marketing and distribution.
16This treatment is based in part on Nelson (1984, pp. 8-10).
“It is obvious that the treatment here breaks with the traditional ‘book of blueprints’
approach to technology often embedded in economic models of the innovation process. We
implicitly postulate market failure in the market for know-how. For a more extensive treatment,
see Teece (1980).
14 D.J. Teece, Competition, cooperation, and innovation

b. Connections to complementary technologies. Technological advances are

often linked together because of systems interdependencies. Thus, the electric
lighting system - dynamos, distribution system, and incandescent bulbs - was
severely limited by nondurable bulb filaments that existed until Edison and
his associates invented a high resistance filament. Artificial intelligence
technologies depend both on the availability of computer software and
hardware. Containerization of ocean shipping could not move forward until
new facilities to handle containers had been put in place in ports, in
distribution centers, and in railroads and trucking. The innovation, of course,
also required the construction of ships with the requisite capacities. In a
system technology, an advance in one part of the system may not only
permit but require changes in other parts. The tightness of interdependence
and the requirements for organizational connectedness are discussed later.
Suffice to say here that tight interdependencies require interaction and
information and materials flows among organizations. Whether the appropri-
ate governance mechanism is a contract, a joint venture, equity cross-
holdings, or merger is a matter we consider in section 4.

c. Connections to enabling technologies. New technologies may simulta-

neously affect several different activities, typically because they provide a
common core technology to several businesses (e.g., microelectronics, compo-
sites, biotechnology). Thus advances in semiconductors increase the technical
capabilities of industries that use chips, from computers to telecommunica-
tions. Advances in semiconductors also facilitate more powerful computer-
aided engineering and design and computer-integrated manufacturing.18
Organizations must be designed in order to facilitate the complex coope-
ration which utilization of the enabling technology requires. Without the
appropriate organizational mechanism, the full potential of the enabling
technology will not be realized.

3.3. Strategic coordination

In section 3.2, the operational dimensions of coordination were sketched.

These activities must take place if any system is to be innovative. Strategic
coordination refers to coordination of a different type. It refers to activities
which affect the distribution of returns to innovation through impacts on
prices and competitive entry.
Because of fundamental weaknesses in the system of intellectual property
law,19 leakage and free riding are commonplace. Moreover, because of the
use of strategic trade and industrial policies by some nation states, strategic

“See National Advisory Committee on Semiconductors Report (1989)

“See Levin, Klevorick, Nelson and Winter (1987, p. 3).
 D.J. Teece, Competition, cooperation, and innovation 15

coordination either by firms or governments is often necessary if innovating

firms are to capture value from technology. Strategic coordination can thus
enhance the public as well as private interests.
Strategic coordination is often desirable to ensure that capacity levels at
various stages in an industry are matched to the level of residual demand, to
ensure that beneficial standards are adopted, and to ensure that strategic
moves of competitors are blunted if not deterred, and to ensure that
economies and advantages associated with increasing returns are attained.
Unfortunately, in the United States, strategic behavior is often uncritically
viewed as anticompetitive, with negative effects on economic welfare
assumed. While such behavior may be ‘anticompetitive’ in the sense that it
limits the entry of competitors, strategic behavior can sometimes enhance
national if not global economic welfare.20 This is because it can help
innovators capture enough of the return from innovation to keep them in the
business of innovation, thereby invigorating competition. There is no oppor-
tunity in this paper to document all the various forms of strategic coordina-
tion. Suffice to point out that the timely assembly of complementary assets
may well have both a strategic and an operational dimension, as is discussed
more fully elsewhere [Teece (1986)].

4. Governance structures to facilitate innovation

4.1. The organizational menu

There are of course a wide variety of organizational mechanisms that can

be used to effectuate the coordination which successful innovation requires.
Economists at some level have been aware of this for decades. Thus,
‘Marshall introduces organization as a fourth factor of production; J.B. Clark
gives the coordinating function to the entrepreneur; Knight introduces
managers who coordinate’ [Coase (1937)]. But it is only recently that
significant progress has been made.21 Unfortunately, the emerging literature
on the economics of organization has yet to deal with matters of innovation.
The state of the art is such that many economists are still in the
uncomfortable position of claiming that the price mechanism achieves the
necessary coordination while at other times entrepreneurs and managers do

“‘Jacquemin and Slade (1989) single out two areas where governments can usefully encourage
cooperative behavior: R&D-intensive industries, and declining industries. The work of Brian
Arthur (1988) also points out the critical role of increasing returns and lock-in by small chance
events. Government policy obviously can be of great importance, positively and negatively, in
such environments.
2’Ohver Williamson (1975, 1985) has pioneered the economic analysis of organizations
building on fundamental insights presented by Coase (1937).
16 D.J. Teece, Competition, cooperation, and innovation

the coordination.22 While Williamson (1975, 1985) has elaborated the

distinctive merits of markets and certain hierarchical forms, alternative
organizational arrangements until recently have received relatively short
shrift in the literature. But interlirm agreements and alliances must clearly be
among the alternatives considered. The following subsections will explore
each of the various options in more detail.

4.2. The price system

The invisible hand is one of the oldest notions in economic science. Prices
are considered sufficient statistics; sufficient that is to guide resource allo-
cations toward Pareto optimal outcomes. The invisible hand theorems
require, it would seem, that economic agents know not only today’s supply
and demand but supply and demand for all future periods. Otherwise, we
cannot be confident that the market outcomes generated will be optimal. In
particular, investment levels will be incorrect unless we know about future
market demand and the future investment plans of competitors and sup-
pliers. Any single investment will, in general, only be profitable provided first
that the volume of competitive investment does not exceed a limit set by
demand, and second, that the volume of complementary investment reaches
the correct leve1.23
However, there is no special machinery in a private enterprise, market
economy to ensure that investment programs are made known to all
concerned at the time of their inception. Price movements, by themselves, do
not generally form an adequate system of signalling. Indeed, Koopmans
(1957) has been rather critical of what he calls the ‘overextended belief’ of
certain economists in the efficiency of competitive markets as a means of
allocating resources in a world characterized by ubiquitous uncertainty. The
main source of this uncertainty, according to Koopmans, is the ignorance
which firms have with respect to their competitors’ future actions, prefer-
ences, and states of technological information. In the absence of a complete
set of forward markets in which anticipation and intentions could be tested
and adjusted, there is no reason to believe that with uncertainty competitive

*‘As Coase (1937) notes, ‘it is surely important to enquire why coordination is the work of the
price mechanism in one case and of the entrepreneur in another.’ Coase went on to develop an
approach to economic organization that saw the firm as suppressing the price mechanism in
circumstances where transaction costs were high. Hayek (1945) saw the situation somewhat
similarly, there being three fundamental choices: central planning, competition (decentralized
planning), and monopoly - the latter he refers to as the ‘half-way house’ about which many
people talk but which few like. Despite recent progress, the economic literature has not gone
much beyond Hayek and Coase.
‘%ee Richardson (1960), p. 31.
 D.J. Teece, Competition, cooperation, and innovation 17

markets of the kind described in the textbooks produce efftcient outcomes.24

The information-circulating function which economic theory attributes to
competitive markets is quite simply not discharged by any existing arrange-
ments with the detail and forward extension necessary to support efficient
outcomes.25 Ancillary org anizational mechanisms are needed.
Arrow (1959) suggests that the firm performs the dual role of entrepreneur
and auctioneer when the system is out of equilibrium. Richardson (1960)
argues that some form of market imperfection is essential to the process of
economic adjustment. Telser (1985) has articulated the case for efficient
cartels where firms discuss new investment decisions and share capacity in
order to overcome the shortcomings of the price system.
There is no arena in which uncertainty is higher and the need to
coordinate greater than in the development and commercialization of new
technology. Moreover, there are no theoretical grounds for believing that an
economy that is all tooth and claw will out perform one that involves a
judicious mix of tooth, claw, and intramarket and intermarket cooperation.
Adam Smith’s2‘j warning - that ‘people of the same trade seldom meet
together, even for merriment and diversion, but the conversation ends in a
conspiracy against the public, or in some contrivance to raise prices’ - needs
to be tempered with the recognition that in global markets the difficulty of
assembling all the relevant parties to effectuate an international conspiracy is
an insurmountable challenge in industries’ experiencing rapid technological
change. It also needs to be tempered with a recognition that the exchange of
information on common values such as future demand is often socially
desirable. This is because prices clearly are not sufficient signals in all cases.
The price mechanism does not always find prices efficiently, and it may fail
to elicit those responses from economic agents that will maintain an optimal
allocation of resources. The presence of scale economics or collective goods
are just two considerations which upset the invisible hand theorems.
Yet in the traditional textbook, the price system magically allows all
of the necessary coordination to occur smoothly and efficiently. In the
Walrasian system, which is implicit in textbook thinking about equilibrium
price determination, profits cause output expansion, losses contraction.27 In

24Koopmans (1957, p. 146) points out that because of this deficiency economic theorists are
not able to speak with anything approaching scientific authority on matters relating to
individual versus collective enterprise.
*‘Ibid., p. 163.
26This did not appear to be an important part of Smith’s (1976) overall thesis.
“As Aoki (1984) explains, the prices of goods and services are set by the auctioneer, who
adjusts them according to the law of supply and demand. Given a system of prices, the excess of
sales price of entrepreneurial output over the cost of production may be either positive, null, or
negative. This excess is termed benefice de Penterprise by Walras (1954). A positive or negative
benefice is a sign of disequilibrium, and entrepreneurs respond to this signal according to the law
of cost price; that is, they increase their scale of production when the benefice is positive and
reduce it when the benejce is negative. The presumption that firms strive for higher incomes and
18 D.J. Teece, Competition, cooperation, and innovation

equilibrium, firms make neither profits nor losses. In this system, entrepre-
neurs, together with the auctioneer, act as coordinators to bring harmony to
the competitive pursuit of self-interest. In this simple view, the only
information firms need to develop and commercialize innovation is provided
by the auctioneer in terms of price.
A pure unassisted Walrasian-type market system is clearly inadequate to
effectuate most types of innovation. Yet many economists cling to the belief
that it is adequate, or very nearly so. This would appear to stem from what
Koopmans calls an overextended belief in the efftciency of competitive
markets, coupled with a lack of understanding of the nature of the
innovation process.

4.3. Internal organization

Coase (1937) saw the costs of using the price system, and in particular the
costs of discovering the relevant prices, as the fundamental reason why it is
profitable to establish firms. Williamson (1975) took several cues from this
thesis and has developed a more sophisticated contractual variant of the
Coase thesis. He shows that it is not so much the ditliculty of establishing
prices as the difficulty of regulating economic activity with incomplete
contracts that provides the reason to abandon markets in favor of internal
organization. Unless safeguards can be provided against opportunistic recon-
tracting, transactions must be brought inside the firm where a managerial
hierarchy and appropriate incentives can ameliorate the consequences of
opportunism.
But the full integration solution has liabilities, not least of which is that it
can impair the autonomy so necessary for aspects of the innovation process
to proceed. Still, it has obvious advantages for effectuating strategic coordi-
nation. For example, Michael Borrus (1988, p. 231) recognizes that new
institutional forms are needed in U.S. microelectronics if the industry is to
compete effectively in the future and at the same time avoid antitrust
problems.” However, his solution - the establishment of a number of

lower losses through entry and exit is implicit. However, entrepreneurs in their purely functional
roles are only catalytic agents who accelerate combinations of atomistic factors of production
only when the benefice is positive. Thus, in a state of equilibrium, entrepreneurs make neither
profit nor loss. ‘Profit in the sense of benefice de I’enterprise depends upon exceptional and
not upon normal circumstances.’
*sBorrus (1988) comments:
Almost a decade ago it was clear that Japanese producers would emerge as enduring
players in the semiconductor industry, and would, as a consequence, radically alter the
industry’s terms of competition. Yet it has taken almost that long for U.S. firms to
cooperate sufficiently to begin to devise appropriate responses. It is almost a truism that
had the industry been able to coordinate its actions strategically a decade ago, an adequate
response would have been far less costly and far more likely to succeed. To accomplish such
strategic coordination, the US. chip industry needs an ongoing analytic capacity, embedded
in an electronics industry-wide institution, with the ability to carry on competitive analysis
 D.J. Teece, Competition, cooperation, and innovation 19

holding companies for Silicon Valley firms - implicitly endorses internal

organization (accomplished via merger) as the solution to the problem.2g
While it may be better than the current fragmented structure, there are many
reasons why one should be skeptical of its viability. Many of these relate to
the change in incentives and compensation structures which the arrange-
ments would imply. 3o As explained below, when high technology activities
are at issue, contractual agreements, alliances, and joint ventures are likely to
be superior to full-scale internal organization.

4.4. Strategic alliances and interfirm agreements

There are a wide range of contractual agreements between and among

firms to facilitate the development and commercialization of new technolo-
gies. Strategic alliances are constellations of bilateral and possibly multila-
teral contracts and understandings among firms, typically to develop and
commercialize new technology. These may well constitute a new organizatio-
nal form.
Agreements are bilateral when A agrees to secure Y from B as a condition
for making X available, and both parties understand that agreement will be
continued only if reciprocity is observed. 31 When constellations of these
agreements exist between or among firms, they can be considered to
constitute alliances. While the term is often used rather loosely, a strategic
alliance is defined here as a constellation of agreements characterized by the
commitment of two or more partner firms to reach a common goal, entailing
the pooling of their resources and activities. A strategic alliance might
include the following: (i) an exclusive purchase agreement; (ii) exclusionary
market or manufacturing rights; (iii) technology swaps; (iv) joint R&D or co-
development agreements; (v) co-marketing arrangements. A strategic alliance
denotes some degree of strategic as well as operational coordination.

of foreign market and technology strategies, and with sufftcient prestige to offer strategic
direction on which planning can occur.
There is, of course, a substantial problem associated with industry-strategic planning. To
assure its health, the industry needs strategic coordination short of market sharing. All U.S.
industries facing international competition ought to be permitted to develop industry-wide
competitive assessment capability, at least whenever the industry can demonstrate substan-
tial involvement of foreign governments in assisting foreign competitors,
29Borrus (1988, p. 233) remarked:
[I]t is possible to envision chip-firm holding companies built around common manufactur-
ing facilities .._ R&D resources shared among the holding company’s chip Iirms would
eliminate the problem of duplication of R&D among smaller companies. The high capital
costs of staying in the technology race could be shared among firms in the form of shared
flexible fabrication facilities _. Shared facilities would permit high usage of capacity In
essence, the holding company structure would gain the advantages associated with
consolidation without the disadvantages associated with integration.
“See, in particular, Williamson (1985).
“‘Ibid., p. 191.
20 D.J. Teece, Competition, cooperation, and innovation

Alliances can be differentiated from exchange transactions, such as a

simple licensing agreement with specified royalties, because with an exchange
transaction the object of the transaction is supplied by the selling firm to the
buying firm in exchange for cash. An alliance by definition can never have
one side receiving only cash; moreover, it consists of a constellation of
bilateral agreements. Alliances need not involve equity swaps or equity
investments, though they often do. Equity alliances can take many forms,
including minority equity holdings, consortia, and joint ventures.
Strategic alliances are capable of achieving the various forms of opera-
tional and strategic coordination described in sections 3.2 and 3.3. Comple-
mentary assets, user know-how, complementary technologies and enabling
technologies can all be accessed in this way, though the terms are likely to be
different from what could be obtained through a intralirm agreement were it
feasible since the costs and risks of innovation can be lowered through such
arrangements.
Strategic alliances have increased in frequency in recent years, and are
particularly characteristic of high technology industries. Joint R&D, know-
how, manufacturing, and marketing agreements go well beyond exchange
agreements because they can be used to access complementary technologies
and complementary assets. The object of the transactions, such as the
development and launch of a new product, usually does not exist at the time
the contracts are inked. Whether equity or nonequity forms of alliances are
the most desirable governance structures depends on a variety of
circumstances.32
Equity stakes provide a mechanism for distributing residuals when ex ante
contractual agreements cannot be written to specify or enforce a division of
returns. If equity membership also provides board membership, higher level
strategic coordination is also possible in some cases. These governance
structures are summarized in fig. 3.
Strategic alliances appear to be an attractive organizational form for an
environment characterized by rapid innovation and geographical and organ-
izational dispersion in the sources of know-how. As compared to the price
system, they enable investment plans for complementary assets to be
coordinated more concisely than the price system would allow; as compared
to hierarchy, incentives are not dulled through bureaucratic decision making.
In short, the strategic alliance appears to be a hybrid structure well suited to
today’s global realities in industries experiencing rapid technological change.
Such industries frequently require operational and strategic coordination.
Alliances facilitate reciprocal specialization among firms, such as when one
firm does development and its partner manuufacturing. But as suggested
elsewhere [Teece (1986)], market failures are such that the distribution of the

j2For a fuller treatment, see Pisano and Teece (1989).

 D.J. Teece, Competition, cooperation, and innovation 21

Nonequity Equity

Exchange short-medium term passive stock holdings for

cash-based contracts portfolio diversification

Alliance mid-long-term bilateral operating joint ventures

contracts (non-cash based), and consortia, minority
non-operating joint equity holdings, and
ventures and consortia cross-holdings

Cartel price fixing and/or output price fixing and/or output

restricting agreements restricting agreements

Fig. 3. Taxonomy of interfirm arrangements.

profits that may follow need not be equally distributed among alliance
partners.

5. Strategic alliances and the logic of managerial capitalism

The above analysis might appear, at first glance, to be at odds with

Chandler’s recent claim (1990) that firms that deny whay he calls ‘the logic of
managerial enterprise’ will not survive. Chandler’s historical analysis suggests
that innovating firms that fail to invest in facilities of sufficient scale will lose
market share and technological leadership to competitors. Thus, according to
Chandler the early lead which the British had in dyestuffs was lost to the
Germans because British firms failed to make the necessary investments to
capture economies of scale and scope. This is the principal reason why
German firms outcompeted the British; vertical integration is thus essential
to managerial capitalism according to the Chandler argument.
The thesis in this paper is that the logic of managerial capitalism may well
be eroding, although not as fast as the growth of strategic alliances involving
U.S.-based firms might suggest.
The ‘logic’ of managerial capitalism is being tempered in some industries
because of the heightened importance of generic enabling technologies and
time to market. Both favor small autonomous organization units that can
avoid the complex decision-making complexities usually, though not always,
associated with large integrated hierarchies. Large amounts of information
critical to innovation must move horizontally; if forced to move vertically
before it can move horizontally, its timeliness as well as its value will erode
dramatically. A valued price system has no advantage in this regard; small
22 D.J. Teece, Competition, cooperation, and innovation

autonomous organizational units communicating and interacting directly

with each other are likely to develop and implement an action plan faster
and more efficiently than if they were responding just to price signals. When
product life cycles are short, the ability to quickly and effectively coordinate
business units into a coherent operation often assumes great significance.
One additional reason for the frequency of strategic alliances involving
U.S. high-tech firms, however, is the decline in U.S. manufacturing skills,
particularly in relation to Japan and Germany. U.S. firms still seem to
possess a strong advantage in early-stage technological activity, but their
advantage at commercialization has eroded markedly in recent decades. It is
therefore advantageous for innovative firms which are unable to build and
operate world-class manufacturing facilities to team up with those that can.
Unfortunately for U.S. firms, the market for know-how is riddled with
imperfections, and the ability of innovators to capture a significant share of
the rents through alliances is highly attenuated - except in unusual
circumstances where the innovator has a strong worldwide patent position.
When intellectual property protection is weak, strategic alliances - implying
a constellation of interlirm agreements and the ability to temper opportunis-
tic behavior - are likely to be more effective than a pure licensing
arrangement. But an alliance is likely to be inferior to vertical integration if
the innovator is in the position to integrate at low cost. In the United States
one can perhaps agree with Chandler that there aren’t intrinsic theoretical
disabilities associated with vertical integration; but there may be disabilities
associated with an integration strategy built on decaying U.S. manufacturing
skills. Hence, strategic alliances may often be the best alternative available to
U.S. firms, though that alternative may well be inferior to an integration
strategy based on world-class manufacturing. Hence while strategic alliances
may be the best that many U.S. firms can do, it may not be enough, as
Chandler suggests, to survive in today’s highly-competitive global
environment.

6. Conclusion

Successful technological innovation requires complex forms of business

organization. To be successful, innovating organizations must form linkages,
upstream and downstream, lateral and horizontal. Advanced technological
systems do not and cannot get created in splendid isolation. The communica-
tion and coordination requirements are often quite stupendous, and in
practice the price system alone does not suffice to achieve the necessary
coordination.
A variety of organizational arrangements exist to bring about the neces-
sary coordination. The price system described in the textbooks provides only
a useful backdrop in market-oriented economies. By itself it is not up to the
 D.J. Teece, Co~~tiii5n. cooperation, and in~5~ation 23

task because investments required to effectuate innovation cannot be appro-

priately coordinated by price signals alone. Fully integrated companies, on
the other hand, must be careful not to suffocate creativity and to dampen
incentives. Strategic alliances constitute viable alternatives in many instances.
Alliance structures can facilitate innovation, and are increasingly necessary as
the sources of innovation and the capacities necessary to effectuate
commercialization become increasingly dispersed.
A variety of implications follow for management and public policy.
Managers must become adept at managing not just their own organization,
but also their relationships and alliances with other firms. Very often
difference skills are required for each, which makes management tasks more
complex and challenging. Strategic alliances also must be designed to be self-
reinforcing. There is the danger that changing circumstances can upset
delicate balances, thereby causing relationships and agreements to unravel.
Equity can be judiciously used to anchor alliances, but it may not suffice as a
safeguard if inadequate in amount, and if not bolstered by other mechanisms.
At present there is considerable organizational learning occurring with
respect to such matters, both nationally and internationally, and new
arrangements which are balanced and durable will undoubtedly be crafted.
The greatest challenge probably goes to public policy, particularly in the
United States, where there has been a failure to recognize the importance of
cooperation. This has manifested itself in the absence of inter-agency
coordination in the federal government, with science and technology policy
appearing to be weak and uncoordinated, and a reluctance in some quarters
to permit and encourage the private sector to forge the interfirm agreements,
alliances and consortia necessary to develop and commercialize new techno-
logies like high-density television or superconductors. A key reason for this is
the shadow that neoclassical thinking casts over antitrust policy. It renders
antitrust policy hostile to many forms of beneficial collaboration, because of
fear that such arrangements are a subterfuge for cartelization and other
forms of anticompetitive behavior. Until a greater understanding emerges as
to the organizational requirements of the innovation process and antitrust
uncertainties are removed, antitrust policy in the United States is likely to
remain a barrier to innovation because it has the capacity to stifle beneficial
forms of interfirm cooperation. Antitrust policy, which has always been
rather hostile to horizontal agreements, must accommodate this feature of
capitalist economies if it is to promote enterprise performance and economic
welfare.33
The framework also has strong implications for business history. It
suggests the viability in some instances of new hybrid organizational
arrangements, such as strategic alliances, linking firms with complementary

33For fuller elaboration, see Jorde and Teece (1989, 1990).

24 D.J. Teece, Competition, cooperation, and innovation

capabilities and capacities, over both the integrated alternatives and stand-
alone firms coordinating their activities exclusively via the price
mechanism.34 These organizational forms may well represent a new and
dramatic organizational innovation in American business history. In retros-
pect, the emergence and proliferation of alliances, dating from about 1970,
may turn out to be as significant an organizational innovation as the moving
assembly line and the multidivisional structure. This trend does not deny
what Chandler calls the logic of managerial enterprise; it may simply
suggests its declining attainability for U.S. companies.

34These instances are more clearly delineated in Dosi, Teese and Winter (1990).

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