The interaction effect between firm and competitor level views

of ERA

Up to this point, I have offered two views of firm ERA behaviour; the resource- and competitor-driven. In the resource-driven view, I argue that competing firms will engage in ERA as a response to their idiosyncratic attributes. More specifically, I expect that firms with high levels of resource commitment and prior experience with ERA will be more likely to engage in ERA and they will do so with higher intensity. This argument is very much in line with the theoretical premises of the RBV which perceives firm strategic behaviour as a function of firm-specific idiosyncratic attributes. In the competitor-driven view, I argue that competing firms will engage in ERA as a

106 response to their competitive environment. I thus expect a positive association between competitors’ ERA activity and the likelihood and intensity of the focal

firm engaging in ERA.

In this section, I argue that these two views are not mutually exclusive but complementary. To build my arguments, and test this important proposition, I draw from both the RBV and CD literatures. Surprisingly, these two research streams have largely developed independently42. Through my conceptual development and consequently my empirical analysis, I aim to provide a more holistic treatment of firm behaviour at least in the context of ERA. My conceptual and empirical efforts complement recent research in other contexts such as for example the study of Park and Zhou (2005) on alliance formation motives. More specifically they argue that ―firms not only form alliances to differentiate themselves from others but also as a competitive response to prevent others from gaining a competitive edge by accumulating more capabilities‖ (Park & Zhou, 2005: 533)43. I build a similar argument here but offer a broader theoretical rationale that incorporates interorganizational imitation as mechanism of such firm behaviour. Earlier work of Park and colleagues has provided us with novel empirical evidence on the interplay between internal resource conditions and market changes in the context of alliance formation (Park, Chen, & Gallagher, 2002). In contrast with their

42

Scholars have provided us with several theoretical contributions on how these two streams can be combined. For example, Lieberman and Montgomery (1998) provide insights on how RBV can be combined with FMA theory.

43 Park and Zhou (2005: 545) conclude that ―along with the classic cost-benefit analysis, it is the competitive dynamics in a given market that trigger competitors’ alliance decisions. Despite no substantial benefits from an alliance, it is often a rational choice to form an alliance, primarily to prevent potential losses as a firm’s competitors strengthen their competitive positions through cooperative alliances.‖

107 study, I am not concerned with market dynamics but rather with dynamics between competing firms engaging in ERA.

As I have argued above, I expect a positive association between competitor- level factors (competitors’ ERA activity) and firm-specific factors (resource

commitment and ERA experience) with firm ERA likelihood and intensity. I propose that there is a significant moderation effect between the firm-specific factors identified and competitive pressures to engage in ERA. More specifically, I expect that firms with higher resource commitment and experience with ERA will be less prone to react to the actions of their competitors. On the other hand, firms with lower levels of resource commitment and ERA experience will be more sensitive to competitive pressures.

From a RBV perspective, firms with limited resource commitment and experience will be better off not engaging in ERA. However, such firms will choose to engage in ERA not necessarily to improve their own competitive position but avoid competitive disadvantage (Abrahamson & Rosenkopf, 1993). In this scenario, firms will engage in ERA in order not be disadvantaged in the race of obtaining critical resources with its competitors. This would be particularly true in a competitive environment where firms are intensively compete in a limited resource space with high resource scarcity (Park et al., 2002), as for example in the empirical context of this study; the biopharmaceuticals industry. Of course, such constrained firms are faced with several challenges as they engage in ERA. In this case, the firm’s probability of engaging in ERA is inhibited due to a misalignment between the firm’s

108 current strategic configuration and the external environment (Bingham & Eisenhardt, 2007).

From a neo-institutional perspective, firms with a limited set of resources and experience will be faced with low levels of legitimacy among their peers. As such they will be less favoured when searching for ERA opportunities in their resource environment (Deephouse, 1999). While these firms may gain less when engaging in ERA, I expect that these firms will intensively engage in ERA in order to respond to their competitive environment. In a positive spirit, even as a matter of strategic luck, these firms may pre-empt resources that are critical to other competitors, or can be recombined in innovative ways not yet conceived. In line with my competitor-view of ERA, I expect that these firms will respond to their competitive environment by intensively imitating the ERA-related actions of their competitors. While there are several types of interorganizational imitation (Haunschild & Miner, 1997), I expect that these firms will not imitate specifically targeted resources with their competitors, as they are unable to assess the value-generating potential of such resources. Rather, such firms will try to imitate the actions of their competitors as a broader strategic response. This is not to say that imitation is an erratic strategic behaviour. Rather imitator firms are driven by a growing awareness of the benefits of the new practice, in this case ERA, adopted by other competing firms (Garcia-Pont & Nohria, 2002).

In contrast with the scenario described above, I expect that firms with high levels of resource commitment and experience with ERA will be less prone to respond to competitive pressures. I believe that these firms develop their own view of the competitive environment, and are more likely to direct their ERA-

109 related actions in line with their idiosyncratic attributes. While these firms may be better able to gain value from ERA (as predicted by the resource-driven view), they may be also faced with inertial forces driven by the path-dependent nature of their idiosyncratic attributes. Inertia may be particularly present when competing firms are faced with a newly developed resource space, as for example when incumbent biopharmaceuticals firms were faced with the introduction of biotechnology. Path-dependencies may result in firms being more selective on what kind of resources they target and be less prone to competitive pressures to widely engage in ERA. Such selective behaviour may also be the result of tacit coordination amongst strategically similar firms (Garcia-Pont & Nohria, 2002). These firms will be insulated by competitive pressures to engage in ERA in order to preserve the status quo in the competitive environment. Furthermore, such firms may be able to seize opportunities in strategic factor markets. High levels of resource commitment and prior experience with ERA may enable these firms to ―appraise resource

combinations and carry out commercial ventures that correspond to specific combinations of resources‖ (Foss & Ishikawa, 2007: 756). Thus, highly ―idiosyncratic‖ firms will be able to isolate themselves from competitors’ ERA

actions even when competing firms can acquire resources that can be put to similar uses. One may argue that such isolation stems from the complex relations between resource combinations (Foss & Ishikawa, 2007).

Taking together the above arguments, I hypothesize that:

H3a. The positive impact of competitors’ ERA activity on the focal firm’s likelihood to engage in ERA is moderated by the firm’s prior ERA experience and resource commitment.

110 H3b. The positive impact of competitors’ ERA activity on the focal firm’s ERA intensity is moderated by the firm’s prior ERA experience and resource commitment.

While firm resource endowments and prior experience have been identified as important factors related to ERA, few empirical evidence exist on the interaction effect between competitors’ ERA activity and these firm-level attributes. Instead, scholars have assumed thus far that firms which wish to imitate their competitors’ actions must possess similar resources (Chen, 1996;

Lieberman & Asaba, 2006). However, we know little on how varying levels of such idiosyncratic attributes relate to the competitive pressures that the firm experiences in its competitive environment. By testing hypotheses H3a and H3b, I aim to provide further empirical evidence on this interplay between competitors’ actions and firm-level idiosyncratic attributes that direct ERA. In

their empirical study of the financial services industry, Yang and Hyland (2006) found that both prior experience with M&A and the number of M&A initiated by competing firms in the same product market positively affects the focal firm’s likelihood of consequent M&A activity. They however suggested

that further empirical work on the dynamics of imitation must investigate the interplay between competitors’ activity and firm-level attributes (Yang &

Hyland, 2006: 396). My empirical analysis addresses this point.