Geographic distance between co-inventors and firm performance: The moderating roles of interfirm and cross-country collaborations

Highlights

• The paper examines the causal effect of collaboration distance on firm performance.

• The paper also explores the moderating effects of inter-firm collaborations and cross-country collaborations.

• Panel quantile regression and a two-step system GMM are used in the analysis.

• Collaboration distance is found to positively influence the firm profitability.

• This positive effect is stronger in firms that have lower profits and collaborated with other firms especially from other countries.

Abstract

Firms use strategic collaborations to reduce costs and increase productivity through shared technological capabilities, knowledge and resources. However, technological collaboration over geographic distance involves the risks of facing communication problems including vulnerability to the language difference, cultural issues, and political barriers. Consequently, firms engaging in technical collaborations across different locations often face higher communication (and other distance-related) costs, which in turn could affect their financial performance. This paper investigates the relationship between inventor distance and firm performance by employing panel fixed effect quantile regression techniques with interaction variables on a sample of 556 firms. The study finds empirical evidence that the geographic distance between collaborating inventors has a positive effect on firm performance. This effect is stronger in companies that engage in inventor collaborations across international borders and weaker in multi-national corporations that rely only on intra-firm inventor collaborations.

Introduction

In today's business world, a firm's survival relies heavily on its innovative capability. Innovation driven firms are facing ever-changing challenges and competition stemmed from the fast pace of technological progress. Technological knowledge plays a vital role in innovation and thus firms constantly need to build their knowledge base through research and development (R&D). By doing so, they may be able to devise their technological and scientific strategies and expand their innovative capabilities to emerging business areas (Deeds et al., 2000; Grant and Baden-Fuller, 2004; Powell et al., 1996; Wilden and Gudergan, 2015; Zander and Kogut, 1995). However, as pointed out by prior studies, expanding innovative capabilities to new areas is not easy. Firms prefer to search for new knowledge within their existing technological domain (Benner and Tushman, 2003; Rosenkopf and Almeida, 2003; Stuart and Podolny, 1996).

Research and development (R&D) alliance are among the most common business strategies used by firms, through joint technological collaborations, in efforts to reduce cost and increase productivity (Hagedoorn, 1993) and innovative outputs (Moaniba et al., 2019). These alliances enable firms to acquire external technical knowledge (Frankort, 2013; Frankort et al., 2012a; Gomes-Casseres et al., 2006; Mowery et al., 1996; Oxley and Wada, 2009; Rosenkopf and Almeida, 2003). Nonetheless, a number of studies have highlighted that reliance on R&D alliance may have negative consequences (Chen & Li, 1999; Deeds et al., 2000; Deeds & Hill, 1996; Kotabe & Scott Swan, 1995; Rothaermel & Deeds, 2004). For instance, firms engaging in technological collaborations may face social and political barriers due to cultural difference, geographic distance, and language; leaked knowledge to competitors through their alliances; over-reliance on costly alliances; and limited understanding on how different collaboration networks may affect their financial performance. These problems often translate into financial costs and higher R&D spending levels (Su and Moaniba, 2020), which in turn, can disrupt firm performance.

A popular research stream in the field of R&D alliance strategies focuses on the how geographic location matters in partnerships. The bulk of studies in this stream suggests that location is strongly linked to firm performance (e.g., Decarolis & Deeds, 1999; Gilbert, McDougall, & Audretsch, 2008; Kafouros, Wang, Mavroudi, Hong, & Katsikeas, 2018; Tsai, Ren, & Eisingerich, 2020). However, findings have been mixed. Some studies emphasized the importance of geographic proximity in knowledge creation and firm performance (e.g., Gilbert et al., 2008; Oerlemans & Meeus, 2005) while others point to the geographic diversity and coverage as contributors to firm performance (Driffield et al., 2008; Kafouros et al., 2018). This controversy ignites the need for studies with narrower scopes. To address such issue, this paper focuses on the geographic distance aspect of a collaboration from inventors’ perspective only to examine its relationship with firm performance. In addition, little is known about how different types of inventor collaboration networks influence such a relationship. Prior studies have acknowledged different forms of collaboration networks such as beyond border alliances that allow firms to source knowledge (Cassiman and Veugelers, 2002; Laursen and Salter, 2006). Various papers have also indicated the importance of organizational level R&D alliances in allowing firms to acquire outside knowledge (Hagedoorn and Duysters, 2002; Rosenkopf and Almeida, 2003; Rothaermel and Deeds, 2004; Srivastava and Gnyawali, 2011; Stuart and Podolny, 1996).

Most often, inventors ignore the (geographic) distance aspect of a collaboration network when choosing their innovation partners. Instead, they base their decisions on things such as the skills of the person and how well they know them. However, as explained earlier, problems imposed by the distance between inventors can translate into costs (Su and Moaniba, 2020) and therefore it is imperative that they (i.e., inventors or the companies they work for) understand the relationship between geographic distance and firm performance. Furthermore, knowing the benefits (or consequences) of the type of collaboration network adopted and whether they can help mitigate the financial problems is also vital for an innovative firm. Knowledge of such kind can help companies formulate effective partnership and innovation strategies. Distant collaboration (especially across countries) has been increasingly popular since the advent of the internet despite involving knowledge transfer problems such as language and cultural differences, which in turn, may hinder or prevent positive outcomes (Berry, 2014; Cohen and Levinthal, 1990; Jaffe et al., 1993; Sampson, 2007; Wagner et al., 2011).

In this study, we argue that there is a strong connection between (geographic) inventor distance (referred to as collaboration distance in this paper) and firm performance, and that this link can be moderated by two different forms of collaboration networks: 1) at an organizational level (i.e. firm-level from business perspective) where inventors from one firm can either choose to collaborate among themselves (i.e. an intra-firm collaboration) or with inventors from other companies (i.e. interfirm collaboration). 2) at a country level where inventors may collaborate with other inventors from the same country or with those from other countries (i.e., a cross-country collaboration). An interfirm collaboration at the same site or across different locations. Different types of collaborations have different advantages and disadvantages – due to the heterogeneity in business environments, regulations and bureaucratic systems across firms, and the different languages, cultures and foreign policies among countries. This present study provides empirical evidence that the geographic distance between collaborating inventors has a positive effect on firm performance. This effect is stronger in companies that engage in inventor collaborations across international borders and weaker in multi-national corporations that rely only on intra-firm inventor collaborations.

The lack of knowledge on how the geographic distance between inventors can affect firm performance and how the different types of collaborations can moderate this impact is an important literature gap. Knowing the benefits and costs of different forms of inventor networks would widen our understanding of the broader concept of innovation-performance nexus, from a business perspective. The relationship between a firm's collaborative activities and its performance has inspired research interests from various disciplines. These include a large body of literature examining the impacts of strategic alliance on firm-level innovation (Ahuja, 2000; Brown and Eisenhardt, 1995; Dodgson, 1992; Duysters and Hagedoorn, 1998). Moreover, the bulk of these studies have focused on investigating the moderating effects of social factors such as culture, language, and R&D expenditure on the relationship between geographic distance, technical collaboration and organizational performance – mostly in the context of a cross-country cooperation. To our knowledge, the relationship between geographic inventor distance and firm performance has hardly been examined and that there is no previous empirical study investigating the moderating effects of interfirm and cross-country collaborations on this distance-performance relationship.

This paper contributes to the theory and literature in several ways. First, it extends the innovation strategy literature on the link between a strategic alliance and firm growth by providing empirical evidence that the geographic distance between collaborating inventors has a positive and significant effect on firm performance. Second, the study shows that this effect can be moderating by different types of collaboration networks. For instance, both interfirm and cross-country collaborations have significant positive moderating effects on the relationship between geographic distance and firm profitability. Third, a novel approach to constructing a firm-level indicator of collaboration distance per yearly basis is introduced. This indicator is computed based on the longitudes and latitudes of the cities of inventors and patent data.

The remainder of the paper is structured as follows. The next section presents the literature review, background theory, and our hypotheses. Then, the methodology and the results of our empirical analysis hypotheses testing are provided and discussed. Finally, the managerial implications, limitations of this study, and recommendations for future research are presented.