Master Thesis Wouter van Reenen

Master Thesis
Entrepreneurship &
New Business
Venturing
Wouter van Reenen
272717
Supervisor: Drs. Orietta Marsili
Co-reader: Eric Duca
[Appropriation Strategies for Innovations in
Complex Industries]
The issue of interest will be the appropriation strategies firms execute and as a result the influence on innovative output or
innovative performance in the form of innovations suitable for legal protection (patenting,) researched in the setting of a
complex industry. As possibility arising from the literature, the complexity of an industry might enable firms to refrain from
legal appropriation strategies as they possess unique knowledge and skills that automatically create a barrier for imitators
and still ensure solid performance on innovative output

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Index
Preface ................................................................................................................................................... 5
1. Introduction .............................................................................................................................. 6
2. Theoretical Framework........................................................................................................... 8
2.1 Views on legal protection mechanisms......................................................................................... 8
2.1.1 Positive stance....................................................................................................................... 8
2.1.2 Moderate stance.................................................................................................................... 9
2.1.3 Negative stance ................................................................................................................... 10
2.1.4 Protection trade-off............................................................................................................. 11
2.2 Alternative ways of IP protection................................................................................................ 12
Table 2.1 – Appropriability regime........................................................................................... 13
2.2.1 Alternative appropriability strategies.................................................................................. 13
2.3 Industry specific patenting effectiveness .................................................................................... 14
2.3.1 Patent dependency.............................................................................................................. 14
Table 2.2 – Propensity to patent per industry ......................................................................... 15
2.3.2 Patent effectiveness in knowledge assets........................................................................... 15
Table 2.3: Sectoral differences in the market for know-how................................................... 16
Figure 2.1: Appropriablity regimes for knowledge assets........................................................ 17
2.3.3 Patenting behaviour ............................................................................................................ 17
Table 2.4 – Patenting behaviour per industry.......................................................................... 18
3. Problem Definition................................................................................................................. 20
3.1 Research Questions..................................................................................................................... 20
3.1.1 Research questions.............................................................................................................. 21
3.2 Conceptual Model ....................................................................................................................... 21
3.2.1 Conceptual framework ........................................................................................................ 22
Figure 3.1 – Conceptual model ................................................................................................ 23
4. Research Design ..................................................................................................................... 24
4.1 Case Study................................................................................................................................... 24
4.1.1 Explanatory research........................................................................................................... 25
Table 4.1 – Logical tests ........................................................................................................... 26
4.1.2 Building theory..................................................................................................................... 26
Table 4.2 Theory building......................................................................................................... 27
4.2 Population Selection.................................................................................................................... 27
4.2.1 Industry complexity defined................................................................................................ 28
Table 4.3 – Characteristics complex industry........................................................................... 31

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4.2.2 Innovation definitions and qualifications............................................................................ 31
Table 4.4 – Innovation measures ............................................................................................. 33
4.2.3 Heavy industrial offshore construction (SIC 1629 – 16290107, 16290110)........................ 33
4.2.4 Bunker (inland shipping) industry (SIC 4731, 4412, 4424) .................................................. 36
4.2.5 Explanation population selection........................................................................................ 38
4.3 Sample Selection (units of analysis) ............................................................................................ 39
4.3.1 Sledge Hammer Engineering International (SHEI) – “No nonsense at sea” ........................ 39
4.3.2 Verenigde Tankrederij Unilloyd (VTR) – “Dedicated partner in transport”......................... 40
4.4 Instruments and Protocols .......................................................................................................... 41
4.4.1 Field procedures .................................................................................................................. 42
4.4.2 Case study questions ........................................................................................................... 43
Table 4.5 – Query matrix.......................................................................................................... 43
4.5 Data Collection............................................................................................................................ 44
4.5.1 Documentation.................................................................................................................... 44
4.5.2 Interviews ............................................................................................................................ 46
Table 4.6 – Overview of Interviews.......................................................................................... 47
4.5.3 Direct observation ............................................................................................................... 47
4.5.4 Participant observation ....................................................................................................... 49
4.5.5 Physical artefacts................................................................................................................. 49
4.6 Data Interpretation..................................................................................................................... 50
5. Data Analysis........................................................................................................................... 51
5.1 SHEI ............................................................................................................................................. 52
5.1.1 Hierarchy and information flows......................................................................................... 52
5.1.2 Understanding operations................................................................................................... 53
5.1.3 Effects of strategy................................................................................................................ 55
5.1.4 Appropriation mechanisms ................................................................................................. 57
5.2 VTR .............................................................................................................................................. 58
5.2.1 Hierarchy and information flows......................................................................................... 58
5.2.2 Understanding operations and strategy.............................................................................. 59
5.2.3 Effects of strategy................................................................................................................ 62
5.3 Joint venture SHEI & VTR............................................................................................................. 64
5.3.1 Conception........................................................................................................................... 64
6. Conclusions.............................................................................................................................. 69
6.1 Discussion.................................................................................................................................... 69
6.1.1 Proposition 1 – Firms in complex industries are scarcely involved in IP protection ............ 69
6.1.2 Proposition 2 – Firms refraining from IP protection innovate faster................................... 71
6.1.3 Proposition 3 – Firms refraining from IP protection profit less from innovations.............. 73
6.1.4 Proposition 4 – Industry complexity is a sufficient alternative to legal IP protection ......... 74

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6.1.5 Summary pattern matching................................................................................................. 75
Figure 6.1 – Innovation strategies causing innovative performance....................................... 76
6.2 Limitations................................................................................................................................... 77
6.3 Recommendations....................................................................................................................... 77
Appendix.............................................................................................................................................. 79
A – Industry & industry-scope SHEI .................................................................................................. 79
B – Industry & industry-scope VTR ................................................................................................... 80
C – Port size & growth (influence on VTR business) ......................................................................... 81
D – Protocol case study research...................................................................................................... 83
E – Hang-off Frame Jumbo heavylift project .................................................................................... 86
F – Jacking & Fleeting beam (SHEI for Helix)..................................................................................... 87
G – Hierarchical chart SHEI (including joint venture project set-up)................................................ 89
H – Scaling up of existing products as innovation............................................................................. 90
I – Heavy pipe lifting device SHEI...................................................................................................... 92
J – Salvaging the Kursk ...................................................................................................................... 93
K – Sea-fastening projects SHEI......................................................................................................... 99
L – Casco transport and release...................................................................................................... 101
M – Artefacts SHEI & VTR................................................................................................................ 105
N – Magnetic coupling innovation concept VTR............................................................................. 107
O – Magnetic mooring innovation joint venture SHEI | VTR.......................................................... 108
P – Innovative ship hull ................................................................................................................... 112
Q – Testimonials SHEI | VTR ........................................................................................................... 113
Reference List ................................................................................................................................... 115

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Preface
This master thesis has been established through several situations running at the same time and falling
into place during the different processes accompanying them. During the Master course of
Entrepreneurship & New Business Venturing a student and coincidentally the author of this thesis had
been presented with the opportunity to set up a new venture based on an idea sprung from mere
interest in the harbour industry. When questioning the outdated process of mooring (docking alongside
either the quayside or the hull of a ship in order to unload and/or “park”) ships by means of manual
labour and ropes, both the author, Wouter van Reenen and a study mate, Yuri Ouweneel, then turned
to a close friend operating a shipping company specialized in bunkering (the process of restocking
large container vessels with oil, chemicals and miscellaneous products). He too had been struggling
with this concept as, apart from it being outdated, it is a time-consuming part of their supply chain.
Time and thus money can therefore be saved when solving, or updating the current procedures. After
several brainstorm sessions and talks with involved personnel, including captains and deck crew, Niels
Groenewold, CEO of the Verenigde Tankrederij (VTR) granted both students a budget to actually start
conception followed by development of the idea.
Yuri had already been offered a job at VTR and Wouter had an offer from an offshore construction
company, Sledge Hammer Engineering International (SHEI), who later took on an investment role as
well in the form of constructing the designed system.
Simultaneously the end stages of the Master program had been initiated. With the topic of innovation
as thesis subject being very applicable to the project at hand, the choice for this theme was quickly
made and has eventually resulted in this current thesis. Both students at that moment seized the
opportunity offered to them; a business development job at both companies, with the condition that
they had the space and budget to work on this project as equal partners to the participating companies,
next to their activities for the involved firms. From the early stages of this project, to the finalization of
a globally patented working prototype with national media coverage, the research for this thesis has
been conducted parallel with the duration of this phase of the innovation project. Not only has the
experience gained within both industries benefitted the production of a mooring innovation, it also
gave an insider’s view on the workings within these seemingly complex industries. Much of the
information collected is from firsthand experience, eyewitness observations, conversations &
interviews and actual participation & contribution through the work for both firms and the innovation
project that came to life.

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1. Introduction
Innovation has often been labelled as an essential ingredient for economic development and
competitive advantage for firms. It seems as if innovations could for a large part guarantee success and
growth, virtues held high in the field of entrepreneurship. As Kremer (1998) eloquently summarizes:
“economic growth is ultimately dependent on the constant flow and creation of new ideas” (Kremer,
1998, pg. 1137). Schilling & Hill (1998) add to that when stating that: “the more competitive a market
becomes, the more difficult it is for companies to differentiate their product offerings on the basis of
cost and quality. As a result, new product development has become central to achieving meaningful
differentiation” (Schilling & Hill, 1998, pg. 68). Subsequently, this may mean that new ideas and
innovations are valuable assets for companies, which could imply that certain forms of intellectual
property (IP) protection, in the form of for example patenting, could play a major role in the
competitive strength of involved companies.
In the dynamic environment of innovation, legal protection mechanisms, like patenting, are often seen
as the only way to secure profits from previous efforts ultimately leading to innovative findings. It
maximizes a patent holding firm’s or inventor’s security that it will not miss out on its often expensive
(R&D) discoveries, by other firms trying to mimic or reengineer around novel solutions with large
potential markets (Kamien & Tauman, 1986). It is unclear however what effect this current and
accepted way of protecting IP has on the internal innovativeness of the involved firm. It is however
assumable that patenting and other legal protection tools deliver value for a firm; otherwise such
mechanisms would not have evolved.
Hall et al (2005) claim that patents are recognized as valuable source of data in the research field of
innovation and Griliches (1990) strengthens these assumptions with the statement that patent statistics
are helpful tools in researching the process of understanding innovation. But how does patenting (or
any other legal form of protection) influence a firm’s propensity to innovation? Could protection
subconsciously lead to a decreased urgency for innovative ideas and realization thereof and therefore
influence the value of a firm in the long-run? It would be interesting to see what would be the more
valuable approach to innovations and IP; stay unprotected and deal with competition, keeping a
company sharp and eager to rethink and continuously develop new ideas, possibly leading to faster
realization of new exploitable products and/or services or; protect IP, sealing of competition and
maximizing the returns on the investments made to come to particular innovations. This could very
well be an industry related issue but can be valuable for any company involved in the constant
development of their products and industry, relying on this for survival.

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There are different ways of protecting and benefiting from innovations, alternative to the legal path
one can take in protecting new-to-market products. Mansfield (1986) describes several industries that
do not rely on patents at all in his research on patent dependency. These industries (though not
refraining from protection completely) might in fact use different mechanisms to ensure that their
innovations in combination with the potential pay-offs, stay with them. Teece (2003) and Laursen &
Salter (2005) describe such alternatives where firms rely on secrecy, or the plain complex nature of
their industry or product.
More will be elaborated on in the research that is aimed for, in how it will investigate what the
influence of legal protection of innovations (e.g. patenting) is on the company as an entity, but also
describe the search for alternative ways to seal off sensitive and valuable information from
competition. The focus will be on a company’s propensity to innovate and realization of innovations in
correlation with the upheld protection strategy taking into consideration industry specific differences.

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2. Theoretical Framework
To construct a clear basis for the research that is aimed for, a solid theoretical base is needed. The
subject of innovation, its relationship with legal protection methods and the views on how this linkage
influences factors like performance and growth but also implicitly how these mechanisms might
influence the actual propensity to innovate before the process of protection is elaborate and therefore
needs to be clarified thoroughly. The focus will not only be on these legal means of innovation
protection, but also on the alternatives certain industries might apply. It is then interesting to see what
the effectiveness of these opposites is in comparison to each other.
2.1 Views on legal protection mechanisms
It is important to firstly clarify what the area of interest actually entails. Rogers (1999) defines
innovation as “the process of introducing new ideas to a firm which result in increased performance”
(Rogers, 1999, pg. 2). Simply put innovation, often described as satisfying (latent) market needs or
filling gaps in the market, is the ongoing development and invention of novelties that are relevant
purely because they satisfy a need. This could range from increasing efficiency in certain processes, to
introducing a product that relieves a problem (eg. medicine for Cancer). Rationally, innovation is a
contribution to society. This coincides with Kremer (1998) and his view on this topic, when he states
that: “any effort beside innovative behaviour is socially wasteful” (Kremer, 1998, pg. 1137).
2.1.1 Positive stance
Often legal protection is taken as a natural step involving novel inventions with a large potential
market. It seems that this increased performance can only be realized and sustained if the innovation
on which this strengthened competitive position is based is securely protected from imitating
competitors. This way rents are secured through exclusivity, simultaneously protecting the
investments made in the development of this novelty. Mansfield et al (1981) for example found that
even if an innovating firm has to deal with the imitation costs that competing imitators impede on their
efforts it will still initiate protection and eventually proceed to launching. Often these imitators can
produce the same or similar products with two-thirds of the costs and time initially needed for the first
mover (Mansfield et al, 1981). It seems in this case that legal IP protection does offer enough value for
innovative, first-mover firms despite the various advantages an imitating firm can obtain just by
following and copying.
Economists, as stated by Greenhalgh & Rogers (2007), view legal IP rights as fitting policy tools for
encouraging innovation, as they protect the investments and efforts made in particular innovations to
boost the probability that the inventor, whether this is an individual or an institution, will

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proportionally profit from his efforts (Hall, 2007; Greenhalgh & Rogers, 2007; Arrow, 1962). If the
protection from imitation would be non-existent, the eventual returns from innovation efforts would be
too low due to the threat of imitation with as result a meagre incentive to initiate innovation.
Investments in potential innovation would for example be hard to justify if the needed returns are
almost certain to stay out and to be shared with sharp imitators.
Lieberman & Montgomery (1987) describe the advantages of first-mover firms in threefold; this could
be technological leadership, buyer switching costs and pre-emption of assets. This last advantage is
established through the legal protection of innovations, by for example, patents. Especially when
technological advantage is largely a function of R&D expenditures it is in the inventor’s or pioneer’s
benefit if an invention can be patented or kept away from competitors (Lieberman & Montgomery,
1987). Lieberman & Montgomery (1987) also bring up several cases and case studies where patenting
has shown to give the initiator clear advantage, and if not, a hefty head start. Xerox for example has
very effectively used patents to establish a dominant market position before challengers enforced
compulsory licensing through anti-trust acts (Bresnahan, 1985). They patented their own technology
and sealed of the majority of what could become alternative technologies. Additionally, Bright (1949)
discusses GE’s dominance over the electric lamp industry and debates that their ownership of Edison’s
light bulb patent in combination with patents of all their incremental innovations on this same product
were a large factor, creating a serious barrier to entry (Lieberman & Montgomery, 1987).
2.1.2 Moderate stance
Unfortunately, as Gans & Stern (2003) debate: “For most technologies and industries, intellectual
property protection is highly imperfect, leaving ideas sellers vulnerable to expropriation” (Gans &
Stern, 2003, pg. 338). Teece (2003) adds to this that often imitators profit from innovations more than
the actual innovator behind it and Lieberman & Montgomery (1987) mention in their paper on first-
mover advantages that patents do not provide airtight protection and often are easily invented around.
This enables followers to the first-mover to ‘free-ride’ on investments made by innovators in
numerous areas; R&D, buyer education (making the customer aware of your novel product and
learning them how to use it and benefit from it) and the development of infrastructure, to name a few
(Lieberman & Montgomery, 1987). The first-mover, however, has the privilege of a period of
monopolistic ownership from which can be profited, but Lieberman & Montgomery, (1987) dispute
that the rents collected in this period compensate for the severe savings of last mover firms in terms of
the first movers expenditures to come to the innovation in question.
Gilbert & Newberry (1982) developed a model of “pre-emptive patenting” by describing R&D or
patent ‘races’ where the initial developer achieves a head start in research and can exploit this lead by

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preventing rivals from entering this patent race due to this edge on knowledge (Gilbert & Newberry,
1982). Such patent races seem to be important only in a concise number of industries though, of which
the pharmaceutical industry is one.
Also cautioning the positive effects of IP rights in the form of patents, Mansfield et al (1981) have
concluded in many instances that firms do not regard patents as limiting imitation costs enough. The
value of IP is also very much industry related. Heller & Eisenberg (1998) add to the argument of IP
dysfunction, dubbed in their research, the ‘anticommons’, that patenting often leads to ‘under-use’ of
scarce and valuable resources, something that especially in the pharmaceutical industry (their area of
interest) could slow down highly profitable product innovations as everything is sealed of completely.
The enormous investments needed and long development cycles (often decades) in this industry have
created this current situation.
2.1.3 Negative stance
Contradicting the value of legal protection, Kremer (1998) states that patents and copyrights actually
obstruct innovation as they “create insufficient incentives for original research, since inventors cannot
fully capture consumer surplus or spillovers of their ideas to other researchers” (Kremer, 1998, pg.
1138). He also argues, as mentioned earlier, that patenting causes inefficient efforts in the hunt for
imitation through ‘(socially) wasteful’ expenditures on reverse engineering, something that does not
contribute to actual innovation. Bessen & Maskin (2006) even believe that imitation might stimulate
innovation, and that logically strong protection through patents or other legal tools could inhibit it. In
this case the motivation to protect research developments shows to be misplaced and unnecessary,
limiting innovative behaviour and the swift spread of this knowledge. A good example of this theory
put into practice in their eyes is the software industry where imitation is the driving force of its
dynamic and innovative environment. This does however not mean that the software industry is not
involved in IP protection.
Douglas Brotz, a principal scientist at Adobe (software) commented during a public hearing on ‘the
use of the patent system to protect software related inventions’ (1994) that: “Resources that could
have been used to further innovation have been diverted to the patent problem. Engineers and
scientists such as myself who could have been creating new software, instead are focussing on
analyzing patents, applying for patents and preparing defences. Revenues are being sunk into legal
costs instead of into research and development”. (Quoted from MacDonald, 2004:152; Laursen &
Salter, 2005). This illustrates the actions as described by Kremer (1998), curbing innovativeness.
It is also argued that intellectual property may bring disequilibrium in the working of free-market
dynamics as the owner of a patent has the exclusive right to exploit his novel invention and thus is free

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to determine the price on his terms (Judd, 1985; Schumpeter, 1950). “Market distortions” (Judd, 1985,
pg. 567) arise through the monopolies protected innovators might acquire and influence the consumer
welfare (Horowitz & Lai, 1996, pg. 785). As the patent-holder has the exclusive right over a novel
process, product or service, he can seriously overprice his offering. This lack of competition can have
several effects on the company holding the patent; it can lose its drive to compete and rely too much
on the acquired patent and it can get too comfortable within the timeframe given by a patent as it is
protected, reducing the incentive to continuously strive for development of novel products, something
that would be necessary when the threat of an imitating competitor would be present.
It is similar to what Gans & Stern (2003) explain when they observe that industry incumbents often
relying on patenting, frequently fail to recognize the huge potential of new and emerging technologies
as they focus too much on their zone of comfort, often with the technology they have protected as a
basis. Christensen (1997) confirms these findings with a case study on the hard disk drive industry. He
found that essential and equilibrium breaking innovations came from new firms, while the large
established market leaders only innovated incrementally on the same product. In other words, lack of
innovative drive by large and rigid industry leaders enabled smaller start-ups to use their fresh insights
and spot ‘underserved’ customer groups, exploiting the inertia that had slowly taken over the large
established firms. Arrow pioneered on this theory when he argued that “an incumbent monopolist is
less likely to innovate than a new entrant, since innovation destroys the rents on the firm’s existing
products” (Arrow, 1962).
This inertia could very well be caused by the comfort zone industry leaders might have created by
their position and dependence on certain patents, slowing down significant innovative drive, which on
the contrary is seen and showcased by new entrants. Lieberman & Montgomery (1987) literally call
this “incumbent inertia” (Lieberman & Montgomery, 1987). Firms locked-in (through patents) to a
specific set of fixed assets show reluctance to cannibalize existing product lines and become
organizationally inflexible inhibiting these firms to respond to environmental change or competitive
threats (Lieberman & Montgomery, 1987). Laursen & Salter (2005) describe this situation as a
‘myopia of protectiveness’, where firms become overly protective of their novelty, a stance often
detrimental to their innovativeness.
2.1.4 Protection trade-off
The issue or trade-off that becomes apparent here is caused by a matter of perspective. As legal
protection theoretically leads to slowing down the process of innovation, simply put as gaps in the
market, this trade-off is highlighted. Mainly because it is unclear if this inability to satisfy a certain
need due to the lack of urgency caused by patent protection also affects a company’s performance

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(profits, returns, market-share, etc.) in the long-run. If it chooses to focus fully on the production and
protection of one invention instead of continuously profiting from ongoing market dynamics it might
miss out on potential earlier, or other gaps in the market. It might also maximize profits from this
security purely based on the exclusive nature of the right of exploiting the innovation, and in turn
perform extremely well in terms of profits, growth and market share.
Lanjouw (1997) describes such a trade-off in terms of monopolistic prices and dynamic gains, implicit
in using a patent system to encourage innovation, in her paper on the introduction of product patents in
India’s pharmaceutical market. Her description exemplifies this trade-off in reality as it is conducted in
a case where patenting is introduced, as it had not existed in this market before, enabling a before and
after comparison. She argues that even though the patent holder will effectively drive up prices,
patenting might still contribute to innovative behaviour as patent descriptions of which “the
specifications must be written to enable any person “skilled in the art” to make use of the innovation”
(Lanjouw, 1997, pg.5), can be added in the R&D efforts of others and differing products. This
availability of patents may also help in the efficiency of production and discovery of new drugs
through contracting, licensing and partnering agreements between companies (Lanjouw, 1997).
In line with these findings Laursen & Salter (2005) do not only conclude that an appropriability
strategy (a strategy ensuring the firms novelty will pay off in relation to, or beyond, its efforts) is
beneficial for the firm’s financial performance but might also positively influence its innovative
performance. They have discovered that protective legal appropriation strategies, including patenting,
have a variable effect on innovative performance (expressed in terms of firm size, R&D intensity and
innovative co-operation/collaboration). Measured in comparison with innovative performance this
variability reveals itself as an ‘inverted U-shape’ or ∩-shape (Laursen & Salter, 2005). This implicates
a tipping point (earlier mentioned as the ‘myopia of protectiveness’) where at a certain point legal
actions to protect innovations will start to hurt innovative output. Lanjouw (1997) also uncovers the
negative effect it can have on the consumer’s situation, as prices rise and rapid development toward
new and better products (in this case medicines) lingers.
2.2 Alternative ways of IP protection
Before explaining the protection means deviating from the official and legal possibilities and their
effects on innovative output, Teece (2003) emphasises the need of understanding the legal instruments
first. Table 2.1 described by Teece (2003) in his ‘appropriability regime’ explains what instruments
are used based on the ‘nature of technology’.

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The appropriability regime (key dimensions, table 2.1) entails mainly the environmental factors that
influence the extent to which a firm can conceal the relevant information that makes an innovation
novel and exploitable. This can be created through patenting the product, copywriting the process to
produce the product or anything involving the image of the product, or agree on trade secrets
concerning large expert knowledge needed to understand the information that will lead to the
product’s essence (tacit and codified knowledge) (Teece, 2003, table 2.1).
Table 2.1 – Appropriability regime
Key Dimensions
Legal Instruments Nature of Technology
Patents → Product
Copyrights → Process
Trade Secrets → Tacit, Codified
source: Essays in Technology Management and Policy, Teece, D.J., 2003
2.2.1 Alternative appropriability strategies
Laursen & Salter (2005) divide alternative mechanisms from the legal instruments available by the
term of ‘first mover appropriability strategies’ (Laursen & Salter, 2005). They entail secrecy, market
entry and technological complexity. As patenting forces a firm to codify and bare the knowledge
behind an innovation it thus becomes vulnerable for imitators when it files for a patent. This is
enforced by Jaffe (2000), who states that: “Inventors balance the time and expense of the patent
process, and the possible loss of secrecy that result from patent publication, against the protection
that a patent potentially affords to the invention” (Jaffe, 2000, pg. 538). First mover appropriability
strategies protect an innovator from these obligations to reveal information, making it harder to mimic
innovations (Laursen & Salter, 2005). This could mean there are mechanisms that could bypass the
time consuming and costly process of legal protection options, have the same or better effects and
could still instil innovativeness without trampling income.
Protection however, in any shape or form, should always be balanced in the opinion of Laursen &
Salter (2005). Their main argument for this is the earlier mentioned concept of the ‘myopia of
protectiveness’ where an innovator becomes too closed for outsiders and too severe in its protective
stance that it actually damages opportunities. This could come into effect in for example
complementary assets. “If you seal of all your information, the phenomenon of complementary assets,
which can seriously upgrade the value of your product, will stay out. Failing to interact with your
customers, supplier and competitors is also a foregone opportunity to improve and further develop
your innovation” (Laursen & Salter, 2005). If suppliers or producers are not included in or even

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secluded from information on your product they will have no ability or incentive to create a
complementary asset for you. A good example would be Apple’s Iphone where virtually everyone can
use their software to create applications. As a trade-off these applications enhance the value of the
Iphone and stimulate innovation and development. First mover strategies do however seem to be more
beneficial for the innovativeness of the firm involved in this kind of appropriation as opposed to the
legal possibilities. It also has the before mentioned ‘tipping point’ (inverted U-shape or ∩-shape) of
where too much reluctance to open up will hurt innovative performance, but in a longer stretch. Added
to that, a first mover strategy scores higher on its influence on innovativeness (Laursen & Salter,
2005).
2.3 Industry specific patenting effectiveness
An important additional variable that might help explain these issues is the type of industry and firm
size where the innovation originates from. Certain behaviour in the propensity to patent can explain
more about the process of patenting and the strength of these mechanisms. The differences among
industries in patenting behaviour can also shine a light on which industries rely more on legal
protection and which industries are more involved with alternative first mover appropriability
strategies (Laursen & Salter, 2005), or strategies avoiding legal assistance in novelty protection.
2.3.1 Patent dependency
Mansfield (1986) has researched and ranked the industries where patent protection (PP) is a matter of
life and death and the sector types where there is little to no dependency on novelty protection. From
the showcased table (Table 2.2) of the choices made concerning commercial introduction without PP it
becomes clear that the only industry truly dependent on survival, or where patenting is most effective,
through PP is the Pharmaceutical industry, moderately followed by the Chemical sector. This is in line
with the findings of Arundel & Kabla (1998) where the Pharmaceutical (79,2%) and Chemical
(57,1%) sector are two of the four industries with a propensity to patent of over 50% (with Machinery
53,9% and Precision instruments 52,6%) (Arundel & Kabla, 1998, pg. 133).

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Table 2.2 – Propensity to patent per industry
Percent of Developed or Commercially Introduced Inventions That Would Not Have Been
Developed or Commercially Introduced if Patent Protection Could Not have Been Obtained
Industry % That would not have been
introduced
% That would not have been
developed
Pharmaceuticals 65 60
Chemicals 30 38
Petroleum 18 25
Machinery 15 17
Fabricated metal products 12 12
Primary metals 8 1
Electrical equipment 4 11
Instruments 1 1
Office equipment 0 0
Motor vehicles 0 0
Rubber 0 0
Textiles 0 0
source: Patents and Innovation: An Empirical Study, Mansfield, E. Management Science, Vol. 32, No. 2. (Feb., 1986), pg.
175
It is however difficult to explain whether high dependency also means that these particular industries
(e.g. Pharmaceuticals & Chemicals) are highly innovative or actually merely protecting their high
investments and vested interest in high return innovations and thus obstructing more rapid innovation.
2.3.2 Patent effectiveness in knowledge assets
Teece (2003) explains the phenomenon of industry specific patent dependency in his view on
‘appropriability regimes for knowledge assets’. He argues that assets can only be the source of
competitive advantage if they are: “supported by a regime of strong appropriability or are non-
tradable or ’sticky’ ”(Teece, 2003, pg. 60). He explains that know-how and IP are ‘products’ of an
entirely different kind as opposed to the more standard commodities, making them harder to trade and
thus harder to collect rents from (Teece, 2003). This is caused by various factors:
 Recognition of trading opportunities – it is difficult for involved parties of such a trade to
grasp and understand who owns what and which parties might be interested.
 Disclosure of performance features – as buyers wish to be informed, the reluctance to share
because of weak intellectual property rights protection, creates a stand-off, hurtful to the
negotiation or acquisition process of an IP trade.
 Uncertain legal rights – if IP protection is weak or incomplete, interested parties might view
this as risk and uncertainty of whether exclusivity and thus income can be guaranteed.
 Items of sale – as the items of sale consist of IP or know-how, they are not a pure commodity.
This makes the preservation of value transactions involving IP hard to define

16
 Variety – As IP can be extremely varied, transactions are complicated as buyers often wish
custom made transactions with combined IP. It is also hard to pin-point exactly what the value
is of such a transaction.
 Unit of Consumption – The component constitution of IP complicates its valuation. This could
be the entire system or the component acquired. This makes royalty based income unclear.
(Teece, 2003, pg. 62) (table 2.3)
Table 2.3: Sectoral differences in the market for know-how
Challenge Chemicals/Pharmaceuticals Electronics
Recognition Manageable Extremely complex, often
impossible
Disclosure Handled by NDA, patents
common
More difficult
Interface Issues Compatibility generally not an
issue
Compatibility generally critical
Royalty stacking, royalty base
dilemma’s
Infrequent Frequent
Value context dependent Strongly so Very strongly so
Patent strength Generally high Sometimes limited
Development cycle Often long Generally short
Know-How market works: Generally well Often poorly
Source: Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy.
Teece, D.J., pg. 63
The Pharmaceutical and Chemicals industry produce know-how that is hard to replicate (as complex
formula’s are needed to reach the product, eg. new chemicals or medicines) and is therefore extremely
suitable to protect through patents as information is also straightforward (formulas) as opposed to
abstract, these industries have the highest effectiveness and dependency on legal appropriation
strategies (Teece, 2003). Figure 2.1 depicts how knowledge and IP can effectively be treated and
traded as products. Weak implies it is hard to legally shield from competition, if it is strong it is
generally suited to be protected very reliably through legal systems. So, in chemicals and
pharmaceuticals the market for know-how works better as patents are more effective and thus far more
present (table 2.3). Lieberman & Montgomery (1987) concur with these findings in their earlier
mentioned subject of patent races. These seem to only matter in industries like pharmaceuticals and
chemicals.

17
Figure 2.1: Appropriablity regimes for knowledge assets
IntellectualPropertyRights
Inherent Replicability
Easy Hard
Loose
Weak Moderate
Tight
Moderate Strong
Source: Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy.
Teece, D.J., pg. 60
2.3.3 Patenting behaviour
The facts presented by the second table (2.4) complicate these observations as it shows that in every
industry patentable inventions are actually (percentage-wise) in closer range than table 2.2 would
suggest. Take two of the most indifferent industries on IP protection (Office Equipment & Motor
vehicles) (table 1.2). If hypothetically IP protection was non-existent, all their marketable inventions
would have been developed and introduced anyway. If this is compared to the results of table 2.4,
where the same industries did proceed to protect patentable inventions over two-thirds of the time, an
interesting discrepancy is found. The former table clearly shows that even if these inventions were not
patentable or such contraptions were not available, the majority would overall still be developed and
introduced to the market, while the latter shows that overall, every industry does often choose to patent
if the opportunity is present.

18
Table 2.4 – Patenting behaviour per industry
Percent of Patentable Inventions That Were Patented
Industry Group or Industry All Firms Firms with Sales (1982)
Exceeding $1 Billion
Industry Groups:
Industries where patents
are relatively important
Pharmaceuticals,
Chemicals, Petroleum,
Machinery, etc.
84 86
Industries where patents
are relatively unimportant
Primary Metals,
Electrical & Office
Equipment, Intruments,
Rubber & Textiles, Other
66 66
Individual Industries:
Pharmaceuticals 82 83
Chemicals 81 84
Petroleum 86 87
Machinery 86 97
Primary Metals 50 49
Electrical Equipment 83 83
Office Equipment & Instruments 75 77
Motor Vehicles 65 65
Other 85 86
source: Patents and Innovation: An Empirical Study, Mansfield, E. Management Science, Vol. 32, No. 2. (Feb., 1986), pg.
177
Laursen & Salter (2003) make this seem as irrational behaviour by showing that ‘first mover
appropriability strategies’, like technological complexity are found to be more important than legal
mechanisms, like patents, in the protection of process and product innovations. Only in a limited
number of industries do patents prevail, as shown by Mansfield (1986). Different surveys among
European firms have returned similar results (Harabi, 1995; Arundel & Kabla, 1998; Arundel, 2001).
The importance level of legal mechanisms has not shown any change in the last decade, while first
mover strategies show to have grown in importance (Cohen et al. 2000).
Levin et al. (1987) conducted the “Yale survey” through which they also found that legal mechanisms
were not the main source for creating returns on innovations, the main function of for example patents.
The results of this survey showed that secrecy, lead time advantages, rapid learning curves and
complementary assets and service capabilities showed to be relied on more; all ‘first mover
appriopriability strategies” (Laursen & Salter, 2005), show to be effective, if not more effective than
“legal appropriation strategies” (Laursen & Salter, 2005). As these conclusions would imply that most
companies involved in innovative behaviour should be able to refrain from legal protection, they do
not coincide with actual behaviour in most industries according to the research done by Mansfield
(1986), Harabi (1995), Arundel & Kabla (1998) and Arundel (2001). It is interesting to see that firms
in almost all industries still choose to patent innovations the majority of the time (60-90% - depending
on industry), as researched by Mansfield (1986) (table 2.2).

19
An interesting result of these seemingly differing views is the question that arises on whether legal
protection tools (e.g. patents) are beneficial for the owners on the short- and long-term, what effects
they have on innovative performance and to what extent innovative findings actually lead to
competitive advantage when protected. The performance of a firm is largely influenced by these
aspects of business and therefore understanding the premium solution for dealing with innovation
could help a firm determine a logical and profitable IP strategy.

20
3. Problem Definition
The purpose of this research will be to uncover first and foremost how a firm’s appropriability strategy
or policies actually influence its innovative performance. This will be combined with the performance
measures of firms linked with the complexity of the industry it is situated in. A description of these
goals will be given shortly in the proceeding excerpts.
3.1 Research Questions
The existing literature on the effects of legal protection (patent, copyrights, etc.) on the performance of
innovation for companies is clearly divided. Even though the current view is undisputedly positively
geared toward innovative outcomes and firm performance especially, the choice to patent or remain
unprotected seems to bring up some unanswered questions in relation to their effect on the
performance of innovation and eventually the performance and competitive edge of the involved firm.
The understanding of the correlation between staying unprotected via patents or patenting a novelty
and the outcome of innovation and performance could be valuable for companies dependent on rapid
developments in their industry. There are predominantly positive stances to be found toward legally
protecting innovation, but academics have started showing interest in this matter, especially in the
light of innovation and the speed of development.
As partly illustrated in the preceding chapter, derived from Mansfield’s (1986) and various supporting
studies (Harabi, 1995; Arundel & Kabla, 1998; Arundel, 2001) quantitative research on patenting
behaviour and dependence on this mechanism per industry it is clear that the pharmaceutical and
chemicals industries are purely driven by IP. Surprisingly, the motor vehicles industry’s dependence
on patenting is non-existent as non of the novelties, inventions or ideas that have proven to be
exploitable would have been halted or undeveloped if patenting did not exist as protection tool (table
2.2; 2,4). In this industry, apparently, if it is new and valuable to the inventor and company involved, it
will be introduced to the market whether it can be protected legally or not. Another previously
mentioned fact is that actual patenting percentages of patentable innovations in these highly
differential industries are somewhat in the same range (table 2.4). This means that every sector, highly
dependent or independent on patents do not deviate too much percentage-wise on their choice to file
for a patent. It is apparent that IP protection thus offers a certain value to involved companies. The
question that arises when comparing these industries in terms of patenting dependence is which one
has the largest innovative output. Whether this innovative output also influences firm performance, in
terms of revenue output, firm growth and profitability or shareholder value, is another issue that would
be interesting to investigate. Putting these variables in the context of industry complexity and the

21
appropriation strategies employed could possibly result in additional insights on patenting and its
effect on innovative performance.
3.1.1 Research questions
As the existing literature has insufficient answers to this and there is a growing curiosity on this
matter, a more elaborate and specified case research would be interesting to undertake. The issue of
interest; the appropriation strategies firms execute and as a result the influence on innovative output or
innovative performance in the form of innovations suitable for legal protection (patenting) will be
researched in the setting of a complex industry. As possibility arising from the literature, the
complexity of an industry might enable firms to refrain from legal appropriation strategies as they
possess unique knowledge and skills that automatically create a barrier for imitators and still perform
well on innovative output. This boils down to the following research questions (study’s questions and
propositions (Yin, 2003)):
Research Questions:
“How does a firm’s protection or appropriation strategy affect innovative performance?”
“How does an industry’s complexity influence its appropriation strategy?”
“How can some firms refrain from legal IP protection and still profit from their innovations?”
Here the interest lies not only in the influence of innovations and how the firm performs in
appropriating from them, but also in the dilemma of IP protection and which choice to make; legally
protecting or entering the market unsecured using differing, alternative appropriability mechanisms. It
currently seems unclear whether this is beneficial for actual innovation output and simultaneously firm
performance. The complexity of the industry might act as moderating variable, which could reveal
certain situations where patents are less essential. The expertise or knowledge needed to operate in
these highly complex environments could for example ensure enough protection as it is.
3.2 Conceptual Model
Through this set of formulations a clearer view will be attempted to be formed on legal protection of
innovations and the influence it has on the variables it was designed for; the stimulation of innovation
by creating an incentive for the inventor to actually engage in innovative action without risking his
total investment of time and money through imitation costs. It will be interesting to see whether in

22
some instances it might be much wiser to act fast and rely on alternative mechanisms, such as
complexity of technology and information, instead of protecting a novelty and loosing time in the
process. This could spur continuation of rapid innovation and developments benefiting multiple parties
and possibly the improved performance of the companies involved. An additional point to ponder on is
whether patenting influences the stance of the inventor, as the security it guarantees might slow down
the drive to innovate and continue developing.
3.2.1 Conceptual framework
To clarify and organize the aforementioned subject areas of interest already mentioned in the research
questions, a conceptual model can aid. The model below (figure 3.1), in accordance with Sekaran’s
(2003) rules and elements, depicts the ideas forged during the process of this research. The research
subject of firm performance and innovative performance, the dependent variable in this scheme, can
be embodied by the performance of any firm that is involved in an innovation driven industry.
Innovation should be defined as Schumpeter (1930) has described it. He is often seen as the pioneer
that drew attention to the essential contribution of innovation to various aspects of economic
development and classified five types of innovation (1930):
 Introduction of a new product or a qualitative change in an existing product
 Process innovation new to an industry
 The opening of an entirely new market
 Development of new sources of supply for raw materials or other inputs
 Changes in industrial organization
(Schumpeter, 1930)
The independent variable, the appropriability strategies executed, will be the mechanisms used when
protecting innovations measured by their form and the effectiveness thereof. Now that these
relationships have been clarified it is time to explain the moderating variable, the industry; with
‘complexity’ of the industry as main area of interest. The industry setting in terms of complexity will
entail the environmental and internal factors that outline the industry and influence companies in their
stance toward protection of innovations. This entails the processes and specific knowledge needed to
successfully operate in the industry and how the subject generally approaches IP in terms of
commercialization; file for a patent or flood the market unsecured using different appropriability
strategies. It will be interesting to see how these relationships affect the dependent variable of firm
performance (also in terms of innovative performance). These mechanisms might more clearly
uncover the use and effectiveness of patents when involved in innovative behaviour.

23
Figure 3.1 – Conceptual model
Conceptual Model: “The effect of a firm’s appropriation strategy on its performance, with industry complexity as
moderating variable”

24
4. Research Design
This research is aiming for a case study to more deeply descend into the appropriation strategy
theories described above. It is clear that there are many alternative ways to protect novel findings or
knowledge, but do they provide enough security to ensure sufficient pay-offs for the involved firm?
The research will be conducted in one of the industries low on patent dependence as described by
Mansfield (1986), Harabi (1995), Arundel & Kabla (1998) and Arundel (2001). This choice is based
on the consideration that these industries do not solely rely on IP to reach their revenues and profits
but still frequently participate extensively in IP protection. As in the low patent dependent industries
the propensity to patent is still significant, but as debated by Teece (2003), less effective in legal
protection; this would be the most interesting field of research.
4.1 Case Study
Apart from the research questions’ form, the situation and area of interest also demand a case study
(Yin, 2003). The focus will be on a contemporary event where the relevant behaviours cannot be
manipulated, situated in a real-life context, which in turn demands case study research (Yin, 2003).
Davidsson (2004) also points at the need for qualitative research due to the characteristics of
entrepreneurship as research domain. Davidsson (2004) adds that when involved in “more spectacular
forms of innovative entrepreneurship, we are dealing with events that are infrequent, unanticipated
and/or extraordinary” (Davidsson, 2004, pg. 56). Though not fully applicable to the research topic it
does involve phenomena that are hard to confine with quantitative research methods. Innovative
performance and the protection strategy a company stands by would be such variables. Not because
they are hard to quantify, but are hard to obtain or make tangible data-wise. Innovations could be
measured through for example the number of patent applications, but the whole intention of this
research is to uncover if patenting actually slows down innovative behaviour. Because the data
retrieving in this research most probably will therefore be through practical, experimental,
observational and personal experiences an empirical research would seem to suit best for this research
(Yin, 2003)
Therefore firms that innovate and skip the patenting part to quickly profit from their knowledge
advantage for as long as it lasts before engaging in new developments need to be compared with firms
that actually patent every novel invention. From this comparison it could be possible to derive whether
patenting interferes with a firm’s attitude towards innovation and the search for novel solutions, if
non-patenting firms show to bring out and create more innovations than their protective counterparts.
Non-protection, or alternative appropriation strategies are hardly recorded and is a data value that will
have to be attained in the field. The setting; a complex industry, has an established way of dealing with

25
innovativeness and has created its own ways of appropriation, which means direct observations and in-
depth interviewing with the involved key-figures of a firm operating in such an industry are the most
effective research methods.
4.1.1 Explanatory research
According to Yin (2003) with this type of explanatory research a case study is most suitable. This is
partly because of the ‘how’ form of the research question. As stated before: “A case study is an
empirical inquiry that investigates a contemporary phenomenon within its real-life context, especially
when the boundaries between phenomenon and context are not clearly evident” (Yin, 2003, pg. 13). In
order to obtain acceptable data that are high in reliability, construct, internal & external validity,
described as ‘logical tests’, Yin (2003) suggests ‘six sources of evidence’ for the case study:
documentation, archival records, interviews, direct observations, participant observation & physical
artefacts. A balance between these strategies should be executed but this research benefits most from
interviews and direct observations as source, especially when covering the components, appropriation
strategy and industry complexity. This way it is possible to discover a firm’s internal policy in terms
of patenting and the number of innovative launches. Additionally innovative drive can be obtained.
Innovative behaviour can even be measured through interviews with policy makers of the firms (CEO,
project managers, etc.).
The logical tests are described by Yin (2003): “as the four widely used and recommended tests to
judge the quality of a case study”, (Yin, 2003, pg. 32) being:
 Construct validity – Establishing correct operational measures for the concepts being studied
(data collection phase)
 Internal validity – (for explanatory studies): Establishing a causal relationship, whereby
certain conditions are shown to lead to other conditions, as distinguished from spurious
relationships (data analysis phase)
 External validity – Establishing the domain to which a study’s findings can be generalized
(research design phase)
 Reliability – Demonstrating that the operations of a study, such as the data collection
procedures, can be repeated with the same results (data collection phase)
(Yin, 2003, pg. 33)

26
Table 4.1 – Logical tests
Logical tests
Tests Case study tactic
Construct Validity  Use multiple sources
 Establish chain of evidence
 Have key informants review draft case study
Internal Validity  Do pattern-matching
 Do explanation-building
 Do time-series analysis
External Validity  Use replication logic in multiple case studies
Reliability  Use case study protocol
 Develop case study data base
source: Case Study Research: Design and Methods, third edition, Yin, 2003
Every research design and method has certain steps that should be followed before engaging in any
kind of activity. Five steps have to be taken when engaging in this type of research design. The steps
are as follows (Yin, 2003, p. 20):
1) A study’s questions
2) Its proposition, if any
3) Its unit(s) of analysis
4) The logic linking the data to the propositions
5) The criteria for interpreting the findings
(Yin, 2003)
4.1.2 Building theory
Since this research will be focused on the efforts of firms in complex industries, before actual IP
protection, preferably leading to patentable products which will not be or are not sealed off by such
mechanisms as patents, it is important to find the right sources to uncover this innovative behavior that
is not registered.

27
As a case study is a research strategy which focuses on the dynamics present within single settings
(Hubert & Matthews, 2002) it is of utmost importance to approach it with extreme meticulousness.
Eisenhardt (2002) suggests a couple of essential steps in the course of a case study and building theory
from it (table 4.2). As the path to be followed has been laid out by the preceding chapters it is time to
specify the population by selecting the cases to be studied. Here the industry and the firm incumbents
to be studied will be extricated to gradually get into the topic and give this research a base and
direction.
Table 4.2 Theory building
Process of Building Theory from Case Study Research
Step Activity
Getting Started Definition of research questions. Possibly a priori
constructs. Neither theory, nor hypotheses.
Selecting Cases Specified population. Theoretical, not random
sampling.
Crafting Instruments and Protocols Multiple data collection methods
Entering the Field Overlap data collection and analysis, including field
notes. Flexible and opportunistic data collection
methods.
Analyzing Data Within-case analysis. Cross-case pattern search using
divergent techniques.
Shaping Hypotheses Iterative tabulation of evidence for each construct.
Replication, not sampling, logic across cases. Search
evidence for “why” behind relationships.
Enfolding Literature Comparison with conflicting literature. Comparison
with similar literature.
Reaching Closure Theoretical saturation when possible.
source: Builing Theory from Case Study Research, Eisenhardt, 1989. pg. 7
4.2 Population Selection
The aim of this research is to uncover whether the effects of IP protection are as significant in their
results as they are in most industries. This would not only entail the success of protection but also the
performance of the firm due to protection. It is known that in some industries there are alternative
means to protection of valuable novelties. This could be as simple as secrecy or as complex as the
industry specific or unique skills and knowledge needed to compete. As Laursen & Salter (2003)
argued, complex industry incumbents might have the ability to fend off imitating competitors purely

28
based on skill and experience and still be innovative and successful in appropriating from that
innovativeness. It will be interesting to see if these appropriation strategies substituting legal steps to
confine essential knowledge can deliver performance just as effective and maybe even more efficient
in the hunt for rents while keeping up innovative drive.
4.2.1 Industry complexity defined
In his research on the complexity of the construction industry and project complexity more specifically
Baccarini (1996) elaborates on the dictionary’s definitions of complexity and puts them in an industry
frame:
1) Consisting of many varied, interrelated parts – Complexity in terms of industry description
can in this definition be ‘operationalized’ in terms of:
a. Differentiation – the number of varied elements, e.g tasks, specialists and
components
b. Interdependence or connectivity – the degree of interrelatedness between these
elements
2) Complicated, involved, intricate – A more widely interpretable meaning of complexity.
Baccarini (1996) argues that this interpretation of complexity is in the eyes of the observer,
which is a subjective measure, an unreliable basis for research analysis.
(Baccarini, 1996, pg. 202)
Baccarini (1996) additionally mentions the complexity of technology as an indicator for complex
industry as: “Broadly, technology can be defined as the transformation processes which convert inputs
into outputs” (Baccarini, 1996, pg. 202). This transformational process is characterized by the way
material, means, techniques, knowledge and skills are put to use (Baccarini, 1996, pg. 203). Baccarini
(1996) divides technology in three facets:
1) Operations (equipping and sequencing of activities)
2) Characteristics of materials
3) Characteristics of knowledge
This can be applied to production as a whole or to specific tasks within this process and should be seen
as a “multi-dimensional concept” divided into uncertainty and complexity, but will lead to a much too
broad concept (Baccarini, 1996, pg. 203). Baccarini (1996) therefore links them to the before
mentioned concepts of industry complexity:

29
1) Technological complexity by differentiation – this refers to the variety or diversity to specific
aspects of a task; this could be:
a. Number and diversity of inputs and/or outputs
b. Number of separate and different actions or tasks to produce the end product of a
project. These actions can be seen as separate when differentiated by technology, time
or territory.
c. Number of specialties (like subcontractors or skills utilized) involved
2) Technological complexity by interdependency – involves interdependencies:
a. Between tasks
b. Within a network of tasks
c. Between teams
d. Between different technologies
e. Between inputs
As with organizational interdependence, which refers to the degree to which two or more activities
interact to determine an outcome jointly (Sorensen, 2001), technological interdependence can be one
of three types:
1) Pooled – Linking independent entities. Both parties may have differing views on the desired
outcomes that could be valuable to them individually, but both are independent and dedicated
to reaching a joint end goal (Sorensen, 2001).
2) Sequential – Serial dependence. When the first party’s performance on the attainment of a
goal is essential to the second party’s success on reaching an individual goal (Sorensen, 2001).
3) Reciprocal – Where A affects B’s outputs and B affects A’s outputs. This occurs when there is
mutual causation. Both parties depend on each other to reach a joint goal as both parties
individually hold essential knowledge or skill for successful finalization of the product or
project (Sorenson, 2001).
(Baccarini, 1996, pg. 203)
Mitchell & Singh (1996) approach the concept of complexity from the product side and define
complex goods as: “an applied system with components that have multiple interactions and constitute
a non-decomposable whole” (Mitchell & Singh, 1996, pg. 170). This implies that complex goods
consist of multiple components all of which indispensable for the quality of the entire end product.
This requires outstanding component quality and assembly. As the number of components and
interactions increase, so will the complexity of the good produced, which in turn will define the
industry it operates in (Mitchell & Singh, 1996).

30
Hobday et al. (2000) introduce the concept of ‘complex product systems (CoPS)’ in light of the topic
of complex organizations. They distinguish them from mass produced goods and emphasize the many
interconnected and customized elements and the emergent nature of the production process. The many
unpredictable and unexpected events that often occur and the project nature of production, where small
batch production, enables direct engagement in innovation of the product. The industries where these
companies reside and products are produced are often considered as performing above average on
innovative output (Hobday et al., 2000, pg. 795). Miller et al. (1995) add to the description of complex
industry through their notions on complex systems. They view such systems as: “a group of large
scale, customized products and their associated supply industries. Complex systems, made up of many
interconnected customized components, exhibit emerging properties through time as they respond to
the evolving needs of large users” (Miller et al., 1995).
As derived from these findings, industry complexity can be measured on a wide variety of concepts. It
is however clear that differentiation and interdependency and the extent to which many different skill
sets will have to be put to use to create a final quality product, put simply as component multiplicity
define whether an industry can be considered as complex (Baccarini, 1996; Mitchell & Singh, 1996;
Hobday et al., 2000; Miller et al., 1995). The below table (4.3) summarizes the aspects of industry that
qualify it as ‘complex’, clarifying what to look for to ensure solid research:

31
Table 4.3 – Characteristics complex industry
Complexity Concepts Description
Differentiation Variety and diversity of the specific task
Input/output diversity The variety and amount of inputs needed to come to the final product/service
(Baccarini, 1996)
Task diversity Amount and number of different tasks needed before completing product/service
(Baccarini, 1996)
Skill diversity Number of specialties or different specific skills devoted to the product/service
(Baccarini, 1996)
Interdependency Interdependencies apparent in the task executed
Task interdependency Dependence of differing tasks on the remaining tasks needed to complete a project or
product/service successfully (Baccarini, 1996)
Network interdependency Network interactions in industry and their interdependencies in creating
product/service (Baccarini, 1996)
Team interdependency Involved teams and their interaction in product/service establishment and dependence
on each other (Baccarini, 1996)
Technology interdependency Synergy between used technologies in end product/service (e.g. hydraulics and
electronics in a crane arm, working in sync) (Baccarini, 1996)
Input interdependency See past descriptions interdependency
Product characteristics Product’s industry specific complexity qualifications
Customized product/service often one-of-a-kind, or extensively altered to customers demands in a
project form (Miller et al., 1995; Mitchell & Singh, 1996; Hobday et al, 2000)
Small batch Low-quantity production due to the customized characteristics of the product (Hobday
et al, 2000)
Large scale projects Often heavy industrial and large projects, or products not intended for the consumer
market (Miller et al., 1995)
source: Baccarini (1996); Mitchell & Singh (1996); Hobday (2000) & Miller et al. (1995)
4.2.2 Innovation definitions and qualifications
Even though elaborated on in preceding chapters it is necessary to define and repeat certain guidelines
to measure the sample selections performance on innovation in order to recognize innovation and
innovative companies. As mentioned earlier Schumpeter (1930) (see OECD, 1997, pg. 28) has defined
innovation in five major forms (Schumpeter, 1930) (see OECD, 1997, pg. 28):
 Introduction of a new product or a qualitative change in an existing product
 Process innovation new to an industry
 The opening of an entirely new market
 Development of new sources of supply for raw materials or other inputs
 Changes in industrial organization

32
Different approaches to performance in innovation might help in qualifying subject companies as
viably innovative firms. On his quest for the definition of innovation and a measure for this concept,
Rogers (1999) offers a few insights and concise definitions from industry insiders and specialists on
this topic, among which Schumpeter (1930) and his initiative in creating the fundamentals on
innovation. Their perspective on innovation could help in creating a focal point on determining what
innovation actually is and entails. Zaltman et al. (1973) state that; “innovation concerns change and
‘what is new’. It can be an idea, an action or a material object. However, innovation does not mean
that something has to be new in an absolute sense. It is sufficient that it is new for the individual
organization” (Zaltman et al., 1973)
The OECD1
(Organization for Economic Co-operation and Development) designed the Oslo
manual (1997, 2nd
edition), which aims to set a benchmark for innovation surveys and research
for its members, also acknowledges that the difficulty of defining and measuring innovation in
the first two definitions of Schumpeter is less compared to the rest (Rogers, 1999, pg. 5). They
clarify the definition as follows: “a technological product innovation can either be a new or
improved product whose characteristics differ significantly from previous products. A
technological process innovation is the adoption of new or significantly improved production
methods, including methods of product delivery” (Rogers, 1999, pg. 5).
ABS2
(Australian Bureau of Statistics) used the following description in Australia’s largest
innovation survey: “Innovation is any new or substantially improved good or service which
has been commercialized, or any new or substantially improved process used for the
commercial production of goods and services. ‘New’ means new to your business” (ABS
Innovation Survey Questionnaire, section B, Rogers, 1999).
Jenssen (2003) has attempted to identify innovation specific to the shipping industry (Norwegian). He
argues that with the ‘strategy concept’, which concerns the selection of products and markets, the
efficiency of the value chain are the underlying factors for the definition of innovation (Jenssen, 2003).
This means that companies can be defined as innovative when they: “change products, markets or the
production process” (Jenssen, 2003, pg. 95), which gives an appropriate description of innovation in
shipping in Jenssen’s eyes. Innovation is low when companies enter markets already served by
competitors, offer products already offered or uses production methods already existent. Developing
new services, markets and production methods are what qualify as high degree innovations (Jenssen,
2003), all of which are not necessarily concepts of innovation exclusive to the shipping industry, but
concepts of innovation existent in shipping nonetheless.
1
http://www.oecd.org/home/0,2987,en_2649_201185_1_1_1_1_1,00.html
2
http://www.abs.gov.au/

33
Schilling & Hill (1998) argue that a large and increasing part of businesses’ revenues originate from
new or improved products and Weelwright & Clark (1992) and Zangwill (1993) state that there is a
clear dependency between innovation and profitability in businesses.
Rogers (1999) also suggests a few input and output sources for innovation in his study on the
definition and measurement of innovation. The table below summarizes these (table 4.4).
Table 4.4 – Innovation measures
Input measures Output measures
R&D expenditures Introduction of new or improved products or processes
Intellectual property Percentage of sales from new/improved processes
Acquisition of technology from others (e.g. patents &
licenses)
Intellectual property statistics
Expenditure on tooling-up, industrial engineering and
manufacturing start-up associated with new
products/processes
Firm performance (econometric approach)
Intangible assets
Marketing expenditures for new products
Training expenditures relating to new/changed
products/processes
Managerial and organizational change
source: Excerpts from The Definition of and Measurement of Innovation. Rogers, M. The University of Melbourne,
Melbourne, pg.17
It is clear that innovation is an elusive concept of which the sub-components of product and process
innovation are best identified and quantified. The observations done beyond these sub-components of
innovation are based on the researcher’s observations and the subject’s statements on their
performance on this principle. Rogers (1999) offers clear guidelines, for the search for innovative
behavior making it able to qualify a company as being innovative or not (table 4.4). Subject companies
will be examined within the input/output measures that Rogers (1999) and others have defined (among
others: Schumpeter, 1930; Capon et al., 1992; Link & Bozeman, 1991) for that purpose.
4.2.3 Heavy industrial offshore construction (SIC 1629 – 16290107, 16290110)
One of the Industries aimed for is situated in the port of Rotterdam. Heavy industrial offshore
constructions that deviate from the normal products used on these markets are being produced, built,
designed and altered here to suit companies operating in the harbor, offshore and maritime

34
environment, an aspect that is in line with customized production. Clientele ranges from large tanker
container-liners in need of an extra recreational area to barge companies that wish to convert their
barges to transport ships, implying a business-to-business operation (Barlow, 2000). This industry is
involved in large and heavy projects and is complicated or complex through its enormous dimensions,
extremely narrow time-frame concerning dead-lines and technical competencies and experience
needed (Barlow, 2000). The amount of different and specific skills needed to forge the high standard
product offered and the large component constitution of these huge projects showcase a vast
differentiation in technology and tasks needed. Innovation is a necessary part of daily operations as the
firms in this industry have to deliver products that are either nonexistent in the market or in need of
specialized alterations to its core. Innovation is thus fueled out of pure necessity in some situations,
but is hardly protected by any form of legal IP. This makes trust and strong relationships an extremely
important aspect of this industry as it a close-knit community with experienced and vested incumbents
(P. Schipper, personal communincation, 11 October, 2008).
Another factor enforcing continuous innovation are the highest standards of safety and environmental
issues demanded within the industry. Everyone tendering for projects has to live up to those standards,
either by ISO (International Organization for Standardization)3
qualification or regular approved
checks from independents (Barlow, 2000).
This industry qualifies as complex in many ways. As mentioned before the aspect of customized
production is what Hobday et al. (2000) (small batch, customized, table 4.3) mention as a
characteristic of complex industries; that the best way of illustrating the defining characteristics is by
distinguishing them as follows:
1) Comprised of many customised, interconnected elements including control units, sub-systems
and components; organised in a hierarchical manner and tailored for specific customers and/or
markets. Often their sub-systems e.g. the fan blade system for aircraft are themselves complex,
customised and high cost.
2) They tend to exhibit emergent properties during production, as unpredictable and unexpected
events and interactions often occur during design and systems engineering and integration
(Boardman, 1990; Shenhar, 1994) Emerging properties also occur from generation to
generation, as small changes in one part of a system’s design can call for large alterations in
other parts, requiring new control systems and, sometimes, new materials e.g. in jet. engines
3) They tend to be produced in projects or in small batches which allow for a high degree of
direct user involvement, enabling business users to engage directly in the innovation process,
3
http://www.iso.org

35
rather than through arms length market transactions, as normally the case in commodity
goods.
(Hobday et al., 2000, pg. 794),
All mentioned points seamlessly fit the descriptions of the offshore construction industry’s way of
operating (P. Schipper, personal communication, February 1st
, 2009)
The implication of business-to-business operations adds another feature to their complexity as
mentioned by Miller et al. (1995). Furthermore, it has a high differentiation in terms of number of
specialties needed (task & skill diversity, table 4.3, Baccarini, 1996) and is also characterized by the
non-decomposable whole of the products offered in combination with the indispensability of each
component, another sign of complexity (customized, table 4.3) according to Mitchell & Singh (1996).
The amount of different and specific skills needed to forge the high standard product offered and the
large component constitution of these huge projects showcase huge differentiation in technology and
tasks needed (task & skill diversity, table 4.3), which according to Baccarini (1996) also typifies a
complex industry. Barlow (2000) adds to this by directly describing this particular industry as being
complex (Barlow, 2000, pg. 973-988). His findings and labeling of this industry as such is derived
from his extensive research on a high value, high stakes partnering in the offshore construction sector,
with oil rigs in particular (Barlow, 2000).
Based on her research on the ‘Andrew Alliance’, part of a study of the organizational and managerial
processes involved in construction industry partnering, Barlow (2000) terms partnering with clients,
which is often done in this industry, as a catalyst for project performance and technical and process
innovations (Barlow, 2000, pg. 976). These conclusions originate from research done on over 40 key
companies in the offshore construction industry coming together in 5 case studies of existing and
emerging partnering arrangements (Barlow, 2000, pg. 987). Her key figures were observed (75
interviews at management level), meetings were attended and observations were done all followed up
in the course of 3 years (Barlow, 2000).
Even though projects and components are often custom-built to cater to unique problems, resulting in
an enormous range of innovative products, the scope of the products built in combination with the
small amount of occurrences where such enormous solutions are needed, apparently seems to make
patenting an unnecessary mechanism in this industry the majority of the time.
The emphasis seems to be on the unique knowledge they posses and gain through projects. This might
enable incumbents to provide complex and heavy industrial solutions for the maritime and offshore
sector instead of appropriating (legally) from the innovations they construct through a focus on (mass)

36
production (or licensing). Hobday et al. (2000) describe this as the earlier mentioned ‘CoPS’ or
Complex Product Systems. Innovations are incorporated as core competency and seen more as
learning process. This way unique knowledge is used to build reputation and win similar projects,
which is an alternative way of appropriating from innovations (Hobday et al., 2000). The goal will be
to understand why legal protection is almost non-existent in this industry and if this could be changed
to benefit more from the innovative performance that seems to be continuously displayed (Barlow,
2000).
4.2.4 Bunker (inland shipping) industry (SIC 4731, 4412, 4424)
An industry also active within the harbor environment is the Bunker industry (inland shipping and
transport). A habitat of a few large players that dominate their local markets of ‘bunkering’, the
process of refueling and/or restocking large container tankers (Appendix B). “The term bunker
loading signifies the whole procedure that starts with the contact with the suppliers for a
price quotation and ends after the delivery of the fuel oil” (Stamatopoulos, 1993). While the
tanker liners dock to the harbor to unload the containers or other loads they have brought in, the
smaller bunker vessels dock alongside the tanker to provide their client with the needed fuels or in
some cases chemicals through huge pumps, retrieved from the suppliers of these products. As
illustrated by Boutsikas (2002) and Pinder (1997), both heavily involved within this industry and
having investigated and observed it from the core for several years, backed by tight connections with
industry insiders, everything from viscosity, density, water content, flash point and fuel delivery
temperature for volumetric quantity calculations have to be prepared and calculated both by the bunker
company and the eventual client, often lead by the tanker’s chief engineer. The operators have to deal
with port authorities, the tanker’s personnel, dock owners, laboratories (to check substance quality of
fuels) their own personnel, the oil companies and among others their clients. Apart from these
complicated connections of different involved parties their personnel is highly specialized and skilled,
ranging from bunker captains to technicians and engineers (Boutsikas, 2002; Pinder, 1997).
It is therefore an industry where the process of coming to the final service is very network dependent.
It is an industry that is increasingly readjusting its focus towards international harbors as often local
harbors have been divided and locked-in obstructing the growth potential of the firms involved
(Pinder, 1997). This industry’s incumbents are clearly not aiming at reaching the consumer market but
are purely catering to business clientele, coincidentally all features of the aforementioned complex
industry (table 4.3) The vessels used are state of the art ships capable of transporting anything
demanded and controlled by high-tech control systems and innovative technology (personal
communication, Y. Ouweneel, N. Groeneweold, January 2nd
, 2009).

37
This industry can be seen as complex as it is driven by an intricate planning system, as orders are
overall planned ahead for years, to the minute. As the entire process of eventual bunkering is
established through an extensive amount of processes, this takes enormous precision in management.
Involved parties are the oil companies, the oil-storage companies, the tanker liners and all the highly
specialized personnel involved with all these parties, making it an extremely interdependent industry.
As each party in essence needs the others to function optimally individually to create and sustain a
smooth running economic environment like the harbor industry, it becomes a complex and dependent
coherence (personal communication, Y. Ouweneel, N. Groeneweold, January 2nd
, 2009).
As the companies competing in this industry also keep the construction of their vessels under their
own supervision and/or control, which is a whole different line of industry, they have to deal with
ongoing developments of techniques and innovations valuable for their operations. This could range
from software enhancements, to improving docking systems, to faster ways of bunkering, making it a
largely differentiated whole. This industry also demands specialist knowledge and enormous amounts
of experience before being able to operate or enter (personal communication, Y. Ouweneel, N.
Groeneweold, January 2nd
, 2009).
Even though the focus is not on the appropriation of innovations, but on winning contracts with large
shipping companies, players within this market have to constantly keep up with competitors and the
strict harbor rules and regulations they have to abide to. This implies that every innovation that can
contribute to improved efficiency is extremely valuable to these firms. This forces the incumbents of
this industry to take on an innovative position resulting in a constantly developing industry. The
innovations, whether technical or operational, often spring from the obstacles encountered during daily
operations (personal communication, various interviews, N. Groenewold, Y. Ouweneel). The specific
characteristics of the industry and the specialist skills needed to operate here have created this
environment where only insiders actually spot opportunities. This phenomenon has been described by
Freeman (1986) and Romanelli (1989) where: “organizational contexts provide varying access to
broad industry knowledge and fine-grained information about entrepreneurial opportunities, neither
of which are readily available to outsiders” (Audia & Rider, 2005, pg. 3-4).
It is however less common that those innovations turn into or become part of the business portfolio
Entrepreneurial activity originating from this industry is however not uncommon. But ordinarily these
innovations rather become part of the system that enables companies to operate better, adding value
through enhanced efficiency and effectiveness (N. Groenewold & Y. Ouweneel, personal
communication, November 15, 2008). Often these inventions could very well be exploitable on the
same market and it is therefore interesting to see if and why involved parties do not regularly legally
protect inventions and if this could change their business model and boost income.

38
Baccarini’s (1996) qualifications for complexity would typify the bunker industry as complex by its
task and skill diversity, but also its network and task interdependency. The large-scale and business-to-
business nature of their projects and operations typify this industry as complex by Miller et al. (1995)
and their qualifications of such industries. It will be interesting to investigate whether the findings of
Teece (2003) and Laursen & Salter (2005) apply on every industry or whether more complex
industries actually forge their own way of appropriation security, deviating from the more common
legal ways of appropriating from innovations.
4.2.5 Explanation population selection
The population chosen for has been purposely chosen as suggested by Eisenhardt (1989), as she noted
that random sampling is not preferable and unnecessary in case studies due to the often limited amount
of cases that can be studied (Eisenhardt, 1989). Therefore, these industries are matched to the topic of
interest; appropriation strategies of companies in complex industries refraining from legal means of
innovation protection. As deducted from the existing literature, this would involve companies active in
industries driven by know-how (Teece, 2003) and not dependent on legal protection tools in profiting
from innovativeness. This would entail any industry apart from the Pharmaceutical and Chemical
industry as these are the only knowledge industries that on the majority rely on gaining profit from
patenting their IP (Teece, 2003; Mansfield, 1986). Apart from that, the industries researched need to
qualify as complex and innovative.
It has therefore been the goal to locate industries where some of the residing companies completely
refrain from legal actions and rely on alternative appropriation strategies, more driven by internal
knowledge and complexity of either the process or products and services offered. The maritime sector
and every industry surrounding this and the harbor environment have shown to foster companies that
regulate their innovations on their own terms and profit from them without having real threats from
imitators. As the maritime and harbor sectors are huge, complex and closed communities (Barlow,
2000; Peters, 1993) they show huge potential for this specific research.
The industries picked are in no way similar to each other but both active within the same environment
and both intertwined with the same clientele. The goal is then to compare this sample of two
companies from both industries, differing in appropriation strategies to uncover the reasons behind
their choices and the effectiveness of these choices. This is referred to as selecting ‘polar’ cases
(Eisenhardt, 1989) to build theory on appropriability strategies within industries. The sample will
contain clear-cut cases of reliance on legal appropriation strategies and in contrast, pure involvement
in alternative ways of protection, within both industries.

39
This multiple-case approach simultaneously ensures the quality of this research by enhancing the
likelihood of being up to standard in terms of ‘logical tests’ (4.1) (Yin, 2003). This enables
‘triangulation’ (an approach to data analysis that synthesizes data from multiple sources) of researched
cases and more solid argumentation for the theory developed (Yin, 2003)
4.3 Sample Selection (units of analysis)
The companies that were researched, elaborated on in the proceeding paragraphs, within the two
industries described and qualified as complex and innovative are both considerable players in their
industry and within the borders of the Netherlands. Both operate beside a few competitors and both
have an extensive network to source from. This entails client bases, but also possible project partners
for joint-ventures, which is sometimes even done with competitors. Both have decades of experience
and are established companies not only within their industry but within the entire environment that is
the port of Rotterdam. Similarly both companies understand that the Dutch market is close to being
saturated and are looking into across-borders opportunities to build on their expertise and assets.
Coincidentally they are involved in a joint venture project for the development of a mooring
innovation for the bunker industry, where SHEI has been responsible for the conception, design and
construction and VTR has been participating as potential first client. For the appropriation of this
product patenting has been initiated, but in a separately founded company (Innodox) steered by both
companies’ business developers (W. van Reenen, Y. Ouweneel). This will give a different perspective
next to the normal operations aimed to be researched.
4.3.1 Sledge Hammer Engineering International (SHEI)
4
– “No nonsense at sea”
SHEI is a company that has over twenty years of experience in the maritime and offshore sector. It has
been involved in many high profile projects and has strong business ties with multinationals operating
in the harbor industry globally. SHEI has been called in to help salvage the Kursk (the Russian
submarine that sunk in the Arctic Ocean near the Scandinavian coast) by SMIT International5
and
Mammoet6
(two of the largest players in the maritime sector, specialized in, among others, offshore
construction and salvaging projects) to construct an essential, but at the time non-existent part in their
plan. They are active in the same industry as the two aforementioned industry leaders but involved in
less standardized operations. This results in a correlating relationship with the large players as SHEI
can focus on more complex, intricate solutions complementing services others have to offer (P.
Schipper, M. van Bergen, personal communication, 9 October 2008).
4
http://www.sledgehammer.nl/
5
http://www.smit.com/
6
http://www.mammoet.com/

Master Thesis Wouter van Reenen

Master Thesis Wouter van Reenen

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