Last Updated Jan 4, 2010 12:46 PM EST
BNET: You've done a lot of research into intellectual property regimes and their link to innovation in several sectors. Tell us about that.
Arora: I try to understand the different ways of monetizing technical innovations. I like to look at when intellectual property licensing models are viable. Suppose you come up with an innovation; the standard model is develop a product or service and then to build a company around it. In some cases, that might not be the best thing. But, the set of people who are best at coming up with new things may not be the best for commercializing them or for managing large companies.
What are the implications for strategy? If you look at the chemical industry, something interesting happened after the Second World War. The chemical industry was the most R&D intensive industry. It was the prototypical high tech industry. After the war, licensing became more widespread, particularly for new processes. In the case of polyester, which as you know can be used to make fabrics but can also be used for bottles and other products, people were very concerned about how they could manufacture it better and more efficiently, because there were a lot of substitute materials for it. For polyester companies to succeed, they had to have tremendous process innovation.
Here's the interesting part: a number of companies invested in developing process technologies, but the way they monetized their investment was to license out. New business models were available; you didn't have to invest in a huge plant to make money from your chemical research. On the flip side, you don't have to develop new processes if you are a major producer.
BNET: What's the dynamic in industries where the technical innovations are not available in a market?
Arora: Think about the Tata Nano [an entry-level auto manufactured by an Indian conglomerate]. Why is this car on the front page of the New York Times? The internal combustion technology is at least 100 years old. Why is it so special a company is making a new car in India? It should be utterly unsurprising, except it isn't. The reason people are surprised is that the process technologies in the auto sector is still today controlled. It's difficult to get access to them. In contrast, in 1997, the world's largest oil refinery was set up in India. This was a project that cost $6 billion and eventually with enhancements went up to $12 billion. There were 12-15 firms from all over the world that supplied technologies that an integrated refinery needs.
Why is this interesting? Refining is an amazingly competitive commodity industry. This is because the key technologies are widely available-not freely, and the difference is important. The dominant auto manufacturers in the world keep their process innovations almost exclusively in-house. If you want to set up a chemical plant, you can make a phone call to four or five technology firms who can provide the equipment and engineering firms who can provide all the know-how. If you want to set up an auto plant, how are you going to do it? There's no equivalent marketplace.
BNET: What are the lessons from your research here that can help people across industries?
Arora: There are two main lessons here. The first is: watch carefully. If these sort of key inputs within your industry become available through a market, it's going to change the competitive dynamics. You'll see the source of competitive advantage shift away from technical ability to other things. To succeed in petroleum today, you can't say, "We have the best refining technology." You have to have something else like access to the downstream markets or have location advantages in key markets.
The second lesson, and this is more of a policy lesson, is that the intellectual property system has to work well. In the chemical and refining industry for the most part, patents work well; they protect what they are supposed to protect, but they are not excessive or overreaching. In other industries, we see innovations being held up by people with paper patents. In emerging industries such as biotech, a good IP system has meant that big drug companies can rely on a steady stream of innovations in drug compounds, so all the players benefit and society as a whole benefits, too.