Cross-national distance and the generation of new knowledge in the global pharmaceutical industry

Cross-national distance is a key concept in the field of international management but the concept has also been examined extensively in fields such as Strategy, Organizational Theory, Marketing or Economics. While advances in communications and the development of new technologies allow remote management, some scholars promote the death of distance. Yet, the concept remains important. Distance makes international exchanges and interactions costly, uncertain and, difficult. However, it can also be a source of new knowledge generation and innovation. Indeed, in an era of global competition, rapid technological change, and ever more demanding customers, companies of all sizes are increasingly forced to continuously innovate in order to achieve and sustain a competitive advantage.  In particular in the health-care sector and in the pharmaceutical industry where firms competes on a global scale the generation of new knowledge is important. However, in order to successfully tapping, creating, and integrating new knowledge, firms nowadays look not only within organizational or national boundaries but also across borders through international alliances. A critical question in this context is how distance and what type of distance influence new knowledge generation in international partnerships?

At the University of Mannheim, we conducted a study in which we are exploring the impact of the three most ubiquitous constructs of distance (‘psychic’, ‘cultural’, and ‘institutional’) on international knowledge generation processes. We studied a sample of 626 observations from 11 European pharmaceutical and chemical companies engaging in alliance and cooperation events from 2003 to 2012. Our first research proposition raised the question whether the innovative performance of firms can be increased through their engagement in inter-firm collaborations. We show that the alliance engagement of the sample companies is positively related to their innovation output as measured by the number of successful patent applications.

The second research proposition raised the question whether the constructs of ‘psychic distance’, ‘cultural distance’, and ‘institutional distance’ impact this relationship. Psychic distance can be described as the mostly subjectively perceived differences between countries. Therefore, it is most of the time seen as an individual level construct. Cultural distance can be described as the extent to which shared norms and values in one country differ from those in another. Hence, the level of analysis is the country rather than the individual. Finally, institutional distance refers to the difference between two national institutional environments. Thus, it captures the degree of similarity or dissimilarity between the regulative, normative, and cognitive institutions of two countries. The results of the different regression analyses run to test the hypotheses for the respective constructs have revealed negative mediating effects for all these three concepts of cross-national differences. However, only ‘psychic distance’ and ‘institutional distance’ have shown significant effects. ‘Cultural distance’, by contrast, has not been found to have a significant impact on the relationship between companies’ involvement in cross-border alliances and their innovative performance. This result has even been supported by additional robustness checks. We argue that, while cultural differences between partners from different countries might be mitigated by means of intercultural trainings, assimilative behavior, or the use of boundary-spanners, rather formal differences, e.g. regarding two countries legislative system or business practices, are more difficult or even impossible to alleviate. Since both the constructs of ‘psychic distance’ and ‘institutional distance’ include such dissimilarities in addition to cultural differences, they seem to be more appropriate for explaining impeding effects of distance on the relationship between alliance engagement and innovation output than the concept of ‘cultural distance’.

From a managerial point of view, the findings of this research study suggest that practitioners should actively seek to extend their existing social networks by attending international conferences or industry fares in order to find new contacts which might be used as a starting point for future cross-border alliances. Yet, at the same time, managers need to be aware that managing beyond borders, in its very essence, is nothing else but the management of ‘distance’. As the results of this study suggest, knowledge creation in international alliances can be impeded by the manifold differences between partners’ countries. Hence, it is paramount for managers to become aware of the extremely broad range of factors which need to be taken into account when collaborating beyond national borders and their potentially detrimental effects on the development of trust and knowledge sharing. Moreover, managers need to find ways to alleviate the ‘distance’ between their focal company and the respective partner firms in order to maximize the outcomes of external partnering and hence gain valuable knowledge which then can be used to innovate novel products. Specific mechanisms such as trainings, mutual networking events, or exchange of employees should be considered as means to bridge the geographic, cultural, and institutional gaps between partners. Finally, the success of international collaborations will also be dependent to a significant degree on the respective attitudes of partners. Interacting with one another with a certain sense of openness and tolerance is very likely to positively affect the relationship between partners and hence lead to a successful cooperation.

By Manuel Rez and Suleika Bort

 

Interested in hearing more from Professor Bort? Take a look at her interview below!

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