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Cooperation Between Rivals: Informal Know-How Trading

Cooperation Between Rivals:
Informal Know-How Trading
1.0: Introduction
It has long been recognized that it is difficult for an innovating firm to fully
appropriate the benefits arising from its innovations, and that desired research
might therefore not be performed (1). One sometimes possible solution to this
dilemma is cooperative R&D conducted by firms who share the costs and benefits
of particular R&D projects (2).
In this paper I explore a novel type of cooperative R&D: the informal
trading of proprietary know-how between rival (and non-rival) firms. I have
observed this behavior to be widespread in one industry. I propose that the
phenomenon makes economic sense, and that it may be present in many
industries. Indeed, it may be applicable to any situation in which individuals or
organizations are involved in a competition where possession of proprietary know-
how represents a form of competitive advantage.
I begin by briefly characterizing informal know-how trading as I have
observed it to date (section 2). Next, I present a case study of the phenomenon
involving the trading of proprietary process know-how among US steel minimill
firms (section 3). Then, I explore whether and when technology trading between
direct competitors is an economically advantageous form of cooperative R&D
from the viewpoint of participating firms (section 4). I then place know-how
trading in the context of other forms of R&D cooperation (section 5) and, finally, I