The Welfare Effects of the National Cooperative Research Act of 1984 and the National Cooperative Production Amendments of 1993

Margaret O’Reilly-Allen and Zaher Z. Zantout, Rider University

Common stock prices increase significantly when firms announce the formation of U.S. domestic cooperative ventures. McConnell and Nantell (1985) document a statistically significant two-day announcement period average excess return of 0.73 percent in a sample of 136 U.S. domestic joint ventures over the period 1972 through 1979. However, this study does not address the issue of whether the reported gains to shareholders originate in cost-side effects (i.e., efficiency gains) or in revenue-side effects (i.e., increased market power). Through cooperative ventures, firms can spread the risks associated with investments, secure access to necessary complementary skills or assets, and achieve scale and scope economies in research, production and distribution, all of which are desirable cost efficiencies. However, joint ventures can also be means for firms to coordinate their production rates, reduce the industry output, and raise prices, which is not welfare-improving.

A review of the theoretical studies on the welfare implications of allowing rival firms to cooperate in the production stage indicates that the issue is controversial. Jorde and Teece (1990) support the National Cooperative Production Amendments of 1990 which relaxed the antitrust treatment of production joint ventures. They argue that innovative firms confront significant challenges in capturing value from new technology, even when it meets a significant market need. In order to translate success in research and development into financial success in today’s increasingly global markets, innovative firms must be able to quickly enter into bilateral and multilateral cooperative agreements in order to have access to the complementary assets that they need.

However, Brodley (1990) and Shapiro and Willig (1990) do not advocate sweeping changes in antitrust law and enforcement policy with respect to production joint ventures. They argue that there is no evidence that the strict U.S. antitrust policies stifled innovation by American firms or hindered them from competing abroad, which are the reasons given for the enactment of the National Cooperative Production Amendments of 1990. They further argue that there are far more fundamental issues that impede U.S. competitiveness, such as the low U.S. savings rate, the high cost of capital, the technological weaknesses, the neglect of human resources, to mention a few. Given the anticompetitive risks that these undertakings entail, Brodley (1990) and Shapiro and Willig (1990) consider the changes in antitrust policies regarding production joint ventures unnecessary.

Kogut (1988) reviews the empirical evidence regarding the motivations of joint ventures and concludes that it is mixed. He also notes correctly that the results of previous studies must be taken as preliminary and that future work should specify more rigorous tests.

This paper uses capital market data and industry-specific characteristics in order to answer the question, are cooperative research and/or production ventures between U.S. rival firms motivated by cost-efficiency or market power considerations ? The results are intended to assess the welfare implications of the National Cooperative Research Act of 1984 and the National Cooperative Production Amendments of 1990, which relaxed the antitrust treatment of cooperative ventures.

Evidence on the motivations of U.S. cooperative ventures can be obtained through a cross-sectional analysis of abnormal returns for the venturing firms. Under the market concentration doctrine, a cooperative venture between two rival firms is more likely to have anti-competitive effects the higher is the pre-venture level of industry concentration. Therefore, if cooperative ventures are motivated by a collusive behavior, the gains to the venturing firms must be larger in concentrated industries than in fragmented industries. The failure to find such cross-sectional differences supports the cost efficiency perspective.

Using samples of 110 cooperative research and development and 303 production ventures announced in the period 1979-1999, this paper finds that gains are not related to concentration ratios. These results indicate that cooperative ventures between rival firms in U.S. industries are due to efficiency and not market power considerations.

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