North Atlantic Innovative Relations of Swiss ... · PDF filegeographic distribution of the inventions of new active substances (NASs; new chem- ... (Gerybadze and Reger 1999). Because

83

The functions of research and develop-ment (R&D) are strategically among themost relevant sections of an enterprise inthe pharmaceutical industry. At the sametime, technology is a determining field forcooperation and competition among oligop-olistic rivals. Large companies, particularlyin the pharmaceutical industry, invest enor-mous sums on research. International local-ization of R&D and its interweaving occurin an extremely selective spatial manner; thatis, highly innovative and technologicallyadvanced pharmaceutical R&D takes place

in only a few countries and regions of theworld. This fact raises the question of theimportance of regional and local economicand social contexts for the organization ofthe R&D functions of large companies. Thehighly selective localization of multinationalcorporations’ (MNCs’) research and tech-nology capacities, as well as the associatedproblems of scanning, production, transfer,and use of technological knowledge, are thefocus of this article. On the basis of a studyof the pharmaceutical companies F.Hoffmann-La Roche (hereafter Roche) and

North Atlantic Innovative Relations ofSwiss Pharmaceuticals and the Proximities

with Regional Biotech Arenas

Christian ZellerInstitute of Geography, Economic Geography and Regional Studies,

University of Berne, Hallerstrasse 12, CH-3012 [email protected]

Abstract: Under the pressure of increased global competition and processes ofconcentration, the pharmaceutical giants are reorganizing their innovative capaci-ties. Technology and research and development (R&D) play a key role in the compet-itive strategies of multinational pharmaceutical companies. This article analyzesthe interrelation of the far-reaching but spatially selective international expansionof R&D and technology of a major Swiss pharmaceutical company and its anchoringin regional arenas of innovation. It combines this international technologicalexpansion with a perspective on integrating spatial and social proximities. Multinationalcorporations (MNCs) tend to locate their R&D activities in regions that are char-acterized by a richness of knowledge. The structure of inter- and intrafirm networksis shaped by the geography of talent. The Swiss pharmaceutical giants made substan-tial efforts to anchor themselves in regional arenas of innovation, such as the SanFrancisco Bay Area, Boston, and San Diego. A case study of a pharmaceutical giant’sembedding in the biotech arena of San Diego reveals how oligopolistic rivals fightover privileged access to spatially concentrated bases of technology. MNCsattempt to create, complement, and substitute spatial proximity with other types ofsocial proximities, internal as well as external to their own organizations. These effortscontribute to the generation of specific global-local interfaces in the processes ofglobal scanning, transferring, and generating new pharmaceutical compounds andtechnologies.

Key words: pharmaceutical industry, biotechnology, multinational corporations,innovation.

#1055—ECONOMIC GEOGRAPHY—VOL. 80 NO. 1—80105-zeller

Economic Geography 80(1): 83–111, 2004.© 2004 Clark University. http://www.clarku.edu/econgeography

I am grateful to Peter Dicken, Manchester; Harald Bathelt, Frankfurt; Paul Messerli, Berne; andtwo anonymous referees for their helpful comments.

84 ECONOMIC GEOGRAPHY JANUARY 2004

Novartis (Ciba-Geigy and Sandoz beforetheir merger in 1996), which have theirheadquarters in Basel, Switzerland, thisarticle examines the interaction among thespatial concentration of research activities,their embeddedness in local arenas of inno-vation, and the interweaving of these activ-ities on a North Atlantic scale.

The goal of this article is to contribute tothe development of a concept of scales ofinnovative systems that combines interna-tional technological expansion by MNCswith all relevant dimensions of proximity.It aims to extend the understanding of thespatial implications of new innovative strate-gies in the context of oligopolistic rivalry inthe pharmaceutical and biotech industries.The article combines theoretical approachesof oligopolistic rivalry and concentration ofcapital with those of regional innovativesystems and emphasizes different aspects ofproximity. It suggests the following twoideas:

1. Large pharmaceutical companiesmonitor technological developments ona global scale to internalize promisingknow-how and technologies. For thispurpose, they enter into collaborativeagreements with innovative biotechcompanies and research institutions thatare generally clustered in specificregions. The search for talent and qual-ified people determines the location ofnew in-house capabilities. In view of theintensified oligopolistic rivalry for crucialtechnological potentials, large pharma-ceuticals try to become anchored inregions from which they can launch aneffective oligopolistic rivalry against theirmost important rivals.

2. To gain access to these localized tech-nological potentials, large pharmaceu-tical companies strive to become insidersand to embed themselves in regionalarenas of innovation that are character-ized by specific social capital. On thebasis of spatial proximity, they attemptto create a relational and cultural prox-imity to the key actors in these arenasof innovation. At the same time, they are

forced to compensate for the lack inspatial proximity to other intrafirmresearch centers with organizational, rela-tional, and virtual proximity.

This article is based, in part, on a compre-hensive analysis of the internationalizationof the Swiss pharmaceuticals Novartis andRoche (Zeller 2001b). It draws heavily onannual reports, media releases, industryreports, and articles in business and localnewspapers. In addition, I conducted 19semistructured interviews with senior exec-utives and researchers on the internation-alization of pharmaceutical R&D, and about36 interviews on further corporate issueswith biotech firms in the United States andEurope between September 1997 andMarch 2002. Also, I confirmed informationby e-mail exchange with interviewees andother employees in research institutes.

The first section introduces the contra-dicting aspects of the recent discussion oninternational restructuring, the internation-alization of technology, and the need forspecific kinds of proximity. The secondsection illustrates the importance of regionalarenas of innovation for the localization andorganization of R&D by large companies.On the basis of the biotech arena of SanDiego, it stresses the increasing importanceof knowledge-rich regions for the strategicproduction of technology and the internal-ization of oligopolistic rivals. In contrast tothe national and regional systems of inno-vation presented in the literature, I preferthe notion of arena of innovation (e.g.,Lundvall 1992; Cooke 1998; Howells 1999;Archibugi, Howells, and Michie 1999). Thus,the focus is on collaborating, rival, andconflicting actors with collective and indi-vidual interests and cultures that exertdifferent economic and politic power inspecific socioeconomic contexts, not onelements and relationships that interact inthe creation, diffusion, and deployment ofnew knowledge or regions as systems ofcollective order. The third section closes withreflections on the spatiality of innovative rela-tions, of the generation and absorption ofknowledge, and of oligopolistic corporate


VOL. 80 NO. 1 INNOVATIVE RELATIONS OF SWISS PHARMACEUTICALS 85

technological strategies. The articlecontributes to the debate on relationalperspectives of the firm-territory nexus(Dicken and Malmberg 2001).

Dimensions of TechnologicalFlows and ProximitiesChallenges for Corporate Strategiesof R&D: Reconfiguring Scale

The changes in the relations amongscience, technology, and industrial activitiessince the end of the 1970s have entailedknowledge and technology increasinglyadopting the character of strategic input andbecoming a key factor of competitive advan-tage (Michalet 1985; Dunning 1993), partic-ularly in the pharmaceutical industry(Taggart 1991, 236). Investments in R&Dare among the most concentrated industrialexpenditures in the world, in their distri-bution throughout both countries andcompanies. MNCs are the major actors inthe technological race (Gerybadze and Reger1999). The United States, Japan, Germany,France, Great Britain, Switzerland, Italy,and Sweden alone account for approximately92 percent of the corporate pharmaceu-tical R&D expenditures worldwide (Pharma-ceutical Research and Manufacturers ofAmerica (PhRMA) 2001, 80). Thegeographic distribution of the inventionsof new active substances (NASs; new chem-ical and biological entities) displays a similarpicture. Of the 211 NASs that were launchedfrom 1996 to 2000, 81 were invented in theUnited States, 31 were invented in Japan,22 were invented in Great Britain, 21 wereinvented in Germany, and 13 were inventedin Switzerland (Verband ForschenderArzneimittelhersteller e.V (VFA) 1998, 33;1999, 33; 2000, 33; 2001, 33).

The industry argues that it has faced atremendous rise in R&D expenses andlonger development times. The costs ofR&D increased from about $120 million inthe mid–1970s to about $231 million in 1987(DiMasi, Hansen, Grabowski, and Lasagna1991; DiMasi 1995). The Office ofTechnology Assessment (OTA 1993), using

significantly higher opportunity costs, putthe full capitalized costs of R&D per newdrug at $359 million in 1990 dollars. DiMasi(cited in “Drug Companies” 2001) increasedthis figure to $802 million in 2000. Thesefigures, based on data given by the industry,are strongly contested. Public Citizen, a U.S.consumer organization, calculated a figureof $150 million, on average, which doesnot include opportunity costs and statesupport for the industry’s R&D efforts (see“Rx R&D” 2001).

In the same period, however, the lifespanof new products and technologies, as well asthe exclusivity of the market, shortened(Mossinghoff 1995, 1,085; Drews 1998, 186;PhRMA 2002, 33). The industry faces adeficit of innovations. The number of NASsper year dropped from 86.2 in the early1960s to about 40 in the past few years,although recent breakthroughs in genomicsmay increase the rate of innovation in thefuture (Grabowski and Vernon 1994; DiMasi1995; Drews and Ryser 1996; Drews 1998,204; Davis 1998; Shimmings 1999, 2000;Southgate 2001). Despite the recent remark-able growth rates in the pharmaceuticalindustry, especially in the United States,markets cannot be extended to the extentthat is necessary to sustain continuousgrowth of the industry as a whole. In mostcountries, the industry faces growing marketshares of generic drugs and greater pressureto contain health care costs (Schweitzer1997; IMS 2000, 2002; PhRMA 2002).

Under the pressure of these challenges,the large pharmaceutical companiesincreased their research efforts andmarketing expenditures. They reorganizedtheir research departments repeatedly in the1990s and implemented new forms of coor-dination and spatial configuration of theirresearch sites. Massive rationalization effortscontributed to the reduction of the time andcosts of development in this period (DiMasi2001; Reinhardt 2001). After a significantgeographic extension and trend toward thetransnational configuration of R&D activi-ties in the 1980s and early 1990s, globallyactive corporations have tended to consoli-date and streamline their R&D organizations



since the mid–1990s (Gerybadze and Reger1999). Because the huge capital require-ments demand economies of scale, productsmust be launched in many markets simul-taneously. These tendencies favor mergersand acquisitions and boost the internation-alization process, since only large corpora-tions are capable of raising the necessaryfunds. The degree of market concentrationin individual therapeutic areas can beextremely high (Howells and Wood 1993,41; Taggart 1993, 28ff; Organization forEconomic Cooperation and Development(OECD) 1996, 84; Chesnais 1997, 166;Andreff 1996, 52; Drews 1998, 232; Zeller2001b, 194ff). In the course of this process,there has been a rise in global oligopolies,which can be identified “as spaces of rivalry”among the rivals in the triad (Chesnais 1995,1997). In the context of this increased oligop-olistic rivalry, the large pharmaceuticalcompanies attack their rivals in their homebases.

Technological Expansion of MNCs

Previous research showed a contradictorypicture of the degree of internationalizationof R&D and of technology. The interna-tionalization of R&D expenditures wasuneven in the individual industrial sectorsin the late 1980s. The largest proportion ofresearch activities abroad was conducted bycompanies in the chemicals, pharmaceuti-cals, and nutrition sectors (Pearce 1989,12–20; Pearce and Singh 1992, 189). In theirinvestigation of data on patents, Pavitt andPatel (1999) denied that R&D was beingglobalized and stressed the importance ofthe home base, claiming that high-techindustries are spatially more strongly fixedthan are others. However, leading Dutch,British, Swiss, and Swedish MNCs hadalmost half or more of their R&D localizedoutside their home bases (Papanastassiouand Pearce 1994).

An exclusive focus on internal technologyproduction presents an incomplete pictureof the degree of internationalization,however, since both the location and disper-sion of R&D and the degree of R&D coop-

eration and interweaving are important(Gassmann and von Zedwitz 1999). Tounderstand the dynamics of international-ization, one needs to analyze the differentdimensions of technology—the global useof technology, global technological cooper-ation, and the global production of tech-nology (Archibugi and Michie 1995, 1997;Howells 1997, 14f). The variety of organi-zational forms and dimensions suggests thatthere may be different motives for interna-tionalizing R&D, depending on the industry,the strategy, and the home base. Florida(1997, 101) determined that foreign MNCslocate R&D facilities in the United Statesmainly to gain “access to scientific and tech-nical talent and developing links to theU.S. scientific and technical community.” Intheir studies on foreign R&D in the UnitedKingdom, Pearce and Papanastassiou (1996,322; see also Pearce 1999, 173) presentedsimilar results with respect to pharmaceu-ticals and consumer chemicals. The “inwardlearning” requires presence at the mostadvanced locations (Gerybadze and Reger1999, 255), which enables the fast transferof local expertise into the company andinternal diffusion to the appropriate places(Cantwell 1995, 171ff; Howells 1997).

According to Chesnais (1997, 170ff),five major dimensions of the internationaltechnological expansion and concentrationof MNCs can be identified:

1. Internal technology production byMNCs: This dimension concerns theinnovations that an enterprise generateswithin its own R&D capacities.

2. Acquisition of technology abroad withpurchase or uneven power relations:Primarily MNCs, but also other enter-prises and institutions, monitor techno-logical developments and acquire special-ized inputs from universities, publicresearch centers, and small high-techfirms.

3. International exchange of know-how andtechnologies with cooperation andpartnerships by means of strategicalliances. This dimension represents aform of oligopolistic acknowledgment



and the establishment of industrialentrance barriers.

4. Protection of knowledge and innovationsabroad: The large enterprises individu-ally protect their knowledge fromimitation with patents abroad. Thecreation of international standards corre-sponds to a collective behavior of thecompanies.

5. Use of technological capital outside thecountry of origin or from a multinationalbase: This dimension includes threeforms of international use of R&D activ-ities: the production of goods for exporton the basis of innovative products orprocesses; the sale of patent rights ortransfers of licenses; and the use of tech-nologies on the level of the entirecompany, which means that the tech-nology circulates within the privatesphere of the MNC.

The MNCs are the only actors that areactive in all five dimensions. All other actors,such as mid-level and smaller enterprises,research institutes, or states, act only intwo or three dimensions. The internation-alization of R&D is also expressed by newtypes of organizational and network exter-nalities (Gerybadze and Reger 1999, 255).The technological expansion is carried outover the exchange of materials and people.Whereas the transfer of knowledge that isembodied in materials normally does notraise major problems, knowledge embodiedin human beings can be exchanged only byexchanging personnel. But the transfer ofknowledge that is embedded in social capitalis not possible because the networks thatform this social capital remain locally fixed(Sölvell and Zander 1998).

Types and Dimensions of Proximity

Parallel to the debates on the interna-tionalization of technology, the literature hasdiscussed many approaches that empha-size the importance of regional industry andtechnology clusters for innovative processes.This literature has contributed argumentsto explain the need for spatial clustering and

proximity, such as transaction costs (Scott1988); external economies of scale andscope—especially the pooling of labormarkets (Krugman 1991); the reduction ofuncertainty; collective learning processesand the cumulative nature of knowledge-based innovative inputs (Lundvall 1988);localized learning processes (Malmberg andMaskell 1997; Maskell and Malmberg 1999);the importance of tacit knowledge (Nelsonand Winter 1982); and spillovers of knowl-edge and information from R&D in univer-sities and industries (Feldman 1994).Colocation facilitates the saving of all kindsof transaction costs, rapid face-to-face inter-actions, and the monitoring of resources.Spatial proximity serves the emergence of“interpretative communities” that filterand transform “noise,” rumors, impressions,and recommendations into valuable inter-pretations (Grabher 2001, 366–9).Furthermore, a high density of differentinstitutions and various interactions betweenparticipants and institutions in a region aresubstantial requirements for the “localembeddedness” of large-company functions(Dicken, Forsgren, and Malmberg 1994).

Spatial concentration in itself does notcreate effective synergies. But spatial prox-imity facilitates cultural, organizational, andrelational proximity; shared experiences; andperceptions in the sense of “untraded inter-dependencies” (Storper 1997, 35ff). EvenStorper, an advocate of the “regional world,”clarified that “noncosmopolitan knowledge”is not necessarily associated with spatial prox-imity but can also be settled in a techno-logical, organizational, or professional space,such as an MNC. Yet regular human inter-action is necessary in an interpretative andpersonal community. The problems ofdistance and the creation of proximity basi-cally arise because firms need to overcomethe disadvantages and to combine the advan-tages of concentration and dispersal(Schoenberger 1997, 21).

All five dimensions of technological expan-sion require and consist of social interac-tions. Although spatial proximity can beimportant, several kinds of social proximitymust be considered to capture the scales of



innovative relations. Indeed, a company isconfronted with completely differentgeographic levels of its own system ofinnovation. National, subnational, regional,and local innovation systems, and in addi-tion to the mentioned geographic levels,sectoral innovation systems, need to beconsidered (Howells 1999, 72, 76).Therefore, in addition to spatial proximity,external and internal innovation relations arecarried out on the basis of further types ofproximity.

Institutional proximity (cf. Nelson 1988)refers to the institutional framework in coun-tries and regions, such as legislative condi-tions, labor relations, business practices andaccounting rules, dominant workplace prac-tices, and the training system, which are alloutcomes and elements of the evolution ofpolitical power relations that contribute toa “cultural affinity.”

Cultural proximity is interrelated withinstitutional proximity and is expressed bya common cultural background, which facil-itates the understanding of information andthe establishment of norms of behaviorbetween innovative actors and researchers(Lundvall 1988, 355). Social relationshipsamong individuals, in the form of a commonworking ethos, a common language andculture, mutual knowledge, mutual trust,and mutually respected norms of behavior,form a common cultural space (Lundvall1992, 47). The culture of specific, nationallyrooted industrial practices can be incorpo-rated into the design of products (Gertler1995, 5; 1997, 52).

Within given institutional and culturalconditions, firms can create organizationalproximity to compensate for the lack ofspatial, institutional, and cultural proximity.Organizational proximity consists of sharedorganizational principles, rules, and codes,including a corporate identity and a corpo-rate philosophy (Blanc and Sierra 1999, 196),to promote a certain coherence within a firmand compatibility among collaborating firms.It facilitates interactive and collectivelearning processes and the exchange of infor-mation, experiences, and knowledge (seealso “organizational distance” in Gertler

1995, 5; 1997, 51). Organizational proximitysimplifies interactive learning between usersand producers (Lundvall 1993, 59). Bycreating their internal codes of information,MNCs generate a specific corporate culturethat reduces national differences (cf.Lundvall 1992, 287). Actors that belong tothe same space of relations (e.g., firms)interact according to adherence logic,whereas actors that are close in organiza-tional terms, in that they have the samereference space and share the same knowl-edge, interact according to similarity logic(Torre and Gilly 2000, 174). The latter aspectrefers to the context of institutional andcultural proximities.

However, every exchange within andamong firms is based on personal relations.Relational proximity is expressed by informalstructures that reinforce or counteract theeffects of the formal organization.Knowledge, especially knowledge producedoutside the firm, cannot be acquired,transferred, and transformed without contin-uing personal relationships (Sierra 1997, 25).An innovative firm must participate in thelocalized social capital. There are no hardmonetary and value exchanges without softrelations or untraded interdependencies(Storper 1997, 38). Relational proximity isshaped by cultural affinity and facilitated byspatial and institutional proximity.

Technological proximity is based onshared technological experiences, bases, andplatforms. It facilitates shared perceptions,as well as the anticipation of technologicaldevelopments. Technological proximity facil-itates the acquisition and exchange of tech-nology. In the form of common standardsand interfaces, it helps to erect entrybarriers. Technological proximity dependsmainly on institutional and cultural proximityand can be facilitated by spatial and rela-tional proximity.

Virtual proximity can be produced byusing communication and information tech-nologies. An MNC can create virtual prox-imity to substitute partially for spatial prox-imity for a period of time on the conditionthat it disposes of organizational, cultural,and relational proximity among the members



of its network, to allow real communica-tion to be established (cf. Howells 1995).Therefore, the effects of virtual proximityare limited.

Finally, a firm needs to manage internaland external proximity (Blanc and Sierra1999). Internal proximity refers to theinternal relations of a firm that should enablethe creation and transfer of knowledge andtechnologies among different units and loca-tions of the organization. Proximity to actorsthat are external to the firm serves theMNC’s capability to scan and absorb exter-nally produced knowledge and technologies.It helps to transfer internal resources toexternal partners.

The rounds of time-space transformation(Schoenberger 1997, 52) reduced the impor-tance of spatial distance but did not ensurethat distance was a solved problem. In inno-vative activities, the question of which orga-nizational actors really need to be in constantcontact and with whom is crucial. Theconstraints of a global oligopolistic rivalryhave even increased the need for controlover time and space. The challenge is this:To what extent are globally active compa-nies able to overcome problems of spatialseparation and to create, complement, andsubstitute different types of proximities anddistances, internal as well as external to theirboundaries? However, compared to otheractors, they possess unique capabilities tohandle this challenge. Every kind of infor-mation and knowledge is produced, trans-ferred, and used in the context of specificcombinations of proximities. The more tacitor uncodified parts of knowledge and trustare a relevant factor, the more importantsocial interactions (Howells 1998), and there-fore cultural and relational proximities,become. Transnational project teams, withtheir dense social interactions, can be anorganizational instrument for creating sucha specific mix of proximities (Zeller 2002a).The speed requirements in the pharma-ceutical industry make the capability ofcreating and managing proximities an essen-tial factor in oligopolistic rivalry. The connec-tion of the dimensions of technologicalexpansion, mentioned earlier, with a social

comprehension of proximities provides aframework for analyzing the spatiality ofinnovative relations of MNCs.

Linking Innovation Hubs: San Diego and BaselThe Rise of Biotech Regions

In the course of the molecular-biologicalrevolution and the emergence of biotech-nology, the basic economic and technolog-ical conditions for the pharmaceuticalindustry changed considerably. In the late1980s, a real boom started in the UnitedStates with the creation of biotech compa-nies that were concentrated spatially in theSan Francisco Bay Area, Boston, San Diego,Maryland–Washington, D.C., and NewJersey–New York (Willoughby and Blakely1990; Blakely and Nishikawa 1992; Gray andParker 1998; Prevezer 1998, 2001; Audretsch2001).

The innovative process in the pharma-ceutical industry has become so complex anddiverse that even the largest pharmaceuti-cals are no longer able to cope alone withthe important technological progress.Therefore, since the 1980s, they have devel-oped strategies to acquire NASs and tech-nologies through collaborations with biotechfirms. Particularly in the United States,universities have increasingly also becomepartners of the pharmaceuticals(Gambardella 1995, 48–61; Drews 1998,248). Collaborations with “big pharma” area major financial resource for biotechcompanies in the United States. The shareof financial inputs from partnerships withpharmaceutical and other biotech firms was45 percent and 61 percent, respectively, in1997 and 1998 but dropped to 14 percentin 2001, whereas, the share of venture capitaloscillated from 1997 to 2000 between 4.7percent and 7.9 percent and increased to17.4 percent in 2001 (calculated from datafrom Burrill & Co. 1998, 1999, 2000, 2001,2002). These figures also reflect the cyclesof the stock markets and therefore theopportunities of initial public offerings andventure capital. But “big pharma” has



increasingly also installed its own venturecapital funds to observe the technologicaldevelopments. Given the numerous transat-lantic collaborations between Europeanpharmaceuticals and U.S. biotech firms, itis no surprise that the international transferof technology in the biotech sector hasplayed a particular role (see Pisano 1991;Dibner and Bulluck 1992; Valle andGambardella 1993; Sharp, Thomas, andMartin 1994; Dolata 1996; Cavalla 1997).

Invasion and Embedding in California

The three Swiss pharmaceuticals havealways localized their research establish-ments in specific regional knowledge-and-technology agglomerations. From the 1930suntil the 1970s, the primary regional agglom-eration, apart from the historical locationof Basel, was in “pharmacy New Jersey,”where these companies erected majorresearch centers. In the 1980s, all three Baselcompanies began to invest heavily in biotech-nology. Sandoz set up its own biotechresearch unit in its Basel headquarters in1985. Shortly afterward, Ciba-Geigy andRoche also created biotech units. In thesame period, the companies entered intocollaboration agreements with the mostadvanced biotech firms, located primarily inthe San Francisco Bay Area and the Bostonregion. Ciba-Geigy, Sandoz, and Rochebecame anchored with considerable invest-ments in biotechnology and fixed capital inthese two regions. Roche acquired a 60-percent stake in the biotech pioneerGenentech in South San Francisco in 1989and two years later bought the revolutionaryPCR technology (polymerase chain reaction)from Cetus in Emeryville, California, nearOakland, which was then immediatelyacquired by Chiron in Emeryville. Rochebuilt up its PCR activities (Roche MolecularSystems) in Alameda, also near Oakland.In 1994, it took over the pharmaceuticalmultinational Syntex, including a bigresearch center in Palo Alto. Roche rein-forced its presence in the region when itacquired the German diagnostic and phar-maceutical company Boehringer Mannheim

in 1998, which had localized its diagnosticsworks in Pleasanton and Berkeley. In addi-tion, Roche entered at least a dozen collab-orations with biotech firms that werebased in the San Francisco Bay Area. About5,000 people worked for Roche and forcompanies that were majority owned byRoche in the San Francisco Bay Area in 2000(Woody 2000).

Sandoz and Ciba-Geigy also launchedoffensive localization and collaborationstrategies in the San Francisco Bay Area (seeTable 1). Sandoz took over 60 percent ofSyStemix, located in Palo Alto, in 1991–92.SyStemix was fully integrated into Novartisin 1997. Ciba-Geigy entered a strategicalliance with the Emeryville-based Chiron,including a capital investment of about 47percent, in 1994. Chiron was one of thelargest and most dynamic biotech firms, withabout 2,600 employees at that time (Chiron1997a). In early 1997, Chiron had more than1,400 agreements with universities and insti-tutions and 64 collaborations with otherfirms (Chiron 1997b). Entering into theselarge alliances, Swiss pharmaceuticals simul-taneously acquired a network of furthercollaborations and gained substantial accessto the regional innovation resources. Thisembedding was completed by a multiplicityof research grants for university projects andfurther biotech collaborations in the SanFrancisco Bay Area (for collaborations inBoston, see Zeller 2002b).

The three companies have pursued thestrategy of biotech alliances so systematicallyand rigorously that King and Moore (1995,1) wrote, with some patriotic concern andadmiration: “With direct or indirect stakesin more than 100 companies such asGenentech Inc. and Chiron Corp., plus near-exclusive access to research centers such asthe Scripps Research Institute, the octopus-like Swiss have stealthily captured what maybe the biggest foreign share ever of anemerging American technology.” An analysisof Recombinant Capital ’s database ofalliances confirmed that Roche and Novartiswere the most active deal makers in theindustry until the late 1990s (Hullmann2000). Novartis Pharma increased its share




Table 1

Collaborations of Novartis with Biotech Companies (Including Ciba-Geigy and Sandoz) inthe San Francisco Bay Area

Year

Ciba-Geigy1977

198119861988

19901990199119911994

1995

SandozMid–1980s19901991

19911992

1992

Novartis19971997

19971997

19981998

19981999

199919992000

2001

Sources: Annual reports and media releases (cf. Zeller 2001b).

Deal

Acquisition of controlling stake of shares, collaboration intransdermal delivery systems

Divestment of controlling stake, continuation of collaborationJoint venture “Biocine Company” in vaccinesCiba-Geigy Selfmedication acquires marketing rights for delivery

technologyIntensification of joint venture “Biocine”Development agreement together with Tanox (Houston)Several agreements in ophthalmicsResearch agreement in growth factorsBroad-based strategic alliance ($2 billion), Ciba acquires 47.7

percent of the outstanding shares of Chiron and rights incombinatorial chemistry; Chiron has more than 20 collabora-tions with biotech and pharmaceutical firms, many of themin California

Ciba acquires access to optical mapping and sequencing of genes,agreement in diagnostics

Development of innovative drug delivery systemsResearch collaboration in anticancer antibodiesExclusive license agreement for drug against spasms

Collaboration in immunologySandoz acquires 60 percent of outstanding shares, collabora-

tion on stem cells and immunologyCollaboration on catalytic antibodies

Acquisition of remaining 26.8 percent of sharesDevelopment of a company-wide bioinformatics software for

NovartisNovartis acquires access to GeneChip technologyNovartis acquires worldwide marketing rights for Iloperidone

Extension of the agreementNovartis Agricultural Discovery Institute in San Diego

acquires licensing rightsResearch collaboration in transplantation technologyNovartis Institute for Functional Genomics, Scripps Institute

and Novartis Agricultural Institute, all in San Diego, acquireaccess to GeneChip technology

Collaboration for the discovery of antibacterial active substancesFive research projects for the identification of drug targetsGenomics Institute of the Novartis Research Foundation in

San Diego receives access to libraries in combinatorialchemistry

Novartis Pharmaceuticals Corporation acquires access toGeneChip technology and customized gene sequencing anddatabase information

Partner

ALZA, Palo Alto

ALZA, Palo AltoChiron Corp., EmeryvilleALZA, Palo Alto

Chiron Corp., EmeryvilleGenentech, South San FranciscoInSiteVision, AlamedaChiron Corp., EmeryvilleChiron Corp., Emeryville

Chiron Corp., Emeryville

ALZA, Palo AltoProtein Design Labs, Palo AltoAthena Neurosciences, South San

Francisco (1996 acquired byElan)

SyStemix, Palo AltoSyStemix, Palo Alto

Affymax, Palo Alto (1995 acquiredby Glaxo)

SyStemix, Palo AltoIncyte Pharmaceuticals, Palo Alto

Affymetrix, Santa ClaraTitan Pharmaceuticals, South San

FranciscoIncyte Pharmaceuticals, Palo AltoUniversity of California–Berkeley

Stanford University, Palo AltoAffymetrix, Santa Clara

Versicor, FremontRigel, South San FranciscoAxys Pharmaceuticals, South San

Francisco

Affymetrix, Santa Clara


of the research budget for collaborationswith external partners from 23 percent in1997 to 27 percent in 2000, which was abovethe industry average (Herrling 2000). Theembedding in these “new industrial spaces”does not mean that New Jersey and Baselhad lost their importance. The Swiss phar-maceuticals made substantial researchinvestments at these “old” locations, estab-lished new research centers in the early1990s, and rebuilt research facilities in theseyears.

The increasing integration of Novartis intothe region of San Diego and La Jolla, shortlyfollowing the embedding process in the SanFrancisco Bay Area, deserves a closer look.Ciba-Geigy and Sandoz had already beenpresent in La Jolla and San Diego throughseveral broad-based research collaborationssince the early 1990s. The most importantof these collaborations was the intensive ten-year research collaboration that Sandoz andThe Scripps Research Institute (TSRI)entered into in 1992, which started in1997. This long-term collaboration wasdesigned to complement internal researchprograms in immunology, the centralnervous system, and cardiovascular diseases(Rose 1992; Sandoz 1993, 17). It gaveSandoz the first right of refusal to technologydeveloped at TSRI. It is not surprising thatit provoked violent debates over the depen-dence of academic research on the interestsof MNCs. Because of political pressure, thescope of the first agreement had to bereduced from $300 million to $200 million(Stern and Rose 1993; Holzmann 1993).Researchers at TSRI received the right tosubmit research proposals to Novartis.Finally, Sandoz acquired the right tocommercialize 47 percent of TSRI’s discov-eries from 1997 onward (Rose 1994; Sandoz1994). However, since then, this relation-ship has been extended several times. Byforming this partnership, Sandoz became animportant player in the fast-growing biotechmilieu of San Diego. Beside the NationalInstitutes of Health (NIH), Novartis isnow the most important industrial finan-cial contributor to TSRI. On the basis ofearly venture capital-induced contacts, local

rival Ciba-Geigy began to cooperate withIsis Pharmaceuticals in the field of antisensetechnology in 1990. This collaboration wassuccessfully resumed by CIBA Vision(Novartis’s eye care division) until the intro-duction of Vitravene, a drug to treat AIDS-induced retinitis, in 1998. Other collabora-tions between Novartis and Isis are ongoing.Since the early 1990s, Ciba and Sandozand their successor Novartis have madenumerous further agreements with youngbiotech firms in San Diego and La Jolla (seeTable 2).

San Diego/La Jolla probably has thehighest concentration of biomedical researchcompanies within walking distance. TSRI(founded in 1955) is one of the largestprivate, nonprofit research organizations inbiomedical science in the United States. Ithouses some 2,800 staff, with 276 facultymembers, nearly 800 postdoctoral fellows,140 Ph.D. students, and nearly 1,500 tech-nical and administrative support personnel.The neighboring Salk Institute for BiologicalStudies (founded in 1960), the BurnhamResearch Institute (founded in 1976), theUniversity of California–San Diego Schoolof Medicine (opened in 1964), and theInstitute for Childhood and NeglectedDiseases (founded in 2001) also employseveral hundred researchers in biomedicalscience (Salk Institute 2002; TSRI 2002a).In 2001, the San Diego metropolitan areahosted about 100 biotech companies, 33 ofwhich were publicly traded and 31 of whichhad 100 or more employees. All together,about 1,430 life scientists worked in the areain 1998 and about 11,000 employees workedin the broader pharmaceutical industryand life sciences research and develop-ment industry (Cortright and Mayer 2002,16, 26, 29f).1 UCSD CONNECT, founded


1 Various reports have published differentfigures on firms and employees in the biotechsector. Cortright and Mayer (2002, 16) listed94; Ernst and Young (2002) listed 110; Biocom,the local biotech lobby organization, listed almost500 companies on their website (http://www.biocom.org/membership/membersearch.asp); andPorter and the Council (2001) listed 27,299



Table 2

Collaborations of Novartis with Biotech Companies in San Diego/La Jolla

Year

Ciba-Geigy199019901992

199419941994199519951996Sandoz1989199119921992

1995

Novartis19971997

19981998

1998199919992001Genomics Institute of the Novartis Research Foundation20002000

200020002000

20002001

2001

20012001

Chiron Corp., Emeryville(Novartis held 44 percent of the outstanding stock in 2000)19951998

Sources: Annual reports and media releases (cf. Zeller 2001b).

Deal

Antisense technologyArthritis, gene therapyReceptors aminoacids

Central nervous system, development and marketingAntisense technology: continuation and extensionAntisense technology: continuationAntisense technology: continuationCell death, signal transduction focus, central nervous systemMultiple sclerosis drug

Research collaboration in immunosuppressionFoundation of venture firm, Avalon Medical PartnersCollaboration in immunologyBroad-based long-term collaboration

Extension of broad-based long-term collaboration

Continuation, Novartis terminated collaboration in 1999Novartis licenses antibodies to examine an immunosuppressive

drugSimulation technology for pharmaceutical developmentCombinatorial chemistry, obesity, diabetes

Agrocultural research, combinatorial chemistrySeeds, agricultural researchFunctional genomics, cloning technologies, expression systems

GNF acquires access to GPCR databaseJoint research with GNF; GNF obtains access to database of

MolsoftNeuropeptide characterizationOsteoarthritis, central nervous system, strokeAntidepressives

Ovarian cancerFive-year strategic alliance in structural proteomics (high-

throughput protein structure determination)Creation of high-quality SNP (single nucleotide polymor-

phism) map of the mouse genomeImaging technologyFive-year oncology discovery and development, collaboration

potentially worth $150 million

Acquisition for $95 million, research in gene therapy Testing of Maxamine with Chiron’s Proleukin

Partner

Isis Pharmaceuticals, CarlsbadUniversity of California–La JollaSibia, La Jolla, acquired by Merck

& Co in 1999CoCensys, IrvineIsis Pharmaceuticals, CarlsbadIsis Pharmaceuticals, CarlsbadIsis Pharmaceuticals, CarlsbadIDUN PharmaceuticalsNeurocrine Biosciences

Cytel, San DiegoAvalon Ventures, La JollaAllergan, IrvineScripps Research Institute, La

JollaScripps Research Institute, La

Jolla

Neurocrine BiosciencesBiosite, Inc. Diagnostics

Molecular SimulationsTrega Biosciences (acquired by

Lion Biosciences, Heidelberg,Germany, in January 2001)

CombiChemDiversaInvitrogen Corp.Immuosol

LifeSpan BiosciencesMolsoft (Molecular Software)

Salk Institute, La JollaThe Scripps Research InstituteUniversity of California–San

DiegoUniversity of California–IrvineSyrrx, La Jolla

Sequenom

XenogenImmusol

ViageneMaxim Pharmaceuticals


in 1985, became an important institutionthat promotes the commercialization ofscientific knowledge. It offers businessadvice and connects researchers with entre-preneurs and investors (Porter and theCouncil 2001, 69). In 2000, San Diego-basedestablishments attracted $681 million (TSRIalone received $132 million) from the NIH,which is the major funder of biotechnologyin the United States. In 2000 alone, NIHdisbursed $13.3 billion for research activi-ties in the United States (Cortright andMayer 2002, 14; TSRI 2002a).

Engagement in Genomics: SpatiallyFocused with North AtlanticIntegration

In 1997, Novartis Pharmaceuticalsdecided to invest massively in the field offunctional genomics and formed newresearch units in Basel and Summit, NewJersey, to integrate the latest findings fromgenome analyses into therapeutic concepts.Pursuing the goals of advancing on the tech-nological forefront and combining all rele-vant technological achievements in-house,Novartis announced in April 1998 that it wasgoing to invest about $250 million in a newgenomics institute in San Diego (Novartis1998a). After Novartis leased facilities in LaJolla for two years, the Genomics Instituteof the Novartis Research Foundation (GNF)opened its new 260,000 square-foot buildingadjacent to TSRI in La Jolla in early 2002(GNF 2002a).

This new research center, staffed withabout 200 scientists and engineers, comple-ments the other in-house functionalgenomics capability for therapeuticdiscovery. The GNF is one of the largestresearch institutes devoted entirely to func-tional genomics—a platform of technologiesthat aims to establish a functional relation-ship between a particular genotype and agiven disease state. It is expected that thisknowledge will help to identify new thera-

peutic targets (Dyer, Cohen, and Herrling1999). Paul Herrling, global head of researchat Novartis Pharma, explained the choice oflocation: “We already had this very goodcollaboration with Scripps. The question washow can I get these top shots I want. Andour trick was that we and Richard Lerner[president of Scripps] offered dual appoint-ments. They can work with us at the insti-tute and can be professors at Scripps at thesame time” (interview, 6 March 2001).

Novartis’s relationship with TSRI andespecially with TSRI’s president RichardLerner enormously facilitated PeterSchultz’s recruitment as the director of theGNF. Schultz, a professor of chemistry atthe University of California–Berkeley anda successful entrepreneurial scientist,received a parallel faculty appointment atTSRI. Previously, he was a founder of twotechnology companies, Affymax ResearchInstitute (1988) and Symyx Technologies(1995). The recruitment of Schultz washighly important because it allowed Novartisto gain academic credibility and to create aclose relational proximity to scientists andscientific communities.

Novartis launched additional, substantiveinvestments. In autumn 1998, work on theNovartis Agricultural Discovery Institutein La Jolla began. This institute, designed toaccommodate 180 researchers, is one of thelargest research centers in the world that isdedicated to research on agriculturalgenomics. Novartis announced that it wouldinvest $600 million over the next ten yearsto fund this huge initiative (Novartis 1998b).After the spin-off of the agribusiness and thesubsequent merger with the agribusinessdivision of AstraZeneca in late 2000, thisresearch center became part of the newlycreated company Syngenta and its interna-tional technology network, and its name waschanged to Torrey Mesa Research Institute.Despite the obvious appeal of the location,the La Jolla City Council approved a tax-reduction package for Novartis that includeda reduced property tax, conditional reduc-tions in water and sewer fees, and rebatesor credits based on additional-use taxes(“Novartis Tax Rebate Approved” 1999).


employees in the overall biotech-pharmaceuticalcluster. Of course, political interests may accountfor the differences in these figures.


Despite an active collaboration strategy,Novartis concluded that the only way toconverge the different technological strandsand remain on the innovation front was toundertake huge internal efforts. The creationof an internal drug-discovery powerhousewas an indispensable prerequisite to theunfolding of a varied and successful collab-oration strategy. The GNF’s mission isfocused on biological discovery andimproved technologies for making thosediscoveries. The GNF aims to build a tech-nology platform that will integrate all essen-tial disciplines of the biological, chemical,engineering, and computational sciences thatare important for the discovery of newdrug targets and substances (McBride 2000;Schultz 2000b; GNF 2001, 2002a). Progressin functional genomics leads to the furtherminiaturization of the discovery process, witha huge increase in information that needs tobe managed. These innovations promote theindustrialization of drug-discovery research.The GNF underscored this tendency byemploying an entire team of robotic engi-neers from General Motors.

The GNF consists of 14 scientific depart-ments: Lead Discovery, Cancer and CellBiology, Immunology, Neurobiology,Infectious Diseases, Cell Biology, Chemistry,Scientific Computing, Engineering, Cellularand Molecular Biology, Mouse Genetics,Protein Sciences, Genomics, andInformation Technology (GNF 2002a). Thehierarchy is flat. All departmental heads, aswell as business development, legal issues,intellectual property, and finance functions,report directly to Schultz, the GNF director.The activities are structured in a three-dimensional matrix that is comprised ofdiscovery, technology, and translationalresearch (focused on the discovery of drugs).The organization can change rapidly. Severalheads and scientists work in various groups.This organization is an attempt to create highlevels of internal relational proximities andto facilitate the formation of shared projectteams with external partners that favorexternal proximities.

The new research center in San Diegocomplements functional genomics research

units in Basel and in Summit, New Jersey,with some 300 researchers.2 The area offunctional genomics is organized intoseven operating units. The molecular biologylaboratory and the model organisms andmolecular cellular biology units are locatedin Summit, whereas the nucleic acidsciences, protein sciences, and transgenicsciences units operate in Basel. Theemployees of the life sciences informaticsunit collaborate from both sites. The headof genomics and the person responsible forexternal collaborations are based inSummit–East Hanover. The three in-house genomics centers in San Diego, Basel,and Summit are the nodes of the internalgenomics network. They collaborate withthe Novartis research centers in Basel,Summit, Vienna, and Britain within specifictherapeutic areas; with wholly ownedGenetic Therapy in Gaithersburg, Maryland,in pharmacogenetics and gene therapy; andwith wholly owned Palo Alto-based SyStemixin the fields of cell and gene therapy (seeFigure 1). The most important external part-ners in genomics are the South SanFrancisco-based Affimetrix and Rigel; Celerain Rockville, Maryland; Incyte in Palo Alto;Protana in Odense, Denmark; the Universityof Maryland; GeneProt in Geneva; Genedatain Basel; Immusol in San Diego; and theSNP consortium3 (Novartis 1999, 11; Vasella


2 The merger of Ciba-Geigy and Sandoz intoNovartis in 1996 brought together two huge R&Dorganizations with about 8,000 employees, oper-ating in four large (two in Basel, one each inSummit and East Hanover, New Jersey), andseven medium-sized or smaller (Vienna inAustria; Horsham, London, and Cambridge inBritain; Takarazuka and Tsukuba in Japan; andGaithersburg in Maryland) research centers.

3 A consortium of pharmaceutical MNCs andother research institutions contributes to a publicdatabase of human gene markers called “singlenucleotide polymorphism” (SNP). This genomicsconsortium in the United States and theEuropean Union was formed in April 1999 by theWellcome Trust, Bayer, BMS, Glaxo Wellcome(now GSK), HMR (now Aventis), Monsanto (nowPharmacia), Novartis, Pfizer, Roche, SKB (nowGSK), and Zeneca (now AstraZeneca) (NovartisPharma 1999).


1999; Herrling 2000; Schultz 2000b; Zeller2001b, 460–64).

The GNF independently entered intoseveral dozen further collaboration agree-ments in specific fields. The most importantpartners are listed in Table 3. Its directneighbor, TSRI, remains by far its moststrategic partner. In fact, the collaborationwith TSRI has been highly productive forNovartis. By the end of 2000, the TSRIresearchers had produced more than 2,000manuscripts from the time the collaborationstarted, and Novartis owns the right toreview the papers before they are submittedto journals. The collaboration also givesNovartis a priority right to file patents.This scientific know-how has shapedNovartis’s research portfolio. It influencedseven already-terminated programs andcontributed to the launching of seven newresearch programs until 2000 (Herrling2000). To illustrate the partnering strategy,Herrling (interview, 6 March 2001)compared himself with a piano player. Everybiotech firm represents a key of a piano anda large pharmaceutical company puts the

piano together. “As a pharma guy who makesa therapy, I combine the keys and I play themusic.” But, the melody sounds harmoniousonly if a large company is able to managethe challenges of combining proximities andleveraging knowledge.

Complementing and SubstitutingExternal Proximities

Specific technology-based metropolitanadvantages (des atouts métropolitains) arecrucial for the emergence and reproductionof regional innovation arenas (Veltz 1996,237ff). To minimize risks and uncertainty,firms tend to locate themselves in knowledge-rich metropolitan areas, mainly because theyhave relatively undefined expectations aboutthe future as they search for a qualified work-force, knowledge pools, and specialist services.The same is true for workers and specialists.In an interview on 18 March 2002 in SanDiego, Troy Wilson, GNF vice president ofbusiness development, clearly expressed thisaspect: “We can recruit people now to GNFbecause they know that even if they are


Figure 1. Novartis’s centers of excellence, other research centers, and genomics network in 2002(collaborations in other fields are not included).


successful, they have many more opportuni-ties here. And if they are not successful,they have still opportunities.”

Legally, the GNF is part of a founda-tion. By implementing such a legally inde-pendent and organizationally relative inde-

pendent status in respect to the headquar-ters, Novartis pursues two goals. First, itpermits a culture to operate between “bigpharma” and “small biotech.” Schultz (2000a,94) explained the advantages of such an orga-nization:


Table 3

Import Partners of GNF’s External Networks

Year

19991999

199919992000

2000

2000

200020002001

2001

2001

2001

2002

1999–

Sources: Company media releases and Schultz (2000b).

Deal

Broad-based research and academic allianceProject-based collaborations

Functional genomics, cloning technologies, expression systemsGNF acquires access to GeneChip technologyGNF receives access to libraries in combinatorial chemistry

Use of nanocrystals to develop biological assays for proteomeanalysis and gene expression at GNF

Molsoft provides software for research in functional and struc-tural annotation of new genomic sequences

GNF licenses high-throughput DNA sequencing technologyGNF acquires access to GPCR databaseFive-year strategic alliance in structural proteomics (high-

throughput protein structure determination)

Creation of high-quality SNP (single nucleotide polymor-phism) map of the mouse genome

Multiyear partnership to use Genicon’s proprietary ResonanceLight Scattering technology

Development of applications using Q3DM’s high-throughputmicroscopy platform

Common identification of novel chemotypes that inhibit a kineasetarget

Many collaborations with universities in California and elsewherein the United States, as well as with institutes in Europe, Asia,and South America

Partner

Scripps (San Diego)University of California–San

DiegoInvitrogen (San Diego)Affimetrix (South San Francisco)Axys (South San Francisco),

acquired by Celera in 2001Quantum Dot Corp. (Palo Alto)

Molsoft (San Diego)

Lark Technologies (Houston)LifeSpan (Seattle)Syrxx (San Diego), spin-off from

GNF in 1999 with GNFdirector Peter Schultz on theboard

Sequenom (San Diego)

Genicon Sciences Corp.(San Diego)

Q3DM (San Diego)

Libraria (San Jose)

Australian National University,Mount Sinai, Oregon BrainBank, Johns HopkinsUniversity, Karolinska Institute,Stanley Foundation, YaleUniversity, University ofChicago, Harvard Brain Bank,University of Virginia,Northwestern University,University of California–Irvine,University of California–SanDiego, Tamagawa University,Kunming Institute, PeruvianInstitute for TraditionalMedicine, University ofCalifornia–Los Angeles, SalkInstitute


I retain my “academic” hat at the ScrippsResearch Institute. But the problem with acad-emia is [that] it’s very hard to focus resourceslike one can do in industry. On the other hand,companies sooner or later tend to become veryproduct focused because they have share-holders wanting value. At this institute, wehave the opportunity to have our cake andeat it, too. As we make discoveries or developtools that have commercial value, we canpass on those discoveries through the foun-dation to Novartis, and they can use them todevelop drugs; if Novartis isn’t interested, wecan spin off startups that can develop and applythe technology at a high level. The instituteis free to continue developing new tools andmaking new discoveries. You can’t do that inacademia. You can’t focus resources like thatbecause it’s a democracy, and everyone has avote.

The second advantage is that this orga-nizational and cultural distance to head-quarters but closeness to the local researchcommunity facilitates joint projects withTSRI and the transfer of knowledge. Severalkey persons at the GNF besides Schultz holdjoint faculty appointments at TSRI, whichallows them to combine careers in industryand academia. For example, the microbi-ology group leader in the infectious diseasesdepartment of the GNF holds an appoint-ment as an assistant professor in theDepartment of Cell Biology at TSRI (GNF2002a). A considerable number of post-doctoral fellows at TSRI collaborate closelywith the GNF. In Schultz’s TSRI laboratoryalone, one sixth of the listed postdoctoralfellows are either employed by GNF or havepublished articles with the GNF scientists(GNF 2002b; TSRI 2002b).

On the one hand, the establishment ofnumerous common project teams thatinclude GNF and TSRI researchers, interns,and visiting scientists; the funding of doctoraland postdoctoral jobs at the local academicinstitutes; and joint appointments offaculty members and GNF departmentheads have contributed to the GNF ’sembeddedness in the local innovation arena.On the other hand, academics find it attrac-tive to work in the GNF because GNF scien-

tists have access to a wide range of oppor-tunities at neighboring institutes: TSRI, Salk,Burnham, and the University ofCalifornia–San Diego.

Schultz and the GNF played a decisiverole in founding the Joint Center forStructural Genomics (JCSG) and theInstitute for Childhood and NeglectedDiseases (ICND). The JCSG is a consortiumcomprised of several research institutes inCalifornia, including TSRI, and is funded bythe NIH (TSRI 2000). The ICND will actas an umbrella group within TSRI for youngscientists who work in areas that are rele-vant to childhood diseases. The ICNDclosely collaborates with the GNF. Six facultymembers opened the ICND, and three ofthe four new faculty are parallel departmentheads at the GNF (Benedyk 2001). Thiscollaboration allows for many informal rela-tions and shared projects, which areexpressed, for example, by common author-ship of a considerable amount of scientificarticles.

The existence of the GNF is closely linkedto the collaboration with TSRI. Comparedto the University of California or StanfordUniversity, which are seen as far too formaland rigid, TSRI is considered much moreflexible and open to the penetration ofcorporate interests. As Wilson said in aninterview on 18 March 2002:

Scripps is a very flexible organization that isalso run by a strong personality. . . . Berkeleyis run as a democracy. So you have to get acommittee to approve everything the univer-sity does. At Scripps and GNF, their approvalis by one person. . . . We can make many thingshappen. Whether we have formal collabora-tions, we have many informal collaborations;you know, Scripps is the first place that weturn when we need expertise that is not inthe GNF.

This close collaboration allows the GNF andNovartis to create remarkable relational,cultural, and spatial proximities to personswho are involved in localized innovationprocesses. Obviously, intellectual propertyissues are strategic. As Wilson put it:



We have a certain number of informal collab-orations. Novartis has rights to intellectualproperty generated from Scripps. They aresimilar to those, the intellectual property rightsgenerated from GNF. So in many cases, thecollaboration will be formed and be completedbefore we have a chance to catch up with it.They move that quickly. If we try to put up awritten agreement in place every time, we killthe collaboration. Scripps is the only institu-tion which allows this to happen. It only worksbecause of that funding arrangement betweenNovartis and Scripps. If Novartis didn’t havethis evaluation right, then we would have tobe much more formal. (Interview, 18 March2002)

In its short history, the GNF has alreadyspun out three technology-based compa-nies—Syrxx in 2000 and Kalypsys andPhenomix in 2001—each of which success-fully raised venture capital. These firmsdeveloped technologies that GNF andNovartis did not want to keep exclusivelyinternal and that, by their very nature, willbecome obsolete after a few years. Novartishas an investment in each company. GNFdirector Schultz is a cofounder of Syrxxand is on the board of directors of all threecompanies. In the case of a successful devel-opment, Novartis and its BioVenture Fundcan realize a considerable return on theirinvestment. This spin-off strategy is anothermethod of making GNF ’s boundariespermeable to the local scientific and busi-ness communities.

The GNF can be interpreted as a codifi-cation institution, absorbing and producingknowledge (including tacit knowledge) andtechnologies and transferring them to theinternal corporate space of Novartis.Exposure in the local arena and the rela-tive permeability of firm boundaries allowsNovartis to use spatial proximity to localproducers of knowledge to create relational,organizational, cultural, and probably eventechnological proximities. This is essentialto promote innovative processes and asuccessful technological scanning. Thecreation of long-term relationships withmajor actors of the scientific community, the

development of common experiences, andinterpretative communities that permit thedevelopment of mutual trust are prerequi-sites for this kind of “innovative embed-dedness” (cf. Grabher 2001).

Complementing and SubstitutingInternal Proximities

In a similar manner, internal organiza-tional, cultural, and relational proximitiesare indispensable for managing the exchangeof knowledge among the intrafirm researchunits located in San Diego, EastHanover–Summit, and Basel. Developingnew technologies and methods, the GNFentered into dozens of collaborations withthe Novartis research units in Basel,Summit–East Hanover, Horsham, andVienna. These units provide knowledgeabout biomedical processes, diseases, andthe concrete subjects for the application oftheses new methods. The GNF is not inte-grated into the corporate structures like theother research centers and therapeutic areas.There is a direct reporting line from the headof GNF to the heads of research and ofdevelopment of Novartis Pharma that under-scores the high degree of organizationalautonomy. A homogenization or a subordi-nation of the GNF under the headquarterstructures in Basel has to be prevented.

The collaboration and sharing of knowl-edge between the GNF and other Novartisresearch centers occurs on a project-by-project basis with the scientists directlyinvolved, not with the heads of the thera-peutic areas. Because of the GNF’s tech-nology-based profile, the counterparts onNovartis’s research side are mostly the targetplatforms, technology platforms, and, to amuch lesser degree, the discovery groups inthe therapeutic areas (see Figure 2). Thisinteraction is governed by steering commit-tees in research, in development, and at theGNF. The exchange of information andcodified knowledge normally does notraise major problems. However, to sharetacit or uncodified knowledge, “you have tobring people personally. There is no other



way to do it” (interview with Wilson, 18March 2002).4 But international meetingsare time consuming and costly. In addi-tion, the promotion of personnel mobilityamong the major research centers throughsabbaticals at the GNF and TSRI forresearchers who work at other Novartis

research centers helps to create these closerelationships. And indeed, some of thebest supporters within Novartis, among teamleaders and senior scientists, have oftenvisited the GNF or spent several months inLa Jolla. However, the intervieweespresented contradictory views on the impor-tance of sabbaticals, which are limited andexpensive.

Nevertheless, it remains a daily challengeto make these genomics groups’ knowl-edge useful to other technology groups,especially in the application-oriented ther-apeutic areas. “And one of our single biggestproblems, our single biggest issue westruggled with, is how to continue to increasethe cooperation and collaboration withNovartis. That’s our biggest problem,”Wilson noted in an interview on 18 March2002. In addition, the special position of the


Figure 2. Intrafirm and extrafirm relations, knowledge, and technology flows of the GenomicsInstitute of the Novartis Research Foundation in San Diego in 2002.

4 “You can’t underestimate the face-to-facediscussions, particularly the cultural differencesand the beers in the bar after the meeting whenpeople can talk freely,” emphasized Alan Main,the former head of the Novartis research centerin Summit, New Jersey, in explaining the prob-lems involved in forming joint internationalproject teams after the merger of Ciba-Geigy andSandoz. No international team can be formed bycommunicating only with even the best electronicmedia because of misunderstandings caused bycultural and linguistic differences (interview withMain, 19 September 1997).

GNF

SanDiego


GNF within the Novartis organization raisesculturally induced communication problems,especially in the transfer of intellectual prop-erty. “I think there is still a certain level ofskepticism within Novartis that confidentialinformation, in particular if it disseminatesinto GNF, would disseminate to the rest ofthe world,” Wilson said.

Novartis-GNF relations show that a closerspatial proximity to innovative milieus canprovoke problems in the internal organiza-tional and technological proximities andcapabilities. Therefore, an MNC has tomanage the challenge of implementing anorganization and strategy in a way that theinternal organization is not constituted tothe detriment of its external proximities, andvice versa. This dilemma reflects theincreasing problems of coordination of loca-tions, business units, and projects. Inwardlearning must be combined with internalprocesses of competence building and lever-aging (Gerybadze and Reger 1999, 255).

Invasion of Oligopolistic Rivals

Overall estimations reveal that capitalinflows by MNCs to a high-tech arena, suchas the San Diego–La Jolla area, are impor-tant and can have cumulative effects.Large pharmaceutical companies haveplayed a key role in San Diego’s biotechindustry. The region has attracted more than$1.6 billion in pharmaceutical-biotechresearch alliances since 1996 (Cortright andMayer 2002, 24). Even though Novartishas been among the most active pharma-ceutical giant in this region, almost all of the“top-ten” pharmaceuticals have substantialstakes in this region. Particularly, Pfizer afterit acquired Warner-Lambert, with itsrecently integrated San Diego-basedsubsidiary Agouron Pharmaceuticals in 2000,has surpassed the rivals’ local presence. Itinvested about $155 million between 2000and 2002 for its expanded eight-buildingresearch center in La Jolla. Merck & Cotransformed SIBIA Neurosciences, acquiredin 1999, into Merck Research Laboratories.Johnson & Johnson has had a local presencefor nearly 20 years and built a new biotech-

nology center in 1996 (see Table 4). Basel-based local rival Roche also maintains rela-tions with several companies in San Diego.Thus, Roche acquired the marketing rightsfor Rituximab, one of the few productswhose active substance was discovered inSan Diego. IDEC Pharmaceuticals discov-ered this monoclonal antibody and devel-oped it, together with Genentech and Roche,for the treatment of non-Hodgkin ’slymphoma (IDEC Pharmaceuticals 1997;Roche 1997). The transatlantic flows of busi-nesses and innovations between San Diegoand Basel have been extended to small firmsand spin-offs; for instance, San Diego-basedDiscovery Partners acquired Basel-basedDiscovery Technologies, a spin-off ofCiba-Geigy that is funded by the NovartisVenture Fund. In November 2001, this firmestablished its European headquarters inBasel (Discovery Partners 2000, 2001).

A particular method of technological scan-ning involves collaboration with venturecapital firms. In 1991, Sandoz Pharmafounded the joint venture Avalon MedicalPartners at La Jolla with Avalon Ventures.Ciba-Geigy and Roche hold significantminority stakes in funds managed by AccelPartners and Advent International, respec-tively. These arrangements put all threecompanies in contact with start-up compa-nies (Mehta and Isaly 1995; Zeller 2001b,409, 432). Shortly after the merger in1996, Novartis created the Novartis VentureFund, which has financed numerous newbiotech companies, many of them in Europe.It established the $100 million NovartisBioVenture Fund in 2000, which byFebruary 2002 had invested in 13 biotechcompanies, mostly in the United States, 7 ofwhich are in California and 4 of which arein San Diego County. In line with Novartis’stechnology scanning strategy, theBioVenture Fund moved its offices fromBasel to the La Jolla-based GNF inNovember 2001 (Van Brunt 2002; NovartisVenture Fund 2002). This behavior of anindividual corresponds to the generaltendency of venture capital and researchcontracts to be highly concentrated within



a few metropolitan areas in the United States(Cortright and Mayer 2002, 22f).

In 2002, Novartis launched a similarprocess of oligopolistic striving for proximityto localized knowledge pools and to phar-maceutical rivals in the biotech arena of

Boston. Madison, New Jersey-based Wyethemploys 800 people in its Cambridge, Mass.research laboratory, which originallybelonged to the independent firm GeneticsInstitute. New Jersey-based neighbor andrival Merck & Co. began on 1 October 2001,


Table 4

Invasion of Large Pharmaceuticals (Except Novartis and Roche) in San Diego

“Big Pharma”

Eli Lilly

Schering-Plough (New Jersey)Johnson & Johnson (New

Brunswick, New Jersey)

Warner-Lambert(Morristown, New Jersey)(acquired by Pfizer in 2000)

Pfizer (New York, New York)

Merck & Co (WhitehouseStation, New Jersey)

Elan Corporation (Dublin,Ireland)

Chugai Pharma (Tokyo, Japan)(acquired by Roche in 2002)

Sankyo Co. Ltd. (Tokyo, Japan)

Sources: Kupper (1998, 1999b, 1999a), Crabtree (2000, 2002), Porter and the Council on Competitiveness andMonitor Group on the Frontier (2001), California Healthcare Institute (2002), Elan (2002), Johnson & Johnson(2002), Pfizer (2002a, 2002b), Chugai (2002), and Sankyo (2002).

Year

Early 1980

1986

19962001199619811995

1995–991996

200220011999

19912000

2002

19992000

19982000

1995

1998

Investment

Lilly enters into collaboration with Scripps and gets right of firstrefusal for $50 million

Lilly acquires Hybritech (founded in 1978, the first biotech firm inSan Diego) for $400 million and sold it a few years later; Lilly takesover the development of a diabetes medicine from LigandPharmaceuticals

Enters into collaboration with Neurocrine Biosciences$200 million collaboration with Isis PharmaceuticalsAcquisition of Canji gene therapy firm with late-stage clinical trialsJohnson & Johnson enters into collaboration with ScrippsAcquires an 11 percent stake on Amylin Pharmaceuticals and extends

collaboration in following yearsCollaborations with Neurocrine BioscienesCreation of an integrated genomics-based research institute in a new

120,000-square-foot facility in La JollaExtension of existing research facilitiesCollaboration with Maxia PharmaceuticalsAcquisition of Agouron Pharmaceuticals, which markets Viracept, an

HIV medicine, for $2.1 billion; based on this drug, Agouron,founded in 1984, was the most successful biopharmaceuticalcompany in the region with about 1,000 employees

Enters into research collaboration with Ligand PharmaceuticalsPfizer integrates Agouron in its global research and development

organization after it acquired Warner-LambertOpening of the first part of an 800,000-square-foot research center

in La Jolla, extending the site of Agouron (investment $155 million)Collaboration with Vical in fields of vaccines and gene therapyAcquires publicly-held SIBIA NeurosciencesTransformation into Merck Research Laboratories; is heavily expanded

and has about 120 employeesEnters into collaboration with Ligand PharmaceuticalsAcquisition of Dura Pharmaceuticals for $1.590 billion; after a radical

downsizing, Elan centralized its North American biopharmaceu-tical operations in Sorrento Valley, La Jolla; Elan has 8 collabora-tions with biotech companies

Establishment of Chugai Biopharmaceuticals in San Diego in 72-square-foot facility and over 100 employees

Establishment of the Sankyo Pharma Research Institute in San Diego


to build a large research center inCambridge near Harvard Medical Schoolthat is designed for 400 scientists and admin-istrative staff. The facilities are scheduled toopen in 2004. On 6 May 2002, Novartisannounced that it would lease laboratoryfacilities from MIT and would invest $250million as a first step. The new NovartisInstitute for Biomedical Research beganoperating in July 2003 and employs about400 persons. Therefore, it recruited special-ists even before Merck, and expansion couldraise the number of employees to 900. Asfor the Genomics Institute in San Diego,Novartis recruited a renowned academicto lead the institute: Mark Fishman, formerlychief of cardiology and director of cardio-vascular research at Massachusetts GeneralHospital. But the effects on the internalresearch organization will be even biggerbecause Fishman leads the global Novartisresearch organization from the new institutein Boston. The investments of Merck andNovartis are expected to influence the laborand real estate markets considerably(Krasner 2002; Merck 2001, 2002; “NovartisOpens Drug Research Center” 2002).

ConclusionI draw three major conclusions: First, to

generate and absorb knowledge, MNCsembed in knowledge-rich regions andreinforce the characteristics of a “pharma-biotech spider’s web economy” in the contextof the uneven development of capitalism.Second, MNCs strive for oligopolisticproximity, which reinforces the highly selec-tive and fragmented geography of talent,innovation, and wealth. Third, a relationalperspective that jumps scales and is basedon democratic and social considerations mustbe developed.

Generation and Absorption ofKnowledge

The spatial clustering of biotech firms andthe increased importance of regional inno-vation arenas do not mean that innovativeprocesses are more spatially integrated.

Many input-output relations, innovativeexchange processes, and shared processesin biotech R&D that are paralleled bylarge monetary transfers by no meanshappen in regionally integrated contexts(Oßenbrügge and Zeller 2002; Zeller 2001a).Rather one observes a combination ofregional and nonregional input-output rela-tions (cf. Markusen 1996).

Organizationally and geographically, flowsof knowledge and technology occurextremely selectively. The spatial inequalityand concentration have even been strength-ened, although the proportion of R&Dundertaken outside large pharmaceuticalcompanies has increased. Also publicspending, venture capital, and biotech firmstend to be highly selectively located. Bigpharma is anxious to internalize externallyproduced local expertise; to diffuse it asquickly as possible internally to the appro-priate places; and, at the same time, to exter-nalize some of the inherent risks of allresearch processes. The entrepreneurial riskpartially shifts toward the biotech firms thatare transatlantically interwoven but that arenevertheless largely constrained regionally(e.g., they do not have development andmarketing capacities). Amin and Thrift’s(1992) characterization of “local nodes inglobal networks,” as well as the somewhatharmonistic “regionalist” approaches andtypologies of regional innovation systems(e.g., Cooke 1998), neglect the power hier-archies and interdependence among theoligopolistic rivals and the other actors ininnovation arenas and the important roleof the former in linking knowledge on aglobal scale.

The spatiality of this pharma-biotechspider’s web economy is depicted in Figure3. The technological competence is gener-ated by actors who work in research centersand firms that together form an innovationhub and are spatially concentrated in a fewknowledge-rich and economically wealthyregions. The socioeconomic context,consisting of collaborating and conflictingactors, forms the arenas and conditions forlocalized learning, and the processes of inclu-sion and exclusion. The MNCs structure and



coordinate the innovative relations ontransnational scales. They are the nodes thatlink knowledge and different strings of tech-nology that are created in the arenas of inno-vation. They are the spiders that spin websthat, in most cases in the pharmaceutical andbiotech industries, have a North Atlantic andsometimes a triadic extension. The spiders’weaving abilities depend largely on theirability to create, complement, and substi-tute spatial, organizational, cultural, rela-tional, and technological proximities. Thatis, the technological expansion of MNCs alsodepends on the MNC’s management ofdifferent proximities and distances. Theseinteractions are a function of the MNC’scapital and market power, which again arestructured by the balance of power arisingfrom the logic of the accumulation of capitaland different actors’ struggles on differentscales (cf. Zeller 2000).

Novartis’s partnership with TSRI and theembedding of the GNF into the localarena of innovation reveal that both before

writing down contracts and based on moun-tains of contract documents, relational prox-imities and untraded interdependencies arecreated that enable the generation andtransfer of tacit knowledge. In this sense, animportant role of the GNF is to codify tacitknowledge that is bound in the social capitalof the regional arena of innovative actors andits fruitful combination with other intrafirmknowledge (cf. Sölvell and Zander 1998).This example illustrates the cohabitation oftacit and codified knowledge within succes-sive steps and rounds of production, acqui-sition, and transfer of both of them. Suchstages of appropriation and learning are anevolutionary process (cf. Torre and Gilly2000).

A pool of highly qualified labor promotes“relational assets,” as well as the creationof uncodified knowledge and “untradedinterdependencies,” that make a regionattractive (Storper 1997). However, itremains methodically unsolved how thespecific effects and relevance of these “rela-


Figure 3. Innovation arenas, hubs, and nodes: Oligopolistic rivals A, B, and C with their headquar-ters and most important research centers, biotech companies, and innovation relations.


tional assets” can be seized. Novartis’sengagement in La Jolla also reflects theambition to tap, at least partially, into a busi-ness culture and social order that are consid-ered industry friendly and that differ fromits own cultural background of the Europeanand Swiss chemical and pharmaceuticalindustries (cf. Schoenberger 1997, 119ff,151ff). Creating such a cultural proximityserves to gain a better understanding of andto be relationally closer to what is happeningin a part of the scientific front.

Oligopolistic Rivalry and Proximity

The oligopolistic rivalry among large phar-maceuticals occurs on a triad level, mainlyon a North Atlantic scale. At the sametime, rivalrous relations find their expres-sion on other scales. Because of importantdifferences in national markets, the outcomeof oligopolistic rivalry is decided, to a consid-erable extent, by competition in nationalmarkets and by market shares in specificmarket segments. For this reason, Europeanpharmaceuticals made huge efforts tostrengthen their sales forces in the UnitedStates. Oligopolistic rivalry for technologicalpotentials is translated into efforts toestablish strong ties to innovation hubs andto become embedded in arenas of regionalinnovation. The existing and growing poolof knowledge in such arenas helps attractneeded specialists from other regions.Attracting the best and brightest talent iscrucial to the technology-and-innovationstrategies of oligopolistic rivals in the phar-maceutical industry.

Investing heavily in fields of strategic tech-nologies, MNCs not only absorb resourcesfrom regions, but, like investment andventure capital funds, they can pump enor-mous sums of externally accumulated capitaland knowledge into a region. The oligopo-listic rivals not only invade their rivals’sectoral and geographic markets, but alsofight over privileged access to the spatiallyconcentrated technological bases. Therefore,a large pharmaceutical company defends andexpands its own technological base in thekey regions, but it also strives to get a foot

in the rivals’ innovative systems. However,the mechanisms and cumulative effects ofthis geography of talent need to be furtherexplored (see Florida 2001). A double mech-anism of value capture can be observed. Onthe one hand, in the 1990s, there was amassive inflow of capital accumulated else-where to a few regions in the United States(Brenner 2002, 206ff). This inflow of capitalhelped extend the U.S. research and tech-nological base. On the other hand, MNCsare eager to capture the values that arecreated in regional innovation arenas byhighly specialized institutions, funded, to alarge extent, by public institutions. Smallcompanies are intermediate agents in thisprocess. Part of these values is captured byfinancial organizations, such as venturecapital funds, and pension funds. Theseprocesses reflect a strong rent-seekingbehavior by MNCs and financial institutions(Chesnais 2001).

Striving for proximity to oligopolistic rivalsis a major strategic behavior. This oligopo-listic proximity is a highly conflictive formof proximity (cf. Blanc and Sierra 1999, 199).Such a process of regional and technolog-ical embedding extends Storper andWalker’s (1989) geographic industrialization,in whose evolution a firm creates and shapesits own locational conditions. Because oligop-olistic rivals adapt their strategies partly tothose of their rivals and the number ofbiotech regions is limited, it is not surprisingthat many European, British, and NewJersey–New York-based large pharmaceuti-cals manifest similar spatial orientations tovarious innovation arenas.

Democratic and Social RelationalPerspective

To understand both the spatial dimensionof innovation relations and innovationsystems and the spatial face of MNC’sbehavior, concepts need to be developedthat are based on a dynamic understandingof interactions among different scales (cf.Swyngedouw 1997). I argue for adopting arelational understanding of space andterritory. Approaches that are preconceived



on a specific spatial level (regional, national,and global) cannot capture the scalardynamics of innovative relations and thejumping of scales by its protagonists (cf.Dicken and Malmberg 2001). The recenteconomic and political restructuringprocesses are linked with fundamental time-space transformations. These transforma-tions are paralleled by the emergence of agrowing number of untransparent and unde-mocratic institutions and processes, reducedcitizenship rights, social disempowermentfor some, and the growing influence andpower of elites (Swyngedouw 2000, 551).Strong innovation hubs are based, to aconsiderable extent, on public investmentsin R&D and high-quality universities andresearch centers that frequently transferknowledge. However, the shaping of theseinstitutions and of the technologies thatare produced in these institutions is out ofdemocratic control. A democratic and socialshaping of technological progress and its useneeds to consider all scales of the produc-tion, exchange, and use of technology. Thedownside of technological arenas is widelymarginalized and fragmented territories.Policies that are limited to winning regionscannot be a source of propositions thatpromote more democratic and more equaltechnological development.

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