Neither buying nor allying: Employing open innovation through the rental of R&D capabilities

The open innovation (OI) literature emphasizes that complementarity between external and internal technological capabilities is essential for sustaining innovation that departs from established trajectories. While most research assumes that external technological assets and capabilities are acquired through collaboration or ownership, this paper introduces Contract Development and Manufacturing Organizations (CDMOs) as a distinctive outsourcing model. CDMOs provide specialized R&D assets and capabilities on a per-use rental basis, allowing firms to access external resources without engaging in collaboration or direct control. This rental-based outsourcing enables firms to maintain authority over downstream development processes and retain the rents from successful commercialization. Such a division of labor allows firms to concentrate on their internal inventive activities while leveraging CDMO capabilities, thereby facilitating innovation activities. We also argue that excessive reliance on CDMOs can undermine a firm's ability to pursue path-breaking innovation. We theorize and find empirical evidence for an inverted U-shaped relationship between CDMO reliance and a firm's capacity to generate destabilizing innovation. Furthermore, we examine two absorptive capacity-related moderators—R&D centralization and inventor network density—and demonstrate their influence on this baseline relationship. Our hypotheses yield broad empirical support when tested within the biopharmaceutical industry.