Mind the Gaps: How Organization Design Shapes the Sourcing of Inventions

An important problem for many firms is sustaining their rate of innovation by launching new products on an ongoing basis. Accordingly, firms need to replenish their innovation pipelines with new inventions as existing inventions are weeded out or reach fruition. The replenishment can be done through internally generated inventions or through externally sourced inventions via licensing, alliance, or acquisition modes. Drawing on incentives- and knowledge-based views of the firm, we consider the difference in managerial decision making between centralized and decentralized research and development (R&D) organization designs and how it impacts firms’ propensities to draw on externally sourced inventions. As compared with centralized designs, decentralized designs are associated with greater incentives for managers to replenish their firms’ pipelines but are limited in terms of intraorganizational knowledge flows that can facilitate the creation of inventions. We explore these mechanisms using a novel data set of firms’ sourcing decisions within the pharmaceutical industry between 1996 and 2015. We find that firms with decentralized R&D designs replenish their pipelines with a higher proportion of externally sourced inventions than do firms with centralized designs. This difference is found to be mainly attributed to external sourcing via licensing and for inventions of moderate novelty. This study offers an important contribution to the question of how firms organize for innovation, highlighting the relationship between internal R&D organization design and the external sourcing of inventions. In so doing, it illustrates that the choice of organization design in terms of centralization or decentralization can shape a firm’s locus of innovation.