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Internal Versus External R&D: A Study of R&D Choice with Sample Selection

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  • James Love
  • Stephen Roper

Abstract

This paper extends previous analyses of the choice between internal and external R&D to consider the costs of internal R&D. The Heckman two-stage estimator is used to estimate the determinants of internal R&D unit cost (i.e. cost per product innovation) allowing for sample selection effects. Theory indicates that R&D unit cost will be influenced by scale issues and by the technological opportunities faced by the firm. Transaction costs encountered in research activities are allowed for and, in addition, consideration is given to issues of market structure which influence the choice of R&D mode without affecting the unit cost of internal or external R&D. The model is tested on data from a sample of over 500 UK manufacturing plants which have engaged in product innovation. The key determinants of R&D mode are the scale of plant and R&D input, and market structure conditions. In terms of the R&D cost equation, scale factors are again important and have a non-linear relationship with R&D unit cost. Specificities in physical and human capital also affect unit cost, but have no clear impact on the choice of R&D mode. There is no evidence of technological opportunity affecting either R&D cost or the internal/external decision.

Suggested Citation

  • James Love & Stephen Roper, 2002. "Internal Versus External R&D: A Study of R&D Choice with Sample Selection," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(2), pages 239-255.
  • Handle: RePEc:taf:ijecbs:v:9:y:2002:i:2:p:239-255
    DOI: 10.1080/13571510210134998
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    References listed on IDEAS

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    Cited by:

    1. Eilhard, Jan, 2008. "Firms on SourceForge," MPRA Paper 7809, University Library of Munich, Germany.
    2. Leoncini, Riccardo & Montresor, Sandro & Rentocchini, Francesco, 2016. "CO2-reducing innovations and outsourcing: Evidence from photovoltaics and green construction in North-East Italy," Research Policy, Elsevier, vol. 45(8), pages 1649-1659.
    3. Giuseppe Medda & Claudio Piga & Donald Siegel, 2006. "Assessing the returns to collaborative research: Firm-level evidence from Italy," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 15(1), pages 37-50.
    4. Laura Barbieri & Daniela Bragoli & Flavia Cortelezzi & Giovanni Marseguerra, 2015. "Public Support to Innovation Strategies," DISCE - Quaderni del Dipartimento di Scienze Economiche e Sociali dises1509, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    5. Jin, Justin Yiqiang & Kanagaretnam, Kiridaran & Lobo, Gerald J. & Mathieu, Robert, 2013. "Impact of FDICIA internal controls on bank risk taking," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 614-624.
    6. J Doran & G Ryan, 2016. "The effectiveness of R&D and external interaction for innovation: Insights from quantile regression," Economic Issues Journal Articles, Economic Issues, vol. 21(1), pages 47-65, March.
    7. Love, James H. & Roper, Stephen & Vahter, Priit, 2014. "Dynamic complementarities in innovation strategies," Research Policy, Elsevier, vol. 43(10), pages 1774-1784.
    8. Rammer, Christian & Köhler, Christian & Murmann, Martin & Pesau, Agnes & Schwiebacher, Franz & Kinkel, Steffen & Kirner, Eva & Schubert, Torben & Som, Oliver, 2010. "Innovationen ohne Forschung und Entwicklung: Eine Untersuchung zu Unternehmen, die ohne eigene FuE-Tätigkeit neue Produkte und Prozesse einführen," Studien zum deutschen Innovationssystem 15-2011, Expertenkommission Forschung und Innovation (EFI) - Commission of Experts for Research and Innovation, Berlin.
    9. Bertrand, Olivier, 2009. "Effects of foreign acquisitions on R&D activity: Evidence from firm-level data for France," Research Policy, Elsevier, vol. 38(6), pages 1021-1031, July.
    10. Giuseppe Medda & Claudio Piga & Donald S. Siegel, 2003. "On the Relationship between R&D and Productivity: a Treatment Effect Analysis," Rensselaer Working Papers in Economics 0307, Rensselaer Polytechnic Institute, Department of Economics.
    11. Reid, Gavin C & Ujjual, Vandana, 2008. "Firms in Scottish High Technology Clusters: software, life sciences, microelectronics, optoelectronics and digital media preliminary evidence and analysis on firm size, growth and optimality," SIRE Discussion Papers 2008-41, Scottish Institute for Research in Economics (SIRE).
    12. Hagedoorn, John & Wang, Ning, 2010. "Is there complementarity or substitutability between internal and external R&D strategies?," MERIT Working Papers 005, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    13. repec:eee:tefoso:v:120:y:2017:i:c:p:284-297 is not listed on IDEAS
    14. Christoph Grimpe & Ulrich Kaiser, 2010. "Balancing Internal and External Knowledge Acquisition: The Gains and Pains from R&D Outsourcing," Journal of Management Studies, Wiley Blackwell, vol. 47(s2), pages 1483-1509, December.
    15. Amandine Pinget & Rachel Bocquet, 2017. "Spécificités des sources de connaissances pour l'innovation environnementale des PME," Post-Print hal-01699651, HAL.
    16. Baldwin, John R. & Beckstead, Desmond & Gellatly, Guy, 2005. "Canada's Investments in Science and Innovation: Is the Existing Concept of Research and Development Sufficient?," Economic Analysis (EA) Research Paper Series 2005032e, Statistics Canada, Analytical Studies Branch.

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