Organizational Design of R & D Activities
This paper addresses the question of whether R&D should be carried out by an independent research unit or be produced in-house by the firm marketing the innovation. We define two contractual structures. In an independent structure, the firm that markets the innovation buys it from an independent research unit which is financed externally. In an integrated structure, the firm that markets the innovation also carries out and finances research leading to the innovation. We compare the two structures under the assumption that the research unit has some private information about the real cost of developing the new product. We find that the integrated structure dominates when an innovation costly to develop is also a less drastic technology or a product less valued by consumers. The independent structure dominates in the opposite case.
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