Headquarters' control capacity and the choice of R&D organizational forms abroad

Recently, regarding globalization, the decentralization of R&D activities abroad by multinational companies (MNCs) has become important in developed countries. However, academic research has not given this topic sufficient attention. This paper explains how the efficiency of control and incentive mechanisms may affect the choice of organizational forms by MNCs that decentralize their R&D activities abroad. We identify five main organizational forms: wholly owned green-field subsidiary, wholly owned acquired subsidiary, joint venture, cross-licensing agreements, and unilateral licensing agreements. A questionnaire addressed to the R&D managers of American and European MNCs finds that MNCs' choice of organizational form is related to the control mechanisms, and the performance measurement and incentive systems, available to resolve agency conflicts in each form. We find that the internalization choice is limited, given the difficulties of undertaking behavioral controls in such organizational forms. The capacity to undertake a strategic performance evaluation of R&D activities favors the choice of a cross-licensing agreement over a joint venture. The choice of unilateral licensing agreements is not supported, because of feasibility issues in the financial evaluation of the performance of R&D activities. These findings provide empirical evidence on the strategic choice of R&D organizational forms abroad. The paper also presents useful implications for understanding the appropriateness of one form over another.