Outsourcing of innovation
- First Online:
- 636 Downloads
This paper looks at the outsourcing of research and development (R&D) activities. We consider cost reducing R&D and allow manufacturing firms to decide whether to outsource the project to research subcontractors or carry out the research in-house. We use a principal-agent framework and consider fixed and revenue-sharing contracts. We solve for the optimal contract under these constraints. We find that allowing for revenue-sharing contracts increases the chance of outsourcing and improves economic efficiency. However, the principal may still find it optimal to choose a contract that allows the leakage to occur—a second-best outcome when leakage cannot be monitored or verified. Stronger protection of trade secrets can induce more R&D outsourcing without inhibiting technology diffusion and increase economic efficiency, as long as it does not significantly lengthen the product cycle.
KeywordsR&D outsourcing Principal-agent problem Fixed versus revenue-sharing contract
JEL ClassificationD21 O31 L14
Unable to display preview. Download preview PDF.
- Allen, B.: Design for Manufacturing. Unpublished Manuscript, University of Minnesota, Minneapolis, (2002)Google Scholar
- Balachandra R.: Outsourcing R&D. Northeastern University Working Paper #05-004, Evanston, (2005)Google Scholar
- Business Week: An Unseen Peril of Outsourcing, March 3 (2004)Google Scholar
- Hemphill, T.A.: US offshore outsourcing of R&D: accommodating firm and national competitiveness perspectives. Innov Manag Policy Pract 7, 351–356 (2005)Google Scholar
- Jones, R.W.: Globalization and the Theory of Input Trade. The MIT Press, Cambridge (2000)Google Scholar
- Milgrom, P., Roberts, J.: Economics, Organization and Management, chap. 6. Englewood Cliffs: Prentice-Hall (1992)Google Scholar
- Quinn, J.B.: Outsourcing innovation: the new engine of growth. Sloan Manag Rev 41, 13–28 (2000)Google Scholar
- R&D Magazine, January (2001)Google Scholar
- Shell, K.: Inventive activity, industrial organisation and economic growth. In: James, A.M., Stern, N.(eds) Models of Economic Growth, pp. 77–100. Macmillan, London (1973)Google Scholar