Scale, Appropriability Conditions, and the Organisations of R&d

This paper extends the analysis of the choice between internal and external R&D to consider the costs of internal R&D. The underlying hypothesis is that the choice of R&D mode is determined by their relative costs. Rather than merely estimating a reduced form probit model for R&D mode, we employ the Heckman two-stage estimator to estimate in addition the determinants of internal R&D unit cost (i.e. cost per 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. We also allow for transaction costs arising from the highly uncertain and incomplete nature of contracting encountered in research activities. In addition, consideration is given to issues of appropriability which influence the choice of R&D mode without affecting the unit cost of internal or external R&D, i.e. factors affecting the likelihood of dissipation of rents accruing from R&D activity. The model is tested on data from a sample of over 500 innovating UK manufacturing plants. The key determinants of R&D mode are the scale of plant and R&D input, and appropriability 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.