Allocation of Control Rights to Intellectual Assets in Business Service Transactions: Implications for Innovation

This empirical study of business service firms examines the dynamic effects of control rights to intellectual assets. Focusing on firms’ knowledge resources I ask whether the allocation of control rights affects innovation outcomes. Findings suggest, first, that the allocation of rights to intellectual assets between a service supplier and its client indeed has innovation implications: Service suppliers who retain control of their own intellectual output are more innovative. Therefore, in long term relationships, client firms should balance their desire to control outsourced activities with the suppliers’ incentives to invest in incontractibles such as learning and innovation. Second, business service firms are more likely to innovate if their internal knowledge resources are organizationally, or collectively, controlled, as opposed to controlled by individual experts. It is suggested that organizational control of knowledge supports R&D investments, and sharing and combination of knowledge within the firm, both of which are regarded as prerequisites for innovation.