The Choice of Organizational Form for Collaborative Innovation

It is commonplace for firms to collaborate with others to gain access to technological components for innovation. This paper examines the choice of organizational form for such activities: when should a firm hire a technological expert as a temporary employee, transact through consulting spot markets, or engage in a long-term employment or supply relationship with the expert? Property rights theory is applied to examine the incentives and commitment created by different organization forms when the property rights of knowledge assets are incomplete. The model highlights the role of fallback options in sustaining socially efficient implicit contracts. Comparison of long-term employment and supply relationships shows that, contrary to received wisdom, an employment relationship is a less robust arrangement than a supply relationship in the presence of large knowledge spillovers. Nevertheless, the employment relationship is relatively more sustainable when there are complementarities between the parties’ cooperation investments. Empirical implications for structuring R&D and consulting arrangements are discussed.