THE ROLE OF SUNK COSTS IN THE DECISION TO INVEST IN R&D*

We present a dynamic empirical model of a firm's R&D decisions that is consistent with the existence of sunk R&D costs, taking into account that these costs may differ between small and large firms, and among different technological regimes. We estimate a multivariate dynamic discrete choice model using firm‐level data of Spanish manufacturing for 1990–2000. Conditional on firm heterogeneity and serially correlated unobservable factors, we find that R&D history matters. This true state dependence allows inferring the existence of sunk R&D costs associated with performing R&D. Sunk R&D costs are found to be higher for large, high‐tech firms.     

FIRM HETEROGENEITY,IMITATION, AND THE INCENTIVES FOR COST REDUCING R&D EFFORT*

I develop and test a model of strategic R&D investments where innovating and non‐innovating firms compete on the basis of their ability to reduce costs and imitate rivals. I find that a larger proportion of non‐innovating rivals stimulates cost‐reducing investments and attenuates the disincentive effect of imitation by innovators on firm level R&D. Key model properties are verified by estimating the first order condition for the optimal choice of R&D, using the 1994 Carnegie Mellon survey of U.S. industrial R&D. Results also suggest that R&D and size are simultaneously determined, with R&D being proportional to size, as predicted by the theoretical model.     

International knowledge sourcing: evidence from U.S. firms expanding abroad

Recent research demonstrates that firms, motivated by national differences in technical activity, expand abroad to source unique knowledge. Extant research suggests that firms use a knowledge sourcing strategy to ‘catch up’ with competitors and to obtain ‘technical diversity.’ We widen the investigation by suggesting that firms also use knowledge sourcing as a springboard to reduce their next generation R&D costs–that firms would seek out similar R&D activity to combine with their own. Using unique data that encompasses the multitude of countries where U.S. firms invest, we test the importance of these explanations. Measuring knowledge via patent stocks, we find that country‐industries with larger stocks and greater technical similarity to the United States are more attractive. These findings suggest that an important explanation for firms investing abroad is not catching up or technologically diversifying, but is using similar R&D efforts of others to overcome fixed R&D cost hurdles. Copyright © 2008 John Wiley & Sons, Ltd.     

MARKET COMPETITION,R&D AND FIRM PROFITS IN ASYMMETRIC OLIGOPOLY*

We investigate a Cournot model with strategic R&D investments wherein efficient low‐cost firms compete against less efficient high‐cost firms. We find that an increase in the number of high‐cost firms can stimulate R&D by the low‐cost firms, while it always reduces R&D by the high‐cost firms. More importantly, this force can be strong enough to compensate for the loss that arises from more intense market competition: the low‐cost firms' profits may indeed increase with the number of high‐cost firms. An implication of this result is far‐reaching, as it gives low‐cost firms an incentive to help, rather than harm, high‐cost competitors. We relate this implication to a practice known as open knowledge disclosure, especially Ford's strategy of disclosing its know‐how publicly and extensively at the beginning of the 20th century.     

How Do Interaction Activities among Customers and between Customers and Firms Influence Market Performance and Continuous Product Innovation? An Empirical Investigation of the Mobile Application Market

Mobile application markets (MAMs) significantly differ from other existing marketplaces at least in two aspects. First, customers (app users) and firms (app providers) frequently interact with each other in real time, which is not common in the conventional marketplaces. Second, many app providers incorporate customers’ opinions or suggestions into their software upgrades, representing one of the most unique and interesting aspects of MAMs. Therefore, it has become critical to understand the impact of interaction activities not only among customers, but also between customers and firms on the market performances of new products in MAMs. One of the most significant issues firms face is whether firms reflect on customers’ postpurchase interaction activities, and the next interesting question is how firms respond to them. This study explores the effects of customer‐to‐customer (C2C), customer‐to‐firm, and firm‐to‐customer interaction activities on market performance. In addition, this study investigates how communication activities influence a firm's tendency to pursue continuous product innovation through research and development (R&D). Using data obtained from a major MAM, T store, three models that are respectively related to product sales, product lifetime, and a firm's R&D activity for product upgrades, are applied to empirically test hypotheses concerning the effects of interaction activities. In our analyses of market performance, a hierarchical log regression model with 10,840 weekly transactions data set related to product sales (model A) and 291 aggregate transactions related to product lifetime (model B) is used. Results indicate that C2C and customer‐to‐firm communication activities have a positive impact on sales, but little relationship with product lifetime. However, a firm's continuous product R&D has a positive impact on both sales and lifetime performance. Our analysis of a firm's R&D (model C) shows that C2C and customer–firm communication increases a firm's R&D activity. Taken together, these results have important implications for customer–firm interactions, market performance, and R&D strategies.     

Financing behaviour of R&D investment in the emerging markets: the role of alliance and financial system

This paper examines the financing behaviour of research and development (R&D) investments in emerging markets. Drawing on institutional theory and using panel data of generalized methods of moment estimation for a sample of 302 firms from 20 countries during the period 2003–2015, we find that emerging market firms tend to use internal funds for financing R&D investments. Interesting results emerged when the sample was divided as alliance and non‐alliance firms, and bank‐based and market‐based financial systems. The results show that R&D financing behaves differently for alliance and non‐alliance firms. Alliance firms use both internal and external funds for R&D investments, while non‐alliance firms do not use external funds. We also document that a country's financial system influences the choice of available sources of finance. Firms from countries that follow a bank‐based financial system tend to rely on external funds while firms from countries that follow a market‐based financial system depend more on internal funds for financing R&D investments. This study is important as it provides new evidence on financing R&D investments in emerging countries taking into account the institutional arguments of financing choices, and so should guide stakeholders about appropriate sources of R&D financing.     

Family Ownership and R&D Intensity in Small‐ and Medium‐Sized Firms

Research was largely consistent in predicting a negative relationship between family ownership and research and development (R&D) intensity until Chrisman and Patel, using a behavioral agency model (BAM), called this general assumption into question. They argued that publicly owned family firms typically invest less in R&D than nonfamily‐owned firms. This behavior may however be reversed if economic performance levels are below family aspirations or if family long‐term goals, such as pursuing strong transgenerational family control, are highly valued. While most researchers, like Chrisman and Patel, primarily focused on large listed firms, more research on the relationship between family ownership and R&D intensity in privately held small‐ and medium‐sized enterprises (SMEs) is required. This is because firm size can play an important role in understanding the innovation management behavior of firms. Building on the BAM perspective, in the present paper it is argued that Chrisman and Patel's results can be extended to the context of SMEs, albeit with one important specification: the relationship between family ownership and R&D intensity is likely to be contingent on the way the family has invested its wealth. Specifically, it is contended that in the context of SMEs, where goals are more fluid and mixed, when there is a high overlap between family wealth and firm equity (i.e., most of the family's wealth is invested in the firm) the relationship between family ownership and R&D intensity is negative because of the family owners' greater desire to protect their socioemotional wealth (SEW). However, if the overlap between the family's total wealth and single firm equity is low (i.e., firm equity is just a small part of the total family wealth), the relationship between family ownership and R&D intensity is positive as the low overlap between family wealth and firm equity reduces the family's loss aversion propensity. In such a situation, family ownership is likely to foster R&D intensity because of the long‐term orientation of family owners that increases the family firm's propensity to bear the risk of investing in R&D activities. The hypothesis is tested and confirmed in a study of 240 small‐ and medium‐sized firms based in Italy. The paper contributes to the literature in several ways. First, adding to the literature on innovation management and R&D intensity, it increases the understanding of what drives or inhibits R&D investments in SMEs when a family is involved in the ownership of the firm. This is particularly important because research on innovation management, as well as research on R&D intensity in family firms, is primarily focused on large firms and much less on SMEs. Second, the study complements arguments from prior research on the correlates of R&D intensity in large listed firms, showing that the BAM and SEW perspective offer a theoretical framework that is also able to illustrate the complex nature of innovation management in the context of SMEs. Third, the study contributes to research on the effects of family ownership on the general functioning of a firm. In particular, it provides new insights into how family ownership may affect R&D intensity.     

R&D Partnerships and Innovation Performance: Can There Be too Much of a Good Thing?

R&D collaboration facilitates the pooling of complementary skills, learning from the partner as well as the sharing of risks and costs. Research therefore stresses the positive relationship between collaborative R&D and innovation performance. Fewer studies address the potential drawbacks of collaborative R&D. Collaborative R&D comes at the cost of coordination and monitoring, requires knowledge disclosure, and involves the risk of opportunistic behavior by the partners. Thus, while for lower collaboration intensities the net gains can be high, costs may start to outweigh benefits if firms perform a higher share of their innovation projects collaboratively. For a sample of 2735 firms located in Germany and active in a broad range of manufacturing and service sectors, this study finds that increasing the share of collaborative R&D projects in total R&D projects is associated with a higher probability of product innovation and with a higher market success of new products. While this confirms previous findings on the gains for innovation performance, the results also show that collaboration has decreasing and even negative returns on product innovation if its intensity increases above a certain threshold. Thus, the relationship between collaboration intensity and innovation follows an inverted‐U shape and, on average, costs start to outweigh benefits if a firm pursues more than about two‐thirds of its R&D projects in collaboration. This result is robust to conditioning market success to the introduction of new products and to accounting for the selection into collaborating. This threshold is, however, contingent on firm characteristics. Smaller and younger as well as resource‐constrained firms benefit from relatively higher collaboration intensities. For firms with higher collaboration complexities in terms of different partners and different stages of the R&D process at which collaboration takes place, returns start to decrease already at lower collaboration intensities.     

The path of R&D efficiency over time

In this paper we investigate the pattern of R&D efficiency in terms of the number of product innovations achieved by firms over time. Using a panel dataset of Spanish manufacturing firms for the period 1990–2006, we follow the innovative performance of R&D active firms and observe that innovation rates change over firms' R&D histories. To explain these facts we propose a model that explicitly acknowledges the twofold composition of firms' R&D expenditures, comprising spending on both physical capital for R&D projects and payments to researchers. We regard this latter component of R&D as a source for dynamic returns to firms' R&D investments. Consequently firms' innovation outcomes clearly depend on how long they have been investing in R&D and also on whether there have been any interruptions in the temporal sequence of R&D activities. Our results suggest that R&D activities exhibit dynamic returns that are positive but at a decreasing rate, and that interruptions in R&D engagement reduce R&D efficiency.     

Market Orientation and R&D Effectiveness in High‐Technology Firms: An Empirical Investigation in the Biotechnology Industry*

There seems to be lack of consensus among informed scholars about the importance a of market orientation for high‐technology firms. This paper gives a comprehensive review of existing empirical studies on the relationship between market orientation and innovation performance and pinpoints two limitations in this research stream that might be at the origin of such controversy. First, extant research often overlooked key innovation outcomes for high‐technology firms, such as those related to research and development (R&D) performance. Second, organizational conditions that can ensure an optimal integration of market knowledge in the innovation process have been less analyzed in the case of these firms. Against this background, the present study contributes to the literature by providing a test of the effect of market orientation on R&D effectiveness and the moderating role of knowledge integration in this relationship, using a sample of Italian biotechnology firms. The study's objectives are addressed in two steps. The first one consists of an in‐depth qualitative study based on semistructured interviews in five biotechnology firms. The second step consists of a follow‐up survey of 50 biotechnology firms. Results from hierarchical multiple regression analysis show that the different dimensions of a market orientation have diverse effects on R&D effectiveness of high‐technology firms: whereas interfunctional coordination has a positive main effect, the effect of customer orientation is moderated by knowledge integration, and competitor orientation has no effect on R&D effectiveness. Post hoc analyses also show two additional results involving a broader set of dependent variables. First, R&D effectiveness mediates the effects of customer orientation and interfunctional coordination on organizational performance. Second, market orientation does not appear to significantly affect R&D efficiency. The present study contributes to current literature in two main respects. First, it adds to previous work on market orientation and innovation by proposing a new dependent variable—R&D effectiveness—which offers a better perspective to understand the impact of market orientation on innovation performance in high‐technology contexts. Second, while part of the current debate on the role of market orientation in high‐tech markets seems to be polarized by positions that sustain its potential drawbacks or, on the contrary, its advantages, this study's findings on the moderating role of knowledge integration shed light on important contingency factors, such as organizational capabilities. The authors discuss the study's limitations and provide directions for future research.     

The strategic dilemmas of innovative enterprises: proposals for high‐technology sectors

High levels of research and development (R&D) expenditure, pressure for innovation and the creation of new knowledge are features that distinguish high‐technology (high‐tech) enterprises from other, less technologically advanced, firms. Confronted with multiple contemporary approaches to strategy and turbulence in their environment, these enterprises make strategic choices continuously and dynamically. This paper proposes a model and matrix for the classification of high‐tech enterprises’ development strategies (with regard to their specific features), which are then verified. Qualitative research was conducted in 61 medium and large high‐tech companies based in Poland that operate either in Poland or in the global marketplace. The results show that high‐tech firms have the fundamental goal of developing R&D activity as a resource (and its redundancy) rather than product/market goals. The studied firms strive above all for leadership in innovation, creating new technologies based on their own R&D resources, while also using outside sources and mostly applying the personalisation approach in knowledge management. However, they choose different paths for product and market development, depending on the opportunities presented by the environment, and the firm's ability to identify and take advantage of these.     

Market Structure, R&D and Advertising in the Pharmaceutical Industry

Recent developments in the literature on market structure have allowed the generation of a few key testable predictions from the theory of strategic behaviour. The seminal model considers one simple but general relationship, that between market structure and market size, focusing on the competitive roles of endogenous sunk costs in the form of advertising and/or research and development (R&D). Evidence presented in this case study, building on earlier econometric work, shows that such endogenous sunk costs do play a crucial role in the formation of market structure in the global pharmaceutical industry.     

The impact of R&D‐specific factors on the attractiveness of small‐ and medium‐sized enterprises as partners vis‐à‐vis alliance formation in large emerging economies

This study examines the impact of research and development (R&D)‐specific factors in determining the likelihood of small‐ and medium‐sized enterprises (SMEs) from developed countries to be attractive partners vis‐à‐vis forming alliances with SMEs from large emerging economies (LEEs). This study is founded on the knowledge‐accessing theory of alliance formation, which emphasises the higher efficiency gains of knowledge application as opposed to knowledge generation. We extend this theory to SMEs on the basis that smaller firms, because of their resources constraints and drive to survive, are likely to use alliances to access external knowledge bases leading to new product development (NPD) opportunities because of the low feasibility of acquiring knowledge. As a mix of complex knowledge is necessary to develop most modern products and services, SMEs are also likely to adopt a more flexible operational approach and to accept compromises to forge knowledge‐accessing alliances. We illustrate this theoretical development using primary data collected from British and German biotechnology SMEs, declaring the intention prospectively to form alliances with their counterparts in Brazil. Binary logistic regression was used to identify the factors influencing the likelihood of a firm as an attractive alliance partner. Our results indicate that R&D‐specific factors influence the likelihood of firms to be attractive alliance partners. In particular, firms showing an in‐house innovation history focused on one or few products are more likely to be attractive alliance partners with LEE firms than those that do not. Another R&D‐specific predictor that enhances the chances of alliance partner attractiveness with LEE firms is the firm's focused searching and identifying capability relative to technology or equipment that demonstrates good prospects to improve the firm's line of products. A third predictor refers to the firm's awareness regarding non‐cost obstacles for its own technological development. Implications for policy makers and practitioners are also discussed.     

The Paradox of Openness: How Product and Patenting Experience Affect R&D Sourcing in China?

External R&D sourcing may help firms compete in an environment characterized by rapid technological changes. Yet, prior studies have produced conflicting findings on how a firm's technological experience affects the extent to which the firm engages in external R&D sourcing. Although many highlight that firms with extensive technological experience are equipped with more technological knowledge, collaborative skills, and absorptive capacity, encouraging greater levels of external R&D, others suggest the opposite due to potential exchange hazards and partnership conflicts. Adopting an external partner's perspective, the current study reconsiders this “paradox of openness” by analyzing how a focal firm's product experience and patenting experience affect an external partner's tendency to provide external R&D services to the focal firm. Specifically, this study explore how a focal firm's knowledge protectiveness and tacitness embedded in its product and patenting experience influences the external partners' motivation for knowledge transfer. This study predicts that a firm's product experience increases the focal firm's external R&D sourcing because it provides high levels of knowledge tacitness and external openness and can encourage external partners to share and exchange knowledge with the focal firm. In contrast, a firm's patenting experience decreases the focal firm's external R&D sourcing because it denotes knowledge explicitness and protectiveness and may discourage external partners to share and exchange knowledge with the focal firm. This study further predicts that patenting experience has a negative moderating effect on the relationship between product experience and external R&D sourcing. Using a data set of 575 high‐tech firms in China, this study finds support for our predictions. Our findings contribute to the growing literature on the knowledge‐based view and technology entrepreneurship in emerging markets.     

Knowing when to leap: Transitioning between exploitative and explorative R&D

A common perspective is that consistent R&D investment facilitates innovation, while volatile spending implies myopic decision making. However, the benefits to exploiting extant competencies eventually erode, so firms must disrupt their R&D function and explore for new competitive advantage. We suggest that high‐performing firms recognize when extant competencies decline and increase exploratory R&D to develop new competencies at the appropriate time. We find that changes in R&D expenditure away from the firm's historic trend, in either direction, are indicative of transitions between exploitative and exploratory R&D and are associated with increased firm performance. Increases in R&D expenditure above the trend are associated with an increased likelihood of highly cited patents, suggesting that firms are making the leap between R&D‐based exploitation and exploration. Copyright © 2013 John Wiley & Sons, Ltd.     

Are all ‘sharks’ dangerous? new biotechnology ventures and partner selection in R&D alliances

We examine how new biotechnology firms (NBFs) select pharmaceutical firms as R&D allies as a function of value creation and value appropriation considerations. We develop a theoretical framework to understand partnering decisions accounting for both, a potential partner's ability as well as incentives to appropriate and create value within an R&D alliance. Our empirical findings show that NBFs are more likely to ally with pharmaceutical firms with the ability to create value, as long as these firms have the incentives to use their skills to create rather than appropriate value. Our study highlights the double‐edged sword nature of value creation skills and provides a deeper understanding into the contextual factors that determine when potential R&D partners will perceive such skills as increasing appropriation risks. Copyright © 2012 John Wiley & Sons, Ltd.     

The Effects of Knowledge Depth and Scope on the Relationship between R&D Alliances and New Product Development

In this study, we extend the new product development (NPD) literature that proposes that firms' knowledge depth, defined as the reuse of well understood technical knowledge, and scope, defined as the use of newly acquired technical knowledge, and new knowledge accessed from R&D alliances all positively impact NPD. Building on the knowledge‐based view of the firm, we posit that the impact of firms' R&D alliances is limited when their internal knowledge depth and scope are adequate for NPD needs. We suggest that although firms form R&D alliances to gain the right to access external knowledge of R&D alliance partners, they are not obligated to invest in resources to integrate external knowledge from R&D alliances. We propose that they wait to see if their internal knowledge depth and scope prove sufficient for NPD. If the external knowledge proves to be unnecessary, firms choose not to invest the resources required to integrate this knowledge with their internal knowledge. Alternatively, we suggest an increased impact of R&D alliances on NPD when firms are more limited in their internal knowledge depth and scope. We propose that when knowledge depth and scope prove insufficient, firms make the additional investments required to integrate external knowledge from R&D alliances with their internal knowledge stock. This reasoning is consistent with real options theory as it has been applied in alliance research, where strategic alliances are characterized as real options. We find support for our hypotheses using panel data of 738 firm year observations for 143 U.S. biopharmaceutical firms operating in 2007. Our study contributes to the NPD literature and suggests new directions for future research.     

Allocation of inventive effort in complex product systems

This paper examines the allocation of inventive effort in complex product systems. I argue that complex product systems, e.g., personal computers (PCs), are distinguished by functional interaction among several components, each guided by a relatively autonomous bundle of technical and economic characteristics. I try to explore whether the dynamics of such interactions between components of complex product systems can help us understand changes in the relative allocation of inventive effort. I advance and empirically test three hypotheses: (1) emergence of component constraints (bottlenecks) in product systems will trigger research and development (R&D) investment to resolve the constraints; (2) slack component firms have a strong incentive to invest in resolving component constraints; and (3) the incentive of slack component firms to invest in resolving component constraints is increasing in their prior sunk R&D investments in slack components. In sum, I argue that interactions between components in a product system conditions the R&D incentives of firms and also that the incentives are increasing in their prior investments or capabilities. Using product reviews from technical journals, I trace the constraint components in the PC from 1981 to 1998 and attempt to predict shifts in the allocation of inventive effort in the subsequent period. The empirical results strongly support all three hypotheses. This study highlights the paradoxical effect of modularity in complex product systems. Modular design architectures, while contributing to accelerating the pace of technical change, also tend to limit the economic benefits of firms' component R&D efforts, especially when different components technologies are progressing at different rates. This often creates an impetus to enlarge the scope of firm R&D activities beyond the component product markets that firms operate in. Other implications for R&D decision making are discussed. Copyright © 2007 John Wiley & Sons, Ltd.     

研发与市场结构:基于成本视角的分析

本文从成本入手，探讨了研发与市场结构的关系。通过对平均成本、固定成本及知识特性的综合分析，认为由于技术复杂度的不断提高及研发带来的规模经济，在多数产业研发会导致市场集中度逐渐提高。通过对研发沉没成本的分析表明，在专利保护与许可证制度下，当研发导致的沉没成本比较小时，厂商数量较多的竞争性市场的福利好于寡占或垄断市场，因为其研发速度更快；反之，寡占或垄断市场的福利更好，因为研发的沉没成本得到了节约。在理论分析的基础上，本文就如何通过优化市场结构，提升我国企业研发能力，应对经济全球化的挑战，提出了三点对策。