The Ownership and Financing of Innovation in R&D Races

Abstract

This paper develops a theory of the organization form and financing of innovation activities where integration, venture capital financing, and strategic alliances emerge as optimal responses to competitive pressures of the R&D race, the stage of the research and product development, and the severity of the financial constraints. We model the relationship between a research unit and its downstream firm in the context of a R&D race with a competing pair. We show that the choice of organization and financial structure of the R&D activity plays a strategic role by committing a research unit and its downstream firm to an accelerated R&D activity. We find that integrated organization structures are more likely to emerge when the downstream firm is more productive than the research unit, competition in the R&D race is more intense or the R&D cycle involves late-stage research, and when the research unit is financially constrained. Non-integration and independent venture capital financing are more likely to emerge when the research unit is more productive than the downstream firm, when competition in the R&D race is less intense or the R&D cycle involves early-stage research, and when the research unit is not financially constrained. Finally, corporate venture capital and strategic alliances are more likely to emerge when competition in the R&D race is more intense, the R&D cycle involves late-stage research, and when the productivity of the research unit is high.