Determinants of R&D Boundaries of the Firm: An Empirical Study of Commissioned R&D, Joint R&D, and Licensing with Japanese Company Data

This paper studies the determinants of R&D boundaries of the firm, namely, the firm’s choice between performing R&D in-house versus procuring it from outside. We separate three modes of ‘procured R&D’, namely, commissioned R&D, joint R&D, and technology acquisitions (i.e., licensing-in), and, using the data of about 14,000 manufacturing firms in Japan, estimate the determinants of each mode. Two novelties are incorporated in this analysis. First, because the majority of the sample firms do not perform any R&D activity at all, we estimate a modified two-hurdle model with the first hurdle being whether the firm performed any R&D and the second hurdle being whether (and how much) it performed each mode of procured R&D. Second, based on the two major theories of the boundary of the firm, that is, the transaction cost theory and the capability theory, we employ firm variables and industry variables (weighted with the firm’s sales composition) as independent variables. The results generally support the two theories: the estimated positive impact of firm size, in-house R&D intensity, diversification, and vertical integration supports the hypothesis that capability is needed for procured R&D, while the estimated positive effect of the index of appropriability by patents supports the hypothesis that appropriability reduces transaction costs.