The Design of Vertical R&D Collaborations

Abstract

Suppliers play a major role in downstream firms' innovation processes. We analyze ownership allocations and the choice of technology in vertical research and development (R&D) cooperations. Given that R&D outcomes are not contractible, there is a trade-off between R&D specifically designed towards a manufacturer (increasing investment productivity) and a general technology (hold-up reduction). We find that in too few cases the market solution yields the specific technology. More intense product market competition shifts optimal ownership towards the supplier. The use of exit clauses increases the gains from the collaboration.

Keywords: Managing innovations, vertical R&D collaboration, choice of technology

JEL Classification: L22, L24, O31, O32