Boundary of the Firm, Commitment, and R&D Financing
Posted: 26 Jan 1999
Date Written: July 1999
A theory is provided to establish that the allocation of a firm's boundary is conditioned on the financial institutions and on the features of R&D. We show that if a firm does not own a project but finances it externally jointly with other financiers, informational asymmetries and conflicts of interest among co-financiers can be used as a commitment device to stop bad projects; however if a firm owns a project the commitment device will be lost. A general message of our theory is that having a full ownership over an asset may be costly since it can destroy the owner's commitment capacity. But on the other hand, non integration may incur other costs. Thus, at equilibrium with developed financial institutions, large firms do not integrate with high uncertain R&D projects; rather they integrate with low uncertain R&D projects. However, in a financially underdeveloped economy, non integration is often too costly to be chosen regardless of uncertainties of R&D projects.
JEL Classification: O31, O32
Suggested Citation: Suggested Citation