Outsourced R&D and Declining R&D Productivity
Posted: 3 Apr 2016 Last revised: 1 Jun 2021
Date Written: May 28, 2021
There has been a six-fold increase in the share of firms’ R&D that is outsourced to other organizations. This rise coincides with a 65% decline in firms’ R&D productivity. I examine whether the two are related. The reason to expect outsourcing to reduce productivity is that R&D produces an externality—knowledge accumulation. When R&D is outsourced, that knowledge accumulates at the performing firm rather than the funding firm. Results confirm expectations. I find that on average, outsourced R&D is unproductive for the funding firm—its output elasticity is zero. This result is robust to controls for the type of firms who outsource, and the type of projects they outsource. Moreover, neither the productivity of outsourced R&D nor internal R&D has changed over time. Thus the 65% decline in R&D productivity appears to stem from substantial reallocation of R&D away from internal execution to outsourced execution, rather than fundamental decline in firms’ R&D capability. This is good news. It suggests firms can restore their R&D productivity, and thereby revive growth, by gradually insourcing R&D.
Keywords: R&D, outsourcing, productivity, growth
JEL Classification: O32, L25
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