Integration and Competition for Innovation in Science-Based Industries

36 Pages Posted: 17 May 2018

See all articles by Tapas Kundu

Tapas Kundu

Oslo Business School, Oslo Metropolitan University; UiT the Arctic University of Norway

Seongwuk Moon

Sogang University

Date Written: April 24, 2018

Abstract

We develop a model for how innovation competition affects the organization of research activity and property-rights allocation in science-based industries. We consider a vertical production process with division of labor between research and commercialization. We analyze firms' incentive for integration in the presence of upstream innovation competition. Integration adversely affects integrated firms' R&D investment and creates positive externality for independent firms. For a sufficiently strong externality, a semi-integrated structure appears in equilibrium. Thus, the model can explain the coexistence of integrated and independent research firms and conforms to evidence of R&D competition in science-based industries. A non-integrated arrangement can sometimes appear in equilibrium although a semi-integrated arrangement has higher innovation probability and aggregate industry payoff, because parties that gain from integration cannot commit to compensate losing parties at the contracting stage. We analyze the effects of resource constraints and inter-customer licensing on industry structure and their implications for innovation competition.

Keywords: R&D Contest, Innovation, Vertical Integration, Science-Based Industry

JEL Classification: L22, O31, O32

Suggested Citation

Kundu, Tapas and Moon, Seongwuk, Integration and Competition for Innovation in Science-Based Industries (April 24, 2018). Available at SSRN: https://ssrn.com/abstract=3172719 or http://dx.doi.org/10.2139/ssrn.3172719

Tapas Kundu (Contact Author)

Oslo Business School, Oslo Metropolitan University ( email )

Pilestredet 35
Oslo, 0167
Norway

HOME PAGE: http://www.tapaskundu.net

UiT the Arctic University of Norway ( email )

Breivika
Tromsø, NO-9037
Norway

HOME PAGE: http://www.tapaskundu.net

Seongwuk Moon

Sogang University ( email )

Seoul 121-742
Korea, Republic of (South Korea)

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