The Ownership and Financing of Innovation in R&D Races

54 Pages Posted: 23 Apr 2003

See all articles by Paolo Fulghieri

Paolo Fulghieri

University of North Carolina Kenan-Flagler Business School; European Corporate Governance Institute (ECGI)

Merih Sevilir

Indiana University - Kelley School of Business - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 2003

Abstract

This paper develops a theory of the organization and financing of innovation activities where integration, venture capital financing, and strategic alliances emerge as optimal responses to competitive pressures of the R&D race, research intensity of R&D projects, the stage of the research and product development, and the severity of the financial constraints. We model the relationship between a research unit and its downstream firm in the context of a R&D race with a competing pair. We show that the choice of organization and financial structure of R&D plays a strategic role by committing a research unit and its downstream firm to an accelerated R&D activity. We find that integrated organization structures are more likely to emerge when R&D projects have low research intensity, competition in the R&D race is more intense or the R&D cycle involves late-stage research, and when the research unit is financially constrained. Non-integration and independent venture capital financing are more likely to emerge when R&D projects have high research intensity, when competition in the R&D race is less intense or the R&D cycle involves early-stage research, and when the research unit is not financially constrained. Finally, corporate venture capital and strategic alliances are more likely to emerge when competition in the R&D race is more intense, the R&D cycle involves late-stage research, and when projects have high research intensity.

Keywords: R&D races, financing, venture capitalists, vertical integration

JEL Classification: G24, L22, O32

Suggested Citation

Fulghieri, Paolo and Sevilir, Merih, The Ownership and Financing of Innovation in R&D Races (April 2003). ECGI - Finance Working Paper No. 18/2003. Available at SSRN: https://ssrn.com/abstract=397500 or http://dx.doi.org/10.2139/ssrn.397500

Paolo Fulghieri (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Merih Sevilir

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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