R&D Performance, Collaborative Arrangements and the Market for Know-How: A Test of the "Lemons" Hypothesis in Biotechnology

Abstract

This paper examines the relative performance of vertically integrated projects versus collaborative projects in the bio-pharmaceuticals industry. Using Akerlof's (1970) model of the impact of asymetric information on quality, this paper suggests that a potential "lemons" problem exists in the market for know-how. It hypothesizes that projects with poorer prospects for reaching the market tend to be licensed to collaborative partners while those with better prospects are commercialized internally. This hypothesis is tested with data on 260 bio-pharmaceutical projects that have either been successfully completed or terminated in progress over the past 10 years. After controlling for a variety of factors, the paper shows evidence of an apparent "lemons" problem in the market for know-how in biotechnology: the rate of termination for partnered projects is significantly higher than the failure rate of projects undertaken via vertical integration. Further empirical analysis also suggests that the higher rate of failure of partnered projects is attributable to ex-ante project selection biases rather than differences in ex-post execution of partnered versus non-partnered projects. Implications for technology strategy and future research are discussed.

JEL Classification: L19