Organizing for moonshots

Abstract

What is the best way to organize innovation, especially high-risk, high-reward projects? We compare "acquire and develop," which focuses on building internal capabilities through M&A, and alliances, which involves cooperation among independent firms. Acquisitions can lead to integration problems, while alliances are subject to appropriability hazards. In equilibrium, alliances tend to be chosen when intellectual property rights (IPRs) are strong or projects are incremental, whereas acquisitions are selected for moonshots in weak IPR environments. The market exhibits in general a socially excessive level of alliance activity, as firms that integrate exert a positive externality on firms in alliances.

Keywords: Innovation, moonshots, acquisitions, alliances