Effective Control Rights in Vertical R&D Collaboration

Abstract

Because of increasing technological complexity of new products, the manufacturers of final products more often seek access to external sources of knowledge at the early, market-distant stages of innovation processes. However, they are confronted with a specifically high danger of moral hazard. Traditional management instruments fail to control that danger mainly for two reasons. First, the supplier activities are not transparent. Second, market-distant R&D results are credence goods whose quality cannot be evaluated, not even ex post. It is the theory of incomplete contracts that solves the problem by allocating the so-called control rights to the supplier. These rights primarily regulate the assignment of the intellectual property rights, the control of the R&D process, and the marketing of the final products that are based on the delivered R&D results. To date, we do not have any empirical evidence about the relative effectiveness of these control rights. Moreover, studies on incomplete contracts in R&D alliances only focused on the collaboration between biotechnology and pharmaceutical firms. Our study fills these gaps. On the basis of a sample of French and German R&D suppliers, we find that only enforceable intellectual property rights assigned to the supplier effectively control moral hazard. a The direction of the responses was reversed prior to the analysis. M. KLOYER 464

Determinants of moral hazard in research and development supply relations: Empirical results beyond the agency‐theory explanation

“…Even ex‐post, the buyer firm cannot fully assess the quality of the supplier's intermediate or final knowledge output. It does not know whether the output is the result of the supplier's efforts or whether it is due to exogenous factors (Kloyer, ; Steinle et al, ).…”

“…Although these adaptations are necessary, they also provide latitude both to behave opportunistically and to renegotiate to their own advantage (Anderson & Narus, ), that is, to hold up (e.g., Klein, Crawford, & Alchian, ). In our case, it is the R&D buyer who could attempt to hold down the supplier firm's remuneration (Tirole, ); however, supplier firms anticipating buyer holdup can themselves become motivated to behave unethically (Kloyer, ; Kloyer & Scholderer, ). To compensate for potential losses due to anticipated holdup, the supplier firm could be motivated to withhold information or efforts intentionally.…”

“…Although both parties in an exchange relationship usually make a specific investment, it is the R&D supplier firm that must make higher transaction‐specific investments than the buyer firm, particularly at the beginning of the relationship (Kloyer, ). Transaction‐specific investments are both tangible and intangible investments that are of high value within a focal transaction (Williamson, , ).…”

Vertical Integration, Organizational Governance, and Firm Performance: Evidence from Italian Business Groups

“…This approach relies on the empirical identification of the degree of 'misalignment' between 'observed' governance choices made by firms and those predicted by TCE theory. Along this line, several papers investigate the relationship between 'observed' organizational choices and economic performance (Silverman et al, 1997;Mayer, 2000;Nickerson and Silverman, 2003;Yvrande-Billon and Saussier, 2005;Novak and Stern, 2008;Kloyer, 2011;Helm and Kloyer, 2004). Other papers examine the same relation at the macrolevel, by analyzing how the structure of vertical relations within an industry affects the survival rates or firms within the industry (De Figueiredo and Silverman, 2012;Argyres and Bigelow, 2007).…”

“… Kloyer () and Kloyer and Scholderer () examine the problem arising from adverse selection and moral hazard in the context of vertical R&D collaborations. Specifically, they look at the contractual mechanisms that can mitigate opportunism when R&D results are ‘distant’ from specific market applications.…”