R&D outsourcing and intellectual property infringement

Highlights

• We empirically address value appropriation hazards when firms enter into external relationships in search for innovation.

• Using firm-level data from Germany we document a positive link between R&D outsourcing and intellectual property infringement.

• In line with theory we show that this effect varies with the market value of knowledge, and the allocation of property rights.

• Implication for managers: increasing the specificity of outsourced tasks can lower imitation risks.

• We discuss how outsourcing induced spillovers may foster technology diffusion, affecting industry evolution and market structure.

Abstract

We empirically address value appropriation hazards when firms enter into external relationships in search for innovation. Using firm-level data from Germany we document a positive link between R&D outsourcing and intellectual property infringement. In line with theory we show that this effect varies with the market value of knowledge, and the allocation of property rights. We discuss how outsourcing induced spillovers may foster technology diffusion, affecting industry evolution and market structure.

Introduction

In this paper we empirically address value appropriation hazards when firms enter into external relationships in search for innovation (Grimpe and Kaiser, 2010, Martinez-Noya et al., 2013, Laursen and Salter, 2014).

Picturing vendors as “bees cross-pollinating between firms, carrying experiences and ideas from one location or context into another” (Bessant and Rush, 1995: 102), it has been argued that outsourcing allows firms to substitute for a lack of internal resources that are essential to keep pace with competitors (Laursen and Salter, 2006, Weigelt, 2013). Complementarities between internal and external knowledge are additionally able to enhance the productivity of internal knowledge (Cohen and Levinthal, 1989, Arora and Gambardella, 1990, Cassiman and Veugelers, 2006). In support for such an argumentation, a growing empirical literature finds a positive link between outsourcing and innovation performance (Grimpe and Kaiser, 2010, Görg and Hanley, 2011, Bertrand and Mol, 2013).

However, a prerequisite to benefit from knowledge spillovers ex-post, is often to ex-ante transfer firm-specific knowledge to the vendor (Bönte and Wiethaus, 2007, Laursen and Salter, 2014). This creates a trade-off that is similar to the inventor's dilemma in the classical work of Anton and Yao (1994): Disclosing information about the invention to a potential buyer increases the buyer's willingness-to-pay, but also increases the risk that the buyer uses this information to imitate without compensating the inventor. The analogy of a ‘paradox of openness’ (Laursen and Salter, 2014) in the context of our paper is the following. Without disclosure, the vendor has too little information to perform in the client's best interest (Bönte and Wiethaus, 2007), while disclosure puts the vendor into the position to resell knowledge to the client's competitors or directly enter the market (Baccara, 2007, Lai et al., 2009).

In this vein, a first contribution of this paper is to document the existence of non-negligible appropriability hazards put forward in the theoretical literature. Using data from the German part of the European Community Innovation Survey, we show that there is a link between research and development (R&D) outsourcing and intellectual property (IP) infringement.

A second contribution is that we show how firms manage appropriability hazards without losing the benefits of external collaboration. We do this by investigating how and for what types of firms and what types of IP the risk of infringement changes conditional on R&D outsourcing. Specifically, we distinguish between infringement of inventions, designs and products, and compare differences in how firms manage outgoing spillovers by allocating property rights either formally (patents, design patents, trademarks and copyright) or strategically (partnering with competitors).

We show that the effect of R&D outsourcing on infringement is stronger concerning generic than firm-specific IP. Hence, spillovers are more likely in early (less firm-specific) stages of product development. This suggests that firms can use the specificity of outsourced tasks to balance risks and benefits of R&D outsourcing. Our results further suggest that the allocation of property rights can reduce spillovers. First, in contrast to vertical outsourcing relationships, we do not find evidence for infringement in horizontal outsourcing relationships. Second, we show that formal IP protection reduces the infringement risk conditional on outsourcing. However, efficacy of formal protection mechanisms is limited, especially in sectors that typically produce products for which standard IP protection mechanisms are not applicable.

Moving away from the perspective of the individual firm, we further discuss broader welfare implications of our findings using examples from the chemical industry and consumer electronics. We argue that outsourcing-induced spillovers may foster technological diffusion (Attewell, 1992, Antonelli, 1998), which affects industry evolution and market structure (Arora and Gambardella, 1998) and has the potential to enhance long-run economic growth (Romer, 1990, Grossman and Helpman, 1994).

We aim to contribute to a broad literature that has made important progress in the study of inter-firm knowledge transfer (Dahlander and Gann, 2010), including recent work on the internationalization of R&D (Schmiele, 2013), co-patenting (Belderbos et al., 2014) and cross-licensing (Grimpe and Hussinger, 2014).