Acquiring Knowledge Within and Across Firm Boundaries: Evidence from Clinical Development

Considerable evidence suggests that information is acquired more easily within than across firm boundaries. I explore why this is observed in the setting of clinical development. Since the mid-1980s, pharmaceutical firms have partly contracted out the operational aspects of clinical trials to Contract Research Organizations (CROs). Using detailed project-level data for 53 firms, I document that even after controlling for a number of alternative explanations, knowledge-intensive projects are more likely to be assigned to internal teams, while data-intensive projects are more likely to be outsourced. The statistical exercise is complemented by in-depth interviews with six pharmaceutical and biotechnology firms. The qualitative evidence confirms that incentives for knowledge and data production are more easily kept in balance in the firm's own internal labor market than in that of its suppliers. Moreover, firms use relational contracts to ensure that their employees' incentives are both balanced and relatively high-powered.