Allocation of control rights to customised products: Empirical analysis of Finnish SMEs

Collaborative product development plays a pertinent role in many buyer-supplier relationships. It typically involves innovative components as the outcome of customisation and related R&D activities. The allocation of intellectual property rights (IPRs, e.g., patent, copyright, and trade secret) to collaborative output is a central aspect of buyer-supplier contracts. As IPR ownership provides the right to economically exploit and further develop an intellectual asset, they involve an incentive to allocate resources in asset development. Collaborative R&D usually involves contracting under uncertainty, as the precise outcome is not known at the time of contracting. Economic theory suggests that in pursuit of the optimal outcome, contracts allocate control right to the party whose investment is more critical in increasing output value. Firms’ relative bargaining power is another theoretical determinant of control allocation. This paper looks into Finnish buyer-supplier relationships producing IPRs as an outcome of a customisation process. With survey data on 302 suppliers, representing most industrial sectors, the importance of investment criticality and bargaining power in determining IPR allocation mode is estimated. The Finnish evidence implies that firms are concerned about the quality of project output, and thus allocate ownership rights according to relative resource contributions. Bargaining power seems to have, yet with reservation, minor impact on the allocation mode.