Risk and vertical separation: the case of developing new technology

Vertical separation between research and development, called herein 'external development', is an increasingly important route to market for new technologies. In this paper we consider why firms sometimes prefer external to in-house development for their inventions, despite the costs of contracting and the risks of opportunistic behaviour and expropriation. We model the determinants of firms' choice of development pathway for their inventions using survey data from over 2,600 Australian inventions. Our results indicate that firms pursue collaborative development strategies in response to perceived project-level risk about the technical feasibility of the invention. Our findings also confirm that small to medium size enterprises; highly leveraged large firms; and firms with less experience patenting are more likely to pursue an external development strategy. Copyright 2013 Oxford University Press 2013 All rights reserved, Oxford University Press.