The effect of early or late R&D inbound alliance on innovation

Abstract

In the research-and-development (R&D) supply chain, firms can agree an inbound alliance at different times along the R&D process; this decision affects the supplier's effort and the innovation that firms achieve at the end of the agreement. Because the supplier's effort is not entirely observable, firms cannot enforce effort contractually. Early contracts demand greater effort and offer risk-sharing opportunities; in late contracts suppliers have a stronger ex-ante bargaining-power position because of the shorter (and less risky) contract length and the experience suppliers already have. This study argues that later inbound alliances allow a higher innovation value when both partners exert maximum effort and the partner in charge of the explorative burden of the research wants to maximize the payoff and a Cobb–Douglas's research production function links partners efforts (inputs) with innovation (output).