The Role of R&D in Defining Governance Mode for External Technology Sourcing

Abstract

This study examines the effect of internal R&D efforts on the choice of governance mode when sourcing external technology. Firms have increasingly relied on external technology sourcing to compete in fast-paced environments. With technology being more complex than ever, it has become costly to evaluate the commercial potential of new discoveries. Consequently, firms have had to deal with higher amounts of uncertainty. Internal R&D efforts have been associated with increasing one’s ability to identify, comprehend and assimilate external knowledge and thus lower the perceived uncertainty. Combining the contrasting views of transaction cost economics and real option theory regarding the treatment of uncertainty, we hypothesize on the subsequent role R&D plays in influencing the choice of governance. Based on a sample of transactions from the electric utilities industry, we find no significant effect of R&D spending on the choice of governance mode. Following a discussion of the results and methodology, we propose alternative explanations as well as suggestions for future research and theory development.