The Research On The Governance Mechanism In R&D Outsourcing Of The Firm In View Of Incomplete Contract

R&D Outsourcing of the firm has become a very common phenomenon in many industries.However, in the process of R&D outsourcing, the firm is usually faced with the costs caused bycontractual incompleteness, non-appropriability of knowledge and imperfect substitution ofincremental innovation. Since it is so, then why does there exist a phenomenon of increasing R&DOutsourcing in several industries? We think that there must be a lot of governance mechanisms aimedat miligting the costs in the process of R&D outsourcing. Relying on these mechanisms, the firm islikely to resort to outside organizations for R&D and these mechanisms include organizational forms,contract design and the nation(state)-level and firm-level measures which protect intellectual propertyrights(these measures will affect the firm’s dicision of whether or not to oursource R&D more).Although the exsiting literature has given different explanations for the the phenomenon ofincreasing R&D outsourcing, it does not make a normative study in view of cost-governancemechanism. We have achieved the goal to a great extent by literature survey and model-constructing:we have integrated the latest theoretical and empirical lieterature and the relevant constructedtheoretical models through a cost-governance perspective and made a logic-consistant theoreticalsystem based on the theories of organization ecnonomics and the relevant characteristics of innovation.As for the question of what is selected as the reference point for further discussing, generally speaking,the incumbent firm in different industry is selected as the main reference point. Based on this, wefirstly examined the cost-characterisctics of R&D outsourcing and these characteristics includecontractual incompleteness, non-appropriability of knowledge and imperfect substitution ofincremental innovation. The firm then can decide whether to outsource R&D or not. If the firm decidesnot to outsource R&D, this corresponds to inernal R&D; if the firm decides to outsource R&D, thenwhat we should do is to examine the governance menchanisms which give support to the decision.As for the organizational forms which function as a governance mechanism, we examined theopticmal organizational forms through two kinds of firm theories in orgnization economics which arethe theory of incomplete contract and property rights and the theory of delegation. It is necessary tomention that the optimal organizational forms can be classified into the ones under the condition ofheterogeneous hypothesis and the ones under the condition of homogeneous hypothesis when it comesto the theory of incomplete contract and property rights. In the process of examining, we deemedinternal R&D as a special form of the optimal organizational forms in R&D outsourcing aiming atmaking discussing simper and deeper. Following this, we also examined the optimal organizationalforms in the context of dual-channel R&D outsourcing based on the theory of incomplete theory andproperty rights. In fact, this kind of examining constitutes our important theoretical modeling about theorganization of R&D. In the context of Dual-channel R&D Outsourcing, a monopolistic downstream firm can constitutethree kinds of organizational forms with one of the two competing R&D units: stand-alone whichmeans that the relevant R&D unit is a stand-alone, strategic alliance and integration. In the R&D race,the different organizational forms will affect another R&D unit’s decisions on whether to enterupstream market and how much capital to invest. Under stand-alone and strategic alliance, both asnon-integration, the downstream firm will face dual-channel R&D outsourcing, that is, the R&D unitswill enter upstream market both. As a result, integration will always dominate stand-alone in view ofthe downstream firm. Under integration, another R&D unit will not enter upstream market based onthe contractual incompleteness of the internal capital market, the firm will then face only a singleoutsourcing channel. As a result, integration will dominate strategic alliance if the uncertainty that thenew product faces is higher; strategic alliance will dominate integration if the uncertainty that the newproduct is lower because of the costs induced by contractual incompleteness that integration have. Inview of this, strategic alliance is a cost-governance mechanism aimed at contractual incompleteness.As for the contracts which function as governance mechanisms, we examined the contracts aimedat governing project cross-subsidization which corresponds to contractual incompleteness and thecontracts aimed at governing information leakage which corresponds to non-appropriability ofknowledge. In the process of designing the contracts, the points of designing do not lie in whether toinclude the elements that are not contractible into contracts, but lie in choosing the mechanism that canmake not enforcing moral hazards is self-enforcing for relevant parties. Based on this, the first kind ofcontracts above involves the allocation of control rights and and the payment from the principal to theagent, the second kind of contracts above mainly involves the payment from the principal to the agent.In fact, the contracts above can not necessarily miligate moral hazards of the agent, hence there isgreat room to perfect the contracts. It is necessary to mention that the above contracts are not sociallyefficient and the elements that lead to this can limit the formation the R&D outsourcing. In view of this,examining the measures protecting intellectual property rights which function as direct mechanismsand the relationship between the extent of protecting intellectual property rights and R&D outsourcingbecomes another important research task.Before discussing this, it is necessary to make further research on the contract design of R&Doutsourcing from special perspectives. First, we discuss the optimal allocation of general control rightsin the process of R&D oursourcing from a view of path-transforming in R&D. Second, we focus onthe optimal allocation of termination rights because termination rights functions as the most importantform of control rights: in fact, this kind of examining constitutes our important theoretical modelingabout the contract design in R&D outsourcing. The essence about the first topic is: as a contractor inthe process of R&D outsourcing, the agent will disclose the new R&D path to the third party if thenew path emerges. In order to prevent the possible behavior of the agent, the principal will allocate theoptimal control rights to himself at the beginning of R&D outsourcing. The more the control rights are,the possible disclosing behavior will be more effectively prevented and the more benefits the principlewill have, however, the more the control rights are, the more costs that the principal bear will be. As a result, the optimal control rights will be allocated based on the benefits and the costs. In the process ofallocating control rights, the optimal control rights that the principal retains will become more as thecontracts become more incomplete. Furthermore, different from the theoretical results of Lerner&Malmendier(2010), that the principal allocates optimal control rights will dominate that the principaldoes not allocate any control right. On the empirical level, empirical evidences do support theseresults.As for the second topic, the essence is: in the process of R&D outsourcing, the principal pursuescommercial goals, while the agent pursues academic goals, hence, the allocation of termination rightsbecomes important. If the academic extent of the lead compound that the agent screens is below athreshold, that is, the commercial extent of the lead compound that the agent screens is above athreshold, then the firm, which functions as a principal, will delegate the termination rights to theagent; if the academic extent of the lead compound that the agent screens is above a threshold, that is,the commercial extent of the lead compound that the agent screens is below a threshold, then the firmwill retain the termination rights. As the ratio of the implementing wage to the total value of the leadcompound becomes larger, the interval of the principal’s no-delegating will become narrower; whenthe ratio of the implementing wage to the total value of the lead compound is relatively small, theinterval of the principal’s delegating will becomes wider as the ratio becomes larger, however, whenthe ratio of the implementing wage to the total value of the lead compound is relatively large, theinterval of the principal’s delegating will becomes narrower as the ratio becomes larger. Theprincipal’s delegating is socially efficient, while the principal’s no-delegating is not necessarilysocially efficient: when the academic extent of the lead compound that the agent screens is very large,the principal’s no-delegating is not socially efficient. The same as the above topic, on the empiricallevel, the empirical evidence in reality also proves some theoretical results to a great extent.The forms protecting intellectual property rights can be classified into public-policy-levelmeasures which include patent, trade secrets, copyrights, trademark, etc and firm-level measures. In acommon sense, the stronger the forms protecting intellectual property rights become, the more the firmwill perform R&D outsourcing and the effective division of innovative labor will be realized.However，it is necessary to notice the following：although such measures can mitigate the problem ofinformation leakage to a certain extent, increasing the strength of protection of intellectual propertyrights does not necessarily induce firms to outsource their R&D more and the effective division ofinnovative labor will not necessarily be realized: under certain circumstances, weak protection ofintellectual property rights can induce more R&D outsourcing. In this sense, the relationship betweenthe extent of protecting intellectual property rights and R&D outsourcing remains a question worthfurther theoretical and empirical research and this becomes our future research topic: to a great extent,the role about our discussing about this topic is to provide an introduction to futher research. In fact,the process of becoming the relationship of R&D outsourcing is the process of the searching andmatching between the provider of technology and the demander of technology in the technologymarket. Hence, examining the effect brought by the strength of protection of intellectual property rights on the process of the searching and matching between the provider of technology and thedemander of technology from the perspective of the effective division of innovative labor will be atopic in future researching.Of course, as the expanding of this paper, further research does not only lie in the deeperdiscussing of this question and the questions concerning organizational forms and contract design, butalso lie in the grasping of several research directions such as R&D outsourcing in open economy. Asfor as the former is concerned, taking contract design as an example, how to govern the behavior of theagent’s disclosing the new R&D path to the third party through contract design and how to make theexplicit contract and the implicit contract help each other in order to slove the problems of the agent’smoral harzards more effectively, will be topics worth special discussing; as for as the latter isconcerned, bringing the discussing and their solving methods about the topics in the context of theemployer-employee into the context of the principal-agent of R&D outsourcing in order to provide themore effective methods to the similar topics of R&D outsoucing will be one researching direction onthe methodological level; examining the topic about the bi-sourcing in the context of R&D and R&Doutsourcing in open economy will be another researching direction on the material level.