Behind the Scenes: Sources of Complementarity in R&D


  • We thank Rajshree Agarwal, Kazuhiro Asakawa, Dan Breznitz, Annamaria Conti, Ronnie Chatterji, Chris Forman, Alfonso Gambardella, John Haltiwanger, Magnus Holmén, Keld Laursen, Anne Miner, Alex Oettl, Maija Renko, Daniel Spulber, Marie and Jerry Thursby, Arvids Ziedonis, seminar participants at Georgia Tech, CCC doctoral consortium (MIT), Academy of Management annual meeting, DRUID conference, and Trans-Atlantic Doctoral Conference (London Business School) for helpful comments and suggestions. We are indebted to Deloitte ReCap for access to their data. We also thank IMS Health Incorporated for their generous support and access to their data. The statements, findings, conclusions, views, and opinions contained and expressed herein are not necessarily those of IMS Health Incorporated or any of its affiliated or subsidiary entities. The statements, findings, conclusions, views, and opinions contained and expressed in this article are based in part on data obtained under license from the following IMS Health Incorporated or affiliate information service(s): IMS MIDAS, June 1997 to December 2008, IMSA Health Incorporated or its affiliates. Higgins acknowledges support from The Imlay Professorship. Ceccagnoli acknowledges funding from the Kauffman Foundation—Roadmap for an Entrepreneurial Economy. Palermo acknowledges funding from the Kauffman Dissertation Program Fellowship. Authors are listed alphabetically and the usual disclaimers apply.


Management consultants increasingly recommend that internal R&D be outsourced; however, little is known about the substitution or complementarity between internal and external R&D. Through structural estimation of a flexible innovation production function we provide a deeper understanding of firm-level drivers of complementarity between these two types of investments. Our analysis is based on a unique panel data set on the R&D and in-licensing expenditures of pharmaceutical firms. Our results suggest that internal R&D and in-licensing are neither complements nor substitutes. We find that the degree of complementarity is enhanced for firms with stronger absorptive capacity, economies of scope, and licensing experience.