Balancing allocative and dynamic efficiency with redundant R&D allocation: The role of organizational proximity and centralization

Abstract

AbstractResearch SummaryResource‐based‐view scholars have mainly examined two resource allocation approaches for competitive advantage in multiunit firms: resource sharing and resource redeployment. These approaches emphasize allocative efficiency—the optimal allocation of resources to maximize their current value. In technology‐intensive industries, firm success also requires achieving dynamic efficiency to increase its future value‐creation. We propose that the redundant allocation of resources—the parallel deployment of non‐scale‐free resources towards the same objective—although allocatively inefficient, increases dynamic efficiency by stimulating inter‐unit competition. Firms' structural features moderate these effects. An analysis of large pharmaceutical firms reveals that redundant R&D increases innovations with high firm‐specific value but simultaneously increases project terminations to reduce wastage. Organizational proximity increases the former effect and decreases the latter. Firm's R&D centralization amplifies the effect of unit proximity.Managerial SummaryIn technology‐intensive industries, multiunit firms often employ redundant allocation of R&D resources, that is, the parallel deployment of scientists and equipment in different units towards realizing the same business objective. Although common, there is little managerial guidance on how this practice impacts firms' R&D outcomes, and how organizational characteristics influence this relationship. An analysis of large pharmaceutical firms reveals that redundant allocation of R&D resources across units increases wastage but also stimulates competing units to create innovations with high firm‐specific value. Organizationally proximate units are less likely to have their redundant projects terminated, while creating more high‐value‐innovations. Centralization of the firm's R&D amplifies the effect of unit proximity.