Designing Collaborative R&D Contracts for Innovative Performance

Abstract

Strategic management scholars have long emphasized the importance of innovation for a firm's competitive advantage. While firms have looked to interfirm collaborations as a common way to achieve innovative performance, R&D partnerships often fail to meet their expectations. The literature on interfirm collaborations has found that the design of the contract is a significant factor in explaining transaction outcomes. Thus, to understand why R&D partnerships fail or succeed it is important to examine the design of the contract. This paper seeks to develop a framework to better understand how elements of the design of the contract may impact the performance of R&D collaborations. Using the literature on innovation and R&D, the paper identifies management and interfirm relationship factors that can enhance or inhibit innovation that are likely to be affected by contract design. The paper then uses the literature on interfirm contracts to identify the control and coordination provisions of contracts that are highly pertinent to understanding interfirm behavior and outcomes, and augments it with recent research on contract framing to identify how certain provisions can play additional roles by psychologically impacting the exchange and ongoing relationship between firms. Finally, the paper integrates these two literatures streams and develops a framework and a set of propositions for understanding how contract design elements impact innovative performance through their effect on the management and interfirm relationship factors that enhance or inhibit innovation in R&D collaborations.