Financing a central research laboratory: A tool of R & D subsidy policy

Abstract

Abstract. In this paper we discuss two major issues of financing a central research laboratory.First, the decision faced by the firm or the division whether to invest in its own laboratory or to rent compatible central laboratory services. The second issue is the price that a central laboratory should charge for renting out its facilities.Under the assumptions that a laboratory can serve a large number of users over a long period of time and thus diversify the risk of liquidation better than a single firm or division, we show that, under uncertainty, the rent for the central laboratory assets is less than the price that a firm is willing to pay for its usage. This surplus has interesting policy implications for the diversified firm that operates a central R & D laboratory for the use of its divisions and may wish to establish a transfer price system. Moreover, if the government finances a central laboratory to service industrial firms and it follows a policy of subsidizing industrial R & D, the surplus may be given to the user of the laboratory as a direct subsidy.