Innovation via Inter-Firm Collaboration: The Role of Partner Organizational Design

Abstract

Firms are increasingly leveraging external knowledge to facilitate their innovation. However, accessing the required knowledge within partner firms may be challenging due to how partners are structured. Yet, we currently have a limited understanding of how firms’ innovation outcomes may be influenced by partners’ organizational structures. We investigate this in the context of relationships between established firms and startups that arise from corporate venture capital investments. Using the theoretical lens of knowledge search and access costs, we argue that centralization of Research and Development (R&D) of the established firm is associated with lower search costs associated with startups finding the relevant knowledge. However, decentralization of R&D is associated with lower access costs in leveraging the located knowledge due to the more effective usage of higher powered incentives to share information within the established firm. We examine this theoretical tension within the context of the global pharmaceutical industry through 496 startup- established firm partnerships. We find that, on average, search costs outweigh access costs, thus R&D centralization of the established firm is associated with superior startup innovation outcomes. We also find that search costs increase with the diversity of the established firm’s knowledge base making centralization of R&D even more beneficial for startups. Finally, we find centralized R&D structures to be most beneficial when the level of market overlap between the firms is moderate due to a trade-off between the absorptive capacity of the startup and competitive pressures between the firms limiting the degree of knowledge sharing increasing access costs.