Mind the Gaps: How Organization Design Shapes the Sourcing of Inventions

Abstract

In their quest to sustain their innovativeness, firms pursue multiple inventions, with only a small proportion of them achieving fruition. In addition to the challenge of developing their inventions, firms also face the challenge of replenishing and maintaining the flow of inventions within their pipelines. This replenishment could be done via internally or externally sourced inventions through licensing, alliance or acquisition modes. Existing research has considered this decision to take place at the firm-level and the logic for decision-making at the transaction level. We integrate the incentive- and knowledge-based views of the firm to offer a new theory to explain this decision. Within our theory, we consider that firms may decentralize such decisions within specific R&D units and that the decision-making might operate at the pipeline-level rather than at the individual transaction level. This allows us to consider different sources of heterogeneity within firms’ decision-making processes, and show how organization design can have significant implications for firms’ invention sourcing. We explore our arguments using a novel dataset of firms’ invention sourcing decisions in the pharmaceutical industry between 1995 and 2015. We find that decentralized designs with multiple R&D units are associated with a higher proportion of externally sourced inventions. This difference is primarily driven by differences in the propensity to license, and for inventions of moderate novelty. Our findings highlight an important linkage between firms’ internal organization design and their sourcing of inventions, and in doing so, show how such decision-making is impacted by both managerial incentives and intra-organizational knowledge flows.