Should Firms Outsource their Basic Research? The Impact of Firm Size on In‐House versus Outsourced R&D Productivity

Abstract

It has been long known that firms can benefit substantially from basic research. Recently, however, the open innovation literature has questioned whether firms should conduct these basic research activities in‐house and has suggested that outsourcing is more appropriate both for small and large firms. However, existing empirical work investigates the performance implications of R&D outsourcing in general, but does not take into account the differences between basic research on the one hand and more applied R&D on the other. This paper therefore studies whether outsourced basic research indeed contributes equally to firm productivity as in‐house basic research, while explicitly incorporating the moderating effect of firm size. A production function approach is applied to firm‐level data stemming from three waves of the Flemish R&D survey, combined with data from firms' annual accounts. The results show that small firms benefit from outsourcing their basic research activities. For medium‐sized and large firms, however, in‐house basic research is more productive than outsourced basic research. These results contradict the general belief that small firms benefit little from basic research and cast doubts on the recent trend to close medium‐sized and large firms' corporate labs.