The Boundary Evolution of Start-up R&D Firms

Abstract

This paper examines how start-up R&D firms shape organizational boundaries and evolution under the influence of upstream technological uncertainty and internal complementary capabilities. Start-up R&D firms are often located in the upstream industry value chain. Upstream technological uncertainty and internal downstream and fund-raising capabilities may affect their boundaries. This article integrates insights from property rights, complementary capability and real options to explore firm boundary choices, including equity-based property rights sharing (initial public offering (IPO) and equity property-rights shared licensing), and vertical and horizontal boundary expansion (equity property-rights shared vertical or horizontal mergers and acquisitions). We argue that equity property rights sharing may be regarded as a source of fund-raising and partnership incentives to obtain complementary capability for reducing uncertainty. Under high upstream technological uncertainty environment, start-up R&D firms without complementary capabilities may share their minority equity-based property rights to raise capital through an IPO and tend towards minority equity property-rights shared licensing. As technical and internal downstream uncertainty is decreased, R&D firms may shift from vertical integration to complementary horizontal boundary expansion through equity property rights shared mergers (horizontal merger of equals). Furthermore, R&D firms may gradually create their innovation ecosystem to develop into global corporations. The evolution of R&D firm boundary is exemplified by Biogen Idec, Gilead Sciences, and Genentech, the top three biopharmaceutical firms around the world.