Research Joint Ventures: The Role of Financial Constraints

TL;DR

This paper develops a new theory explaining how research joint ventures (RJVs) benefit financially constrained firms by coordinating R&D efforts, reducing costs, and increasing innovation, especially under weak market competition and poor financing conditions.

Contribution

It introduces a novel theoretical framework for RJVs that highlights their role in improving innovation and reducing costs for financially constrained firms, contrasting with mergers.

Findings

RJVs can increase innovation probability and reduce total R&D costs.

RJVs improve consumer surplus and can be profitable.

The effectiveness of RJVs depends on market conditions and financing environment.

Abstract

This paper provides a novel theory of research joint ventures for financially constrained firms. When firms choose R&D portfolios, an RJV can help to coordinate research efforts, reducing investments in duplicate projects. This can free up resources, increase the variety of pursued projects and thereby increase the probability of discovering the innovation. RJVs improve innovation outcomes when market competition is weak and external financing conditions are bad. An RJV may increase the innovation probability and nevertheless lower total R&D costs. RJVs that increase innovation also increase consumer surplus and tend to be profitable, but innovation-reducing RJVs also exist. Finally, we compare RJVs to innovation-enhancing mergers.