Collaborative R&D as a Strategy to Attenuate Financing ConstraintsZEW Discussion Paper No. 12-049 // 2012
Underinvestment in research and development (R&D) due to financing constraints may result in a slowdown in productivity growth and consequently have particularly detrimental effects on technological progress, economic development and competitiveness. The question how firms encounter and deal with such constraints is a crucial one in economic analysis that has, however, received little attention so far.
Firms may develop strategies to attenuate the constraint for instance by creating signals to lenders and investors, finding ways to reduce resource requirements and to exploit economies of scale and scope in R&D. We argue in this article that collaborative R&D may not only increase incentives for investing in R&D by alleviating market failures stemming from incomplete appropriability of returns to R&D investment, but it may also be beneficial with respect to market failures associated with the financing of R&D.
R&D collaboration serves as such a quality signal to investors if the partner firm or institution possesses properties that increase the confidence with respect to successful projects outcomes. Being selected as desired collaboration partner is a quality signal in the sense that it is awarded by the partner. The partner is likely to be less prone to information asymmetries as he is engaged in related or complementary activities that allow a much more accurate assessment of the R&D project’s value than one made by a financial institution, for instance. In addition to the signaling effect, collaboration may simply reduce the riskiness of the R&D endeavor by the realization of scope economies that also reduce the amount of funds that needs to be raised. Firms may for instance have an incentive to source (complementary) knowledge from collaboration partners, to reduce the resources needed to build-up that knowledge on their own. Since R&D often exhibits economies of scale it might well be that only a consortium of firms has the necessary resources both financially and physically to undertake the larger, more complex, and more expensive research projects and synergetic effects and risk pooling can broaden the research horizon of collaborating firms. Strategic R&D collaboration may thus be especially useful in the early stages of an R&D project, in particular in the research phase, when uncertainty and information asymmetries are high.
Using firm-level panel data from the region of Flanders in Belgium and distinguishing between R&D and pure research projects, we find that collaborative research alleviates liquidity constraints. While we do not find such an effect of science-collaboration for R and D investment, looking at pure research investments shows that collaboration with science does indeed reduce the sensitivity of such research investment to internal funds. Moreover, we observe alleviating effects from horizontal collaboration for both for R and D as well as pure research investments. Vertical collaboration with customers or suppliers on the contrary has no such alleviating effects.
Czarnitzki, Dirk and Hanna Hottenrott (2012), Collaborative R&D as a Strategy to Attenuate Financing Constraints, ZEW Discussion Paper No. 12-049, Mannheim.