R&D Outsourcing in the Biopharmaceutical Industry and its Effect on Firm Innovation

Open innovation literature shows that complementarity between external and internal technological components is crucial for firms to sustain innovation that deviates from existing technological trajectories. Most research considers that external technological assets and capabilities can be bought or accessed collaboratively. This paper introduces Contracting Development Manufacturing Organizations (CDMOs) as a distinctive form of outsourcing specialized R&D assets and capabilities on a per-use rental basis instead of collaborating or directly controlling them. Such outsourcing allows firms to control downstream development processes and retain control of the rents that accrue after successful commercialization. This division of labor allows firms to focus on their inventive internal process and simultaneously access diverse CDMO capabilities, enabling them to generate destabilizing innovations. However, excessive CDMO outsourcing will harm a firm’s ability to develop path-breaking innovations. We theorize and find empirical support for the idea that the reliance on CDMOs has an inverted U-shaped relationship with a firm’s ability to produce destabilizing innovation. We then examine three absorptive capacity-related contingencies, namely R&D centralization, intrafirm R&D collaboration, and the average R&D workforce experience as relevant moderators for this baseline relationship. We test our arguments in the context of the Biopharmaceutical industry and find overall support for our hypotheses.