Why do firms outsource research and development for some products while they opt to conduct R&D in-house for similar ones? In our new paper, Sean Nicholson, June Pan, Michael Waldman and I argue that companies want to protect their existing product portfolio. If a firm already successfully operates in a given product category, it is more reluctant to relinquish control of the research and development of new products in order to limit cannibalization of their existing successful products.
We build a novel theoretical model and show that a firm is more likely to conduct R&D for a new product in-house if a.) the company already sells a product in the same product category, b.) the longer the patent on the existing product, and c.) the higher the market share of the existing product are. Data from the pharmaceutical industry strongly supports our findings. We control for various measures of competition and patent existence to exclude simple category specific expertise as an explanation.