Strategic organization of R&D: the choice of basicness and openness

Through a stylized model of the R&D process, we show how the strategic organization of R&D should simultaneously consider the choice of the type of R&D to be performed (basicness) and the organization of R&D, which includes the choice about the exposure of the R&D project to knowledge from outside the firm (openness). We identify how each of these decisions affects the expected benefits and costs (production, transaction and coordination costs) of R&D projects, and formally derive how these decisions interact. The fact that these decisions are customarily allocated to different agents with misaligned objectives pushes top management to strategically adjust the R&D strategy (i.e., the type of R&D performed)in order to affect the organization of the R&D project, an oftentimes decentralized decision taken by a project manager. From the model we develop several implications for theory, explain some observed empirical regularities in the management of R&D, and derive novel testable implications.