Productivity and the role of complementary assets in firms' demand for technology innovations

This article uses data on transactions in the pharmaceutical industry to examine the demand-side of technology outsourcing. By integrating a transaction cost economics perspective with the analysis of internal R&D capabilities, we find that firms with relatively more cospecialized complementary assets or relatively strong internal R&D productivity have a lower propensity to source a technology from outside the firm. We show, however, that since downstream capabilities and internal R&D are complementary activities in the presence of asset specificity and transaction costs, a decrease in internal R&D productivity reduces the marginal value of the downstream assets within firm boundaries, thus stimulating the demand for external technology.