BOFIT Seminar - Travis Ng (The Chinese University of Hong Kong) - Do Weak Contracting Institutions Impede the Formation of R&D Alliance: Evidence from China.


We examine how weak contracting institutions affect R&D by testing whether they would impede the formation of R&D alliances. Relative to innovating on its own, forming R&D alliances allows a firm to reach out and leverage on others’ research capabilities. However, forming R&D alliances requires the sharing of private information among the partners. Weak contracting institutions make it hard to safeguard against the other partners from using private information in an opportunistic manner. Firms are thus less willing to form R&D alliances under weaker contracting institutions, a pattern that we find in our empirical analysis. The implications are that under weak contracting institutions, the private sector may over-engage in small-step incremental innovations and avoid basic research or innovations on products in relatively early stage. Start-ups or younger firms face greater difficulty in competing with the bigger and more established. Relative to regions with weaker contracting institutions, regions with stronger contracting institutions are, ceteris paribus, more likely to develop basic research or new products.


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