Internalization of R&D outsourcing: An empirical study

From the absorptive capacity perspective, this study investigates the extent to which a firm that uses external knowledge attained through R&D outsourcing can increase its performance, and how this effect is moderated by a firm's absorptive capacity via internal R&D efforts and organizational composition of the firm's R&D division. More specifically, we use R&D intensity, a traditional measure of absorptive capacity, and five variables of organizational composition to measure their moderating effect between R&D outsourcing effort and the firm's resulting performance. We use a fixed-effect model to analyze panel data from 19,570 Korean manufacturing firms between 2002 and 2007. Our findings show that the intensity of R&D outsourcing in high technology industries has a direct and positive effect on a firm's performance. We also identify the differences between high- and medium/low-technology industries and analyze how having an R&D staff of highly skilled researchers can moderate the effect of R&D outsourcing on a firm's performance. We find that for high-technology industries, R&D outsourcing is strongly associated with a firm's positive performance when the ratio of researchers with Ph.D. degrees in R&D organization is high. However, in low-technology industries, our study indicates that while the ratio of researchers in R&D to R&D staff has a direct effect on firm performance, it does not actually moderate the effect of R&D outsourcing on firm performance. We provide an interpretation of these empirical findings, emphasizing the importance of a firm's absorptive capacity via organizational composition of the R&D division in maximizing R&D outsourcing results.