How to Make a Research Collaboration Work

Interfirm research collaborations nowadays are a commonly-encountered reality in many sectors. Whereas they are usually acknowledged as potential sources of competitive advantage, they are also undeniably prone to disintegration and exposed to failure. When collaborations go awry, the blame is often placed on the limitations that are intrinsic to research contracts, but specific governance choices could also be relevant.

Indeed, recent results show that specific patterns of ownership and control play a significant role in determining the outcome of a research collaboration. In an article titled On the Contractual Governance of Research Collaborations: Allocating Control and Intellectual Property Rights in the Shadow of Potential Termination, which recently appeared on Research Policy (2011, Vol. 40, pp. 1403-1411, doi: 10.1016/j.respol.2011.06.012), Claudio Panico, an assistant professor at Bocconi University's Department of Management and Technology, tackles this issue studying the emblematic case of alliances between large pharmaceutical companies and a small biotech firms. Whereas the latter are usually cash-constrained and lack proper research and development capabilities, the former have greater financial possibilities and are often on the lookout for opportunities to access early-stage research. Alliance formation usually results in the drafting of extremely complex contracts, which include licenses, fees and, most importantly, a carefully delineated pattern of ownership and control.

To account for these specificities, the author develops a formal model of a research collaboration in which a pharmaceutical company contracts with a cash-constrained biotech firm. The research contract specifies a share of property rights, a share of control rights, and a payment that the pharmaceutical company must correspond to the biotech firm. The outcome (in terms of innovation development and its value) is uncertain, and the pharmaceutical company is not able to observe the actual effort poured by the biotech. The pharmaceutical company must be able design a contract so as to maximize its own profits while incentivizing the biotech to work hard and commit to the project. Depending on the share of property rights given out and on the alternatives both parties have to pursuing the collaboration, collaborations turn out to be either stable, potentially stable-i.e. they can be stabilized-or inherently unstable.

The model shows that if the pharmaceutical company anticipates that the relationship will continue in all possible contingencies, it will keep all property rights to the innovation for itself. Conversely, where termination risk exists, property rights over the innovation will be shared with the biotech to stabilize the relationship where possible. If instead stabilization is impossible, the pharmaceutical company will opt for a mixed governance mode which maximizes the probability of termination. The author's findings strengthen the link between governance choices and the stability of research collaborations and shed new light on the role of ownership and control in contract design.