R&D Outsourcing and the Effectiveness of Intangible Investments: Is Proprietary Core Knowledge Walking out of the Door?

Intangible relationship-specific investments can be double-edged swords, as they facilitate not only the governance of business relationships but also undesired knowledge transfers. Building on transaction costs theory and the relational view of alliances, we analyse the effectiveness of these investments in R&D outsourcing agreements from the viewpoint of the client. We argue that, when outsourcing to business firms, the safeguards adopted by the clients to prevent spillovers may reduce the effectiveness of the supplier's specialized investments. Using original survey data from 170 European and US technology-intensive firms, we find that the contribution of these investments to client performance decreases the more a client's core knowledge is required to perform the service, except when outsourcing to non-profits. This suggests that as the appropriability hazards associated with outsourcing to business firms rise, the client is able to capture less value from the supplier's relationship-specific investments.