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Make, Buy, Organize: The Interplay Between Research,
External Knowledge, and Firm Structure
Ashish Arora
y
Sharon Belenzon
z
Luis A. Rios
x
December 11, 2012
Abstract
We bridge current streams of innovation research to explore the interplay between
R&D, external knowledge, an d organizational structure–three elements of a …rm’s inno-
vation strategy which we argue should logically be studied together. Using within-…rm
patent assignment patterns, we develop a novel measure of structure for a large sample of
American …rms. We …nd that centralized …rms invest more in research and patent more
per R&D dollar than decentralized …rms. Both types acc ess technology via mergers and
acquisitions, but their acquisitions di¤er in terms of frequency, size, and integration. Con-
sistent with our framework, their sources of value creation di¤er: while centralized …rms
derive more value from internal R&D, decentralized …rms rely more on external knowl-
edge. We discuss how these …ndings s hould stimulate more integrative work on theories of
innovation.
Keywords: decentralization, organizational structure, mergers and acquisitions, patents,
R&D, market value
JEL Classi…cation: D23 D83 L22
1 Intro duction
How do …rms allocate resources between R&D and external technology in order to maximize
value and drive growth? And in turn, do their ensuing growth trajectories themselves shape
such future resource allocation? Over the past three decades, the …eld of innovation strategy
All authors contributed equally and are listed in alphabetical order.
y
Duke University, Fuqua School of Business, 100 Fuqua Drive, Durham, NC 27708, U.S.A. E-mail:
ashish.arora@duke.edu
z
Duke University, Fuqua School of Business, 100 Fuqua Drive, Durham, NC 27708, U.S.A. E-mail:
sharon.belenzon@duke.edu
x
Corresponding author. Duke University, Fuqua School of Business, 100 Fuqua Drive, Durham, NC 27708,
U.S.A. E-mail: luis.rios@duke.edu
1
has isolated a set of important dyadic relationships in an e¤ort to understand these interrelated
questions. For example, a substantial body of work has advanced our understanding of the
relationship b etween internal R&D and external knowledge, (e.g. Cohen and Levinthal, 1990;
Pisano, 1990; Katz and Allen, 1982). More recently, a small literature on the structure of R&D
has explored how the resource allocation decision is related to the centralization or decentraliza-
tion of R&D (e.g. Argyres and Silverman, 2004; Lerner and Wulf, 2007). Separately, work on
structural integration and resource recon…guration has lo oked at how organizations are shaped
by acquisitions and absorption (e.g., Ahuja and Katila, 2001; Puranam, Singh, and Zollo, 2006;
Karim and Mitchell, 2000).
Surprisingly, there remains little integration of the aforementioned streams. This lack of
synthesis may be due to data constrains, since most work that considers such organizational
dynamics tends to rely on small samples (Karim and Mitchell, 2004, and Cohen and Levinthal,
1990 are notable exceptions). Understandably, researchers must often cede the pursuit of a richer
understanding of strategic interrelationships in exchange for "analytical precision and theoretical
rigor" (Zollo and Singh, 2004). Nonetheless, this lacuna is an important and understudied
limitation, since the very word "organization"–from the Greek organon ("tool, instrument, set
of rules")–denotes a coherent system or unit where interdependent parts work as one. In fact,
a central tenet of organization theory holds that the structures, systems, and processes of a …rm
should be interdependent and must be mutually supportive and coherent (Drazin and Van de
Ven, 1985; Nadler and Tushman, 1997; Rivkin and Siggelkow, 2003; Siggelkow, 2011).
It is the pursuit of this coherence logic that motivates our paper. Using a novel large-
scale dataset, we explore whether …rms demonstrate distinct and coherent combinations of
R&D organizational structure and knowledge-sourcing strategies, as would be expected given
the concatenated predictions of these emerging theories of innovation. We propose that …rms
pursuing a particular approach to innovation (e.g., a strong focus on internal research like
IBM or an "acquire and develop" approach like Cisco) also need a well-matched supporting
organizational structure (e.g., centralized or decentralized). Empirically, we exploit a sample
that includes nearly all patenting public American …rms, and develop a new measure of R&D
organizational structure which uses the ratio of patents assigned to a¢ liates versus corporate
parents as a proxy for the decentralization of R&D. This involves matching 576,052 patents
to 1,014 publicly traded American corporations and their 2,768 a¢ liates. By do cumenting the
types of choices that …rms make, we bridge streams of the literature that have previously studied
dyadic relationships b etween internal and external knowledge sourcing, between organizational
2
structure and innovation, and between acquisitions and structure.
Our …ndings extend and clarify prior results. We …nd evidence that strongly supports the
coherence logic. Knowledge sourcing strategies appear to be systematically related to orga-
nizational structure. Moreover, the market valuation of these knowledge sourcing strategies
strongly correlates with structure. We …nd con…rmatory large-scale evidence that research-
oriented …rms are signi…cantly more centralized than others, consistent with earlier small-sample
…ndings (Hoskisson, et al. 1993; Kay, 1988; Argyres and Silverman, 2004). But we also …nd
that organizational structure seems to strongly condition the relationship between …rms’ re-
search focus and their external knowledge acquisition strategy. Though both centralized and
decentralized …rms acquire external technology, centralized …rms do so less frequently and tend
to make smaller acquisitions. Moreover, they manage acquisitions di¤erently. Acquisitions by
centralized …rms frequently undergo full structural integration (Puranam et al., 2006), whereas
decentralized …rms tend to keep acquisitions as discrete entities.
Importantly, the logic underlying these patterns of choice is re‡ected in measurable di¤er-
ences in the composition of …rms’market value. Whereas centralized …rms draw most of their
intangible value from internal R&D stocks, decentralized …rms derive relatively more value
from externally acquired patents. This …nding is especially strong for large …rms and …rms with
higher technological diversity.
Our results imply that a successful innovation strategy requires careful alignment both be-
tween internal and external knowledge sourcing, and between the internal/external mix of inputs
and organizational structure. The implied coherence, however, does not necessarily imply a par-
ticular causal structure. Establishing causality is important, but given the nature of our data,
it is beyond the scope of our project. Furthermore, it is just as important to develop a fuller
theory of innovation that accounts for the dynamics we highlight in this study. By developing a
new empirical measure and systematically exposing the relationships between internal research,
external knowledge, and organizational structure among a nearly comprehensive set of …rms,
we take an important step towards the development of such theory.
2 Three Pillars of Innovation Strategy
We draw upon important streams in the innovation literature that have explored dyadic relation-
ships between research, external knowledge and structure. The …rst explores how the nature of
research inside a …rm is related to how the activity itself is organized. Firms that invest heavily
3
