Transaction costs and capabilities as determinants of the R&D boundaries of the firm: A case study of the ten largest pharmaceutical firms in Japan

Abstract

The boundaries of the firm are an important issue in relation not just with the make-or-buy decision in production but also with research and development (R&D). Firms depend on universities to gain scientific knowledge, outsource some of their R&D works, purchase patented technologies, commission research, and participate in consortia. In this paper, we take the case of the 10 major pharmaceutical companies in Japan and show that they employ various types of research alliances with various partners, domestic or foreign. Two major theories to explain the boundaries, the transaction-cost theory and the capability theory, are discussed and we argue that the observed pattern of research alliance is more consistent with the capability theory. Discussion is also made on the consortia and national projects these firms participate. Copyright © 2003 John Wiley & Sons, Ltd.