Outsourced R&D and declining R&D productivity

There has been a six-fold increase in the share of firms’ research and development (R&D) that is outsourced to other organizations. This rise coincides with a 65% decline in firms’ R&D productivity. We examine whether the two trends are related. We find that on average, outsourced R&D is unproductive for the funding firm-its output elasticity is zero. This result is robust to controls for the type of firms who outsource, and the type of projects they outsource. Moreover, neither the productivity of outsourced R&D nor internal R&D has changed over time. Thus the 65% decline in R&D productivity appears to stem from substantial reallocation of R&D away from internal execution to outsourced execution, rather than fundamental decline in firms’ R&D capability. This is good news. It suggests that firms may be able to restore their R&D productivity and growth by gradually insourcing R&D.