R & D in stand-alone firms and conglomerate divisions

Mahrt-Smith, J K (2000) R & D in stand-alone firms and conglomerate divisions. Working Paper. London Business School IFA Working Paper.

Abstract

This paper examines differences in research and development intensity between standalone firms and conglomerate divisions. In the process, two main goals are accomplished: first, the data are consistent with a model of R&D management based on the assignment of property rights; second, the data provide additional insights into the current debate about the costs and benefits of the conglomerate organizational form as a corporate goverce structure. In a 12year panel of US standalone and multidivisional firms, R&D intensity inside standalone firms is significantly greater than in conglomerate divisions. As property rights in conglomerates rest with headquarters and not the divisions themselves, this is consistent with theoretical models which make predictions about property rights allocations when investments (like R&D) lead to noncontractible outcomes. Furthermore, the evidence indicates that conglomerate divisions may be more prevalent when R&D intensity in an industry is low. This finding indicates that the choice of belonging to a conglomerate (as opposed to being a standalone firm) is endogenous. Based on the findings, the implications for the current debate over the benefits and costs of conglomeratization are discussed.