Exploring the Role of Knowledge in the Configuration of Global R&D Value Chains and Networks: A Study of Outsourcing and Offshoring in the Pharmaceutical Industry

Changes in the organisation and location of productive activities resulting from trends towards the vertical disaggregation and internationalisation of firms’ value chains have been a key feature of industrial production over the last 40 years and a defining feature of present day globalisation (Dicken 1992; Dunning 1997; Gereffi and Korzeniewicz 1994). Whilst these processes have been most advanced in the areas of production,  similar trends can now be found in the configuration of the R&D function as firms increasingly ‘outsource’ and ‘offshore’ elements of their R&D activities. These new trends towards the disaggregation of R&D are particularly interesting given the difficulties that the management of knowledge poses to the organisational and geographically dispersal of R&D activities (Patel and Pavitt 1991, 1999; Lundvall and Borras 1997; Howells et al 2008).The factors put forward to explain these difficulties can be grouped into three set of arguments:

Firstly, knowledge management arguments which stress the challenges associated with the communication and transfer of tacit, firm-specific and systemic knowledge. This perspective also highlights the role of ‘economies of agglomeration’ in the innovation process based on the need to integrate numerous scientific disciplines and types of technological knowledge. The path-dependent nature of innovation which is often strongly shaped by national and regional institutions also tends to make the transfer of knowledge across organisational and geographical boundaries difficult, expensive and sometimes impossible.

A second set of arguments highlights different types of market failures associated with the arm’s-length transaction of knowledge (see Howells et al 2008 for a useful summary). This literature stresses the high levels of risk and uncertainty associated with the outcome of R&D outsourcing; the problems of prior disclosure and  information asymmetry; as well as the uncertain character of new knowledge which means that often neither seller nor buyer really understand what they buying and selling. Conflicts over ownership and control of intellectual property rights (IPR) is another important area of difficulty as innovation can often involve or require the collaboration of different organisations resulting in the co-production of knowledge.

A third set of arguments focus on the importance of innovation and knowledge for the core competence and capabilities of firms and therefore their long-term strategy. According to this approach getting R&D outsourcing wrong can have a major impact on long-term performance so firms tend to keep R&D and innovative activities in-house and close to their headquarters in the country of origin.

Based on interviews with senior scientists and R&D managers of leading European and US pharmaceutical firms as well as founders and managers of a sample of European and Indian contract research organisations the paper explores how the nature of knowledge and the R&D process shapes the geographical and organisation configuration of the global R&D value chain of leading firms in the pharmaceutical industry. The implications for knowledge flows within global R&D value chains are also discussed.