Internal and External R&D: An analysis of costs and benefits

Abstract

This paper analyzes the costs and benefits of in-house and contracted-out R&D among Dutch ICT firms from 2000 to 2020. I estimate a dynamic discrete-choice model with mode-specific investment costs. Contracted-out R&D costs about 2.45 million euros, versus 0.13 million for in-house R&D, which is why so few firms contract out alone. Doing both is cheaper than the sum of the two costs: in-house R&D offsets almost all of the extra cost of going outside. Productivity gains are similar across modes. A uniform subsidy raises R&D participation and firm value by more than a subsidy aimed only at in-house R&D.