Internal versus external R&D: a study of R&D choice with sample selection

James H. Love, Stephen Roper

Research output: Contribution to journalArticlepeer-review


This paper extends previous analyses of the choice between internal and external R&D to consider the costs of internal R&D. The Heckman two-stage estimator is used to estimate the determinants of internal R&D unit cost (i.e. cost per product innovation) allowing for sample selection effects. Theory indicates that R&D unit cost will be influenced by scale issues and by the technological opportunities faced by the firm. Transaction costs encountered in research activities are allowed for and, in addition, consideration is given to issues of market structure which influence the choice of R&D mode without affecting the unit cost of internal or external R&D. The model is tested on data from a sample of over 500 UK manufacturing plants which have engaged in product innovation. The key determinants of R&D mode are the scale of plant and R&D input, and market structure conditions. In terms of the R&D cost equation, scale factors are again important and have a non-linear relationship with R&D unit cost. Specificities in physical and human capital also affect unit cost, but have no clear impact on the choice of R&D mode. There is no evidence of technological opportunity affecting either R&D cost or the internal/external decision.
Original languageEnglish
Pages (from-to)239-255
Number of pages17
JournalInternational Journal of the Economics of Business
Issue number2
Publication statusPublished - Jul 2002

Bibliographical note

This is an Author's Accepted Manuscript of an article published in Love, J. H., & Roper, S. (2002). Internal versus external R&D: a study of R&D choice with sample selection. International journal of the economics of business, 9(2), 239-255. International journal of the economics of business 2002 ۩ International Journal of the Economics of Business, Taylor & Francis, available online at:


  • scale
  • market structure
  • cost of R&D
  • R&D mode


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