Ownership as R&D incentive in business groups

Small and medium-sized enterprises (SMEs) are supposed to be less likely to conduct formal R&D because of the lack of financial resources, weaker competencies, and the absence of scale and scope economies. These limitations may be overcome when an SME belongs to a business group. Empirical studies have shown that firms belonging to business groups have a higher propensity to engage in R&D. We demonstrate that this higher propensity depends on the ownership of controlled companies, besides the presence of coordination mechanisms. We develop a model, and we empirically test its predictions using a data set of Italian SMEs operating in the manufacturing sector. From the model we derive three main implications: (1) there is no difference in R&D propensity between standalone firms and firms at the bottom of groups; (2) head and intermediate firms have a higher R&D propensity than standalone firms and firms at the bottom of the group; (3) the intensity of R&D depends on the ownership of controlled firms and on their size. Overall, the results of the empirical analysis are in accordance with the implications of the model.