Stability Analysis of R&D Cooperation in a Supply Chain

R&D outsourcing becomes the often-adopted strategy for firms to innovate. However, R&D cooperation often ends up with failure because of its inherent quality of instability. One of the main reasons for cooperation failure is the opportunistic behavior. As the R&D contract between firms is inherently incomplete, opportunistic behavior always cannot be avoided in the collaborative process. R&D cooperation has been divided into horizontal and vertical types. This paper utilizes game theory to study opportunistic behavior in the vertical R&D cooperation and analyzes the equilibrium of the cooperation. Based on the equilibrium and numerical results, it is found that the vertical R&D cooperation is inherently unstable, and the downstream firm is more likely to break the agreement. The level of knowledge spillovers and the cost of R&D efforts have different effects on firms’ payoffs. When the level of knowledge spillover is low or the cost of R&D efforts is high, mechanisms such as punishment for opportunism may be more effective to guarantee the stability of cooperation.