"The Role of R&D Diversification in Exploiting Knowledge Spillover: Evidence from Major Japanese Chemical and Pharmaceutical Companies"

The role of R&D diversification has been explained by the fact that there exist knowledge spillovers among research programs within a firm. However, the benefit from diversification is not ensured by internal spillovers only. Knowledge can spill over not only within a firm, but also across firms. If it costs a firm to exploit external knowledge spillovers no more than to internal knowledge spillovers, the firm need not keep wide variety of research menu inside. The aim of this paper is to clarify the role of R&D diversification with taking care of knowledge spillovers both within a firm and across firms. The main hypothesis is that the impact of diversification is exaggerated when a firm confronts barrier to exploit knowledge stock outside. Based on the patent data of about 30 major companies in Japanese chemical and pharmaceutical industries, this paper finds the evidence in favor of this hypothesis. Robustness of the results is held for several indices of R&D diversification. The impact of R&D diversification depends on both quantitative and qualitative measures of accessibility to external knowledge.