An analysis of risk sharing in strategic R&D and new product development projects

•A study of contractual risk-sharing in large R&D and new product development projects.•Findings indicate that risk-sharing promotes trust, growth, and innovation.•Data show that contract comprehensiveness supports risk-sharing and learning.•Results demonstrate that contracts with risk sharing foster more growth and change.

While prior research regarding strategic projects recognizes the tension inherent in interfirm relationships, less is understood of the impact of risk sharing in the design of the contracts guiding those relationships. This investigation illuminates important performance elements of projects as they differ in the amount of contractual risk that is shared among firms. Through a multivariate analysis of 240 United States defense department R&D and new product development contracts, we found that defense contracts with partner risk sharing built in involve more change and growth than their concentrated risk counterparts. Our results suggest that projects, when managed through interfirm contracts, are more likely to involve strategic change when risk is shared than when either the buyer or seller assumes full design, technical, and/or financial risk. The results further suggest that projects containing shared buyer and seller risk enhance the prospects of joint gain through the generation of opportunities for learning.