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Why do firms outsource research and development (R&D) for some products while conduct-
ing R&D in-house for similar ones? An innovating firm risks cannibalizing its existing products.
The more profitable these products, the more the firm wants to limit cannibalization. We ap-
ply this logic to the organization of R&D by introducing a novel theoretical model in which
developing in-house provides the firm more control over the new product's location in product
space. An empirical analysis of our testable predictions using pharmaceutical data concerning
patents, patent expiration, and outsourcing at various stages of the R&D process supports our
theoretical approach.
