Conversely, when the legal requirements of patentability are relaxed, as they have been in recent years, a shift of activity from firms to the market should be expected. Trade secret law and the legal treatment of covenants not to compete similarly affect firm boundaries by determining the allocation of entitlements between firms and employees The implications of innovation for the make-or-buy decision have been highlighted by Williamson(1975), Teece(1986, 1988), and Aghion and Tirole(1994) Previous work has also recognized the relevance of appropriability and intellectual property law to various contractual, strategic and organizational questions in technology ntensive industries. The importance of appropriability and the relationship between appropriability and intellectual property rights was first emphasized by Teece(1986) Arora et al. (2001) highlight the difficulty in contracting over tacit knowledge and know how(ch. 5), noting"the role of patents in facilitating transactions in technology. (p. 262 Gans and Stern(2003a)consider the implications of the disclosure paradox for entrepreneur's choice of a commercialization strategy, recognizing the role of intellectual property in solving the paradox. In a couple of related empirical studies, these authors show how intellectual property rights and appropriability problems affect the timing of cooperation/licensing(Gans and Stern, 2003b)as well as the choice of a start-up innovator between competition or cooperation (i.e. contracting) with more established firms(Gans et al., 2000). Another recent empirical study shows that technologies developed by firms operating in countries with weak intellectual property rights are used more internally(Zhao, 2003). Anton and Yao, in a series of papers, explore the implications of and the strategic responses to the disclosure paradox, caused by imperfect legal protection of pre-patent ideas(Anton and Yao, 1994, 2000, 2001, 2003a, 2003b, see also Bhattacharya and Guriev, 2004 Finally, Dan Burk and Ashish Arora and Robert merges, in two recent contributions, explicitly focus on the interrelations between intellectual property law and the boundaries of the firm question. Burk(2004 ) focuses on the implications of the theor of the firm for intellectual property law. While we focus on the reverse implications of intellectual property law for the theory of the firm, Burks insights are clearly important for our analysis. Arora and Merges(2004)show that stronger intellectual property rights support smaller firms that specialize in the supply of technology inputs. The analysis in Arora and Merges(2004) can be interpreted as proposing one way to minimize the costs associated with the disclosure paradox--through intellectual property rights in complementary assets(see also Merges, 2000; Arora et al., 2001). Our focus, on the other hand, is on intellectual property rights in the core informational asset. More generally, the preconditions for the creation of legally enforceable intellectual property rights. On while the literature has focused on the strength of intellectual property rights, we focus on The remainder of the paper is organized as follows. Section 2 presents a simple model, formalizing the role of intellectual property law as a constraint on the optimal level of vertical integration in technology-intensive industries. Section 3 draws the broader implications of the model for the structure and organization of technology intensive industries, discussing firm size, the role of research universities, r&d alliances and joint ventures, and R&D financing. Section 4 argues that intellectual property law affects not only the feasibility of the market option but also the feasibility of the firm option. Section 5 concludesConversely, when the legal requirements of patentability are relaxed, as they have been in recent years, a shift of activity from firms to the market should be expected. Trade secret law and the legal treatment of covenants not to compete similarly affect firm boundaries by determining the allocation of entitlements between firms and employees. The implications of innovation for the make-or-buy decision have been highlighted by Williamson (1975), Teece (1986, 1988), and Aghion and Tirole (1994). Previous work has also recognized the relevance of appropriability and intellectual property law to various contractual, strategic and organizational questions in technology￾intensive industries. The importance of appropriability and the relationship between appropriability and intellectual property rights was first emphasized by Teece (1986). Arora et al. (2001) highlight the difficulty in contracting over tacit knowledge and know￾how (ch. 5), noting “the role of patents in facilitating transactions in technology.” (p. 262) Gans and Stern (2003a) consider the implications of the disclosure paradox for an entrepreneur’s choice of a commercialization strategy, recognizing the role of intellectual property in solving the paradox. In a couple of related empirical studies, these authors show how intellectual property rights and appropriability problems affect the timing of cooperation/licensing (Gans and Stern, 2003b) as well as the choice of a start-up innovator between competition or cooperation (i.e. contracting) with more established firms (Gans et al., 2000). Another recent empirical study shows that technologies developed by firms operating in countries with weak intellectual property rights are used more internally (Zhao, 2003). Anton and Yao, in a series of papers, explore the implications of and the strategic responses to the disclosure paradox, caused by imperfect legal protection of pre-patent ideas (Anton and Yao, 1994, 2000, 2001, 2003a, 2003b; see also Bhattacharya and Guriev, 2004). Finally, Dan Burk and Ashish Arora and Robert Merges, in two recent contributions, explicitly focus on the interrelations between intellectual property law and the boundaries of the firm question. Burk (2004) focuses on the implications of the theory of the firm for intellectual property law. While we focus on the reverse implications of intellectual property law for the theory of the firm, Burk’s insights are clearly important for our analysis. Arora and Merges (2004) show that stronger intellectual property rights support smaller firms that specialize in the supply of technology inputs. The analysis in Arora and Merges (2004) can be interpreted as proposing one way to minimize the costs associated with the disclosure paradox—through intellectual property rights in complementary assets (see also Merges, 2000; Arora et al., 2001). Our focus, on the other hand, is on intellectual property rights in the core informational asset. More generally, while the literature has focused on the strength of intellectual property rights, we focus on the preconditions for the creation of legally enforceable intellectual property rights. The remainder of the paper is organized as follows. Section 2 presents a simple model, formalizing the role of intellectual property law as a constraint on the optimal level of vertical integration in technology-intensive industries. Section 3 draws the broader implications of the model for the structure and organization of technology￾intensive industries, discussing firm size, the role of research universities, R&D alliances and joint ventures, and R&D financing. Section 4 argues that intellectual property law affects not only the feasibility of the market option but also the feasibility of the firm option. Section 5 concludes. 2