Research versus development, external knowledge, and firm innovation
Cindy Lopes-Bento, Markus Simeth
kHUB post date: March 12, 2024
Originally published: December 29, 2023 (PDMA JPIM • Vol. 41, Issue 1 • January 2024)
Read time: 45 minutes
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While the positive influence of external knowledge on firm innovation is widely recognized, our understanding of the interplay between the quest for external knowledge and internally conducted research and development (R&D) remains incomplete. Previous research has identified certain conditions that shape the synergy between internal and external knowledge, such as the institutional origin of the external knowledge and the overall scale of the firm's internal R&D activities. In this study, we focus on an important but not yet considered dimension and analyze whether the returns from external knowledge sourcing are contingent upon a firm's internal involvement in basic or applied research as opposed to development. We argue that engaging in research, while supporting a firm's absorptive capacity, leads overall to lower benefits from seeking external knowledge because of knowledge crowding out and spillover effects. We test our predictions using a representative panel dataset from Spain (Panel de Innovación Tecnológica [PITEC]) and show that the benefits of external knowledge decrease for higher shares of internal research investment. This substitution effect is particularly pronounced in settings where sector-level appropriability is limited and in nonhigh-tech sectors. We contribute to the innovation literature by underscoring the important role of the nature of internal R&D efforts in shaping firms' capacity to benefit from external knowledge sources.
Practitioner Points
- Managers face important trade-offs when it comes to the combination of internally created and externally sourced technological knowledge, as potential complementarities are subject to boundary conditions.
- Firms engaged in basic or applied research face greater challenges in leveraging external knowledge sources. This suggests that managers in research-active firms should thoughtfully evaluate the anticipated benefits of seeking external knowledge and explore options to mitigate the risk of unintended knowledge outflows.