In Search of Complementarity in the Innovation Strategy: Internal R&D and External Knowledge Acquisition

In addition to doing own research and development, firms typically are engaged in the acquisition of knowledge on the technology market. Using data from the Community Innovation Survey on Belgian manufacturing firms, we provide econometric evidence consistent with complementarity between these different innovation activities, i.e. the marginal return to one activity increases with the level of the other activity. Using a productivity approach, we show that firms that are only engaged in a single innovation activity, either internal R&D activities or sourcing technology externally, introduced fewer new or substantially improved products compared to firms which combine internal and external sourcing. We confirm complementarity between innovation activities by directly testing the difference in marginal returns to combinations of innovation activities. Using an adoption approach, we find that the different innovation activities are strongly positively correlated and identify the reliance on basic R&D as a source of complementarity between internal and external innovation activities. Furthermore, given that the effectiveness of strategic protection only directly affects the incentive to source internally, it provides evidence for the existence of complementarity because of a positive (indirect) effect on external knowledge acquisition. While we should interpret these results cautiously, taken together they do provide compelling evidence for complementarity between different innovation activities.