UNU-MERIT Working Papers Series
Is there complementarity or substitutability between internal and external R&D strategies?
John Hagedoorn & Ning Wang #2010-005The mixed picture of extant research on the relationship between
internal and external R&D prompts us to ask such a question: under what
conditions is there complementarity or substitutability between
different R&D strategies? The goal of this paper is to contribute to the
empirical literature by advancing and testing the contingency of the
relationship between internal and external R&D strategies in shaping
firms‘ innovative output. Using a panel sample of incumbent
pharmaceutical firms covering the period 1986-2000, our empirical
analysis suggests that the level of in-house R&D investments, which is
characterized by decreasing marginal returns, is a contingency variable
that critically influences the nature of the link between internal and
external R&D strategies. In particular, internal R&D and external R&D,
through either R&D alliances or R&D acquisitions, turn out to be
complementary innovation activities at higher levels of in-house R&D
investments, whereas at lower levels of in-house R&D efforts internal
and external R&D are substitutive strategic options. These findings are
robust to alternative specifications and estimation techniques,
including a dynamic perspective on firm innovative performance.
Key words: Complementarity; Substitutability; Internal R&D; External
R&D; Innovative output; Pharmaceutical Industry; Biotechnology
JEL codes: O32, L24
UNU-MERIT Working Papers
ISSN 1871-9872
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