Does external knowledge sourcing matter for innovation? Evidence from the Spanish manufacturing industry

Transcription

1 Does external knowledge sourcng matter for nnovaton? Evdence from the Spansh manufacturng ndustry Jader Vega-Jurado *, Antono Gutérrez-Graca and Ignaco Fernández-de-Luco. INGENIO, (CSIC-UPV), Insttute of Innovaton and Knowledge Management. Cudad Poltécnca de la Innovacón. Camno de Vera s/n, Valenca, Span. * Correspondng author. Tel: ; fax: ; e-mal address: javega@ngeno.upv.es. 1

2 Does external knowledge sourcng matter for nnovaton? Evdence from the Spansh manufacturng ndustry Abstract Ths paper presents emprcal evdence on the effects of external knowledge sourcng strateges on the development of both product and process nnovatons, and assesses the degree to whch such effects are nfluenced by the frm s nternal technologcal capactes. In our analyss, we consder two strateges for acqurng external knowledge (buyng and cooperatng) and two types of external sources (ndustral agents and scentfc agents). The analyss s based on a sample of 1,329 manufacturng frms actve n nnovaton actvtes taken from the Spansh Survey of Technologcal Innovaton We fnd that the effects of the knowledge sourcng strateges dffer sgnfcantly across nnovaton types (product or process nnovaton). In addton, our results ndcate that although nternal R&D actvtes are assocated wth a greater use of external scentfc knowledge sources (through cooperaton), they do not seem to promote ther explotaton for nnovaton development, that s to say, they do not have synergstc effects. 1. Introducton The role of external knowledge sources as determnants of nnovaton has been repeatedly emphaszed n the lterature wthn a range of theoretcal approaches. Evolutonary theorsts, for nstance, consder that nnovaton nvolves a process of contnuous nteractve learnng between the frm and the varous agents surroundng t (Lundvall, 2

3 1992; Edqust, 1997; Bresch and Malerba, 1997). Smlarly, nnovaton network theorsts (Håkannson, 1987; Baptsta and Swan, 1998; Cooke and Morgan, 1998) mantan that frms rarely nnovate on ther own, and that the ntroducton onto the market of new products and processes largely depends on the frm s ablty to buld strong lnks wth external agents. Chesbrough, through hs open nnovaton model, also ponts to the mportance of external deas for the nnovaton process and even suggests that nternal R&D s no longer the strategc asset t once was (Chesbrough, 2003). Nevertheless, some researchers have warned about the rsk of overestmatng the role played by external knowledge sources, argung that n many ndustres, nnovaton efforts are not only made by frms themselves, but are generated n house (Nelson, 2000). The studes conducted by Oerlemans et al. (1998) n the Netherlands and Freel (2003) n the UK, show that the frm s nternal resources are the man determnants of ther nnovaton performance, and that the creaton of external networks has only a lmted mpact. Some authors have even suggested that n attemptng to decentralze and outsource R&D actvtes frms may weaken ther core competences (Coombs, 1996). On the other hand, and from a more ntegratve perspectve, some works pont out that external and nternal knowledge acquston can be complementary actvtes n the frm s nnovaton strategy. These authors mantan that the effect of external knowledge sources on nnovaton performance, although mportant, depends on the nternal capabltes of the frm. Rothwell (1992), for example, hghlghts that lnks to external scentfc and techncal knowledge sources are effectve only f the organzaton s well prepared and open to external deas, and has sklled scentfc and techncal staff. In lne wth ths thnkng, Cohen and Levnthal s (1989, 1990) concept of absorptve capacty has ganed nfluence n recent years. Ths concept places specal emphass on the frm s pre-exstng knowledge n the tasks of dentfyng, assmlatng and explotng external knowledge. 3

4 Based on ths concept, t has been argued that not only do the frm s nternal efforts to create new knowledge encourage the use of external knowledge sources, they also ncrease the frm s ablty to explot these sources effcently n the development of new products and processes. Thus, the greater the nternal capabltes of the frm, the greater are the effects of the dfferent external knowledge acquston strateges on nnovaton performance. However, the above argument, though wdespread, lacks sound emprcal foundaton. The few emprcal analyses of these relatonshps have produced mxed fndngs. Cassman and Veugelers (2006), for nstance, found that nternal R&D and external knowledge acquston were complementary wth respect to nfluencng nnovaton performance, whle Laursen and Salter (2006) found evdence of a substtuton effect between nternal research and development (R&D) and external knowledge search actvtes. Ths paper provdes emprcal evdence on the effect of the external knowledge sourcng strateges adopted by frms, on the development of both product and process nnovaton, and assesses to what extent ths effect s nfluenced by the frm s nternal technologcal capabltes. Extendng Cassman and Veugelers (2006), we nvestgate the effects of two strateges for acqurng external knowledge (buyng and cooperatng) and two types of external sources (ndustral agents and scentfc agents). Also, we examne the effects of these actvtes n relaton to the partcular ndustry n whch the frm operates, consderng two sectoral categores: scence-based frms and suppler-domnated frms. Ths paper ams to assess the real value of external knowledge sources as the determnants of nnovaton by ntegratng varous external sourcng strateges, the frm s nternal capabltes and the ndustry characterstcs, nto the same analytcal framework. The analyss of external knowledge sourcng strateges uses frm level data from the Spansh nnovaton survey. Span s a technology follower country, demonstrated by ts 4

5 scence and technology ndcator scores, whch are among the lowest n the EU. For example, total expendture on R&D n relaton to GDP s half of the EU average, and Span s productve sector s characterzed by a concentraton of tradtonal lowtechnology sectors and medum and small enterprses wth low R&D expendture (Castro and Fernández, 2006). Most frms n Span ncludng nnovatve ones are at a lower technologcal level than ther nternatonal compettors (Molero and Buesa, 1996), therefore, t s to be expected that a hgh percentage of the product nnovatons ntroduced n the marketplace consst of small ncremental mprovements. Another feature of the Spansh nnovaton system that s dstnctve, s the great mportance of the publc sector, whch consttutes the prncpal source of knowledge. In 2004, ths sector, comprsed of unverstes and publc research organzatons, accounted for 45% of total natonal expendture on R&D and employed more than 76% of the researchers n Span. Ths s atypcal for Europe as a whole; n other European countres almost half of all researchers are employed by prvate frms. In addton, cooperaton between frms and research centres n Span s lower than the European average accordng to the 4 th Communty Innovaton Survey (CIS-4). Bearng n mnd these features of the Spansh nnovaton system, t s hoped that the results provded n ths paper wll facltate comparson and establsh dfferences n nnovaton patterns wth the technologcally leadng countres, whch tradtonally have been the focus of ths type of analyss. Also, gven that one of the prortes of Spansh nnovaton polcy s to ntensfy the relatonshps between frms and publc research nsttutons (European Commsson, 2001), the results of the present study, whch examnes the effects of cooperaton and other external knowledge sourcng strateges on frms nnovatve performance, should have mportant mplcatons for publc polcy. 5

6 The paper s organzed as follows: Secton 2 provdes a bref revew of the lterature. Secton 3 descrbes the methodologcal aspects of the emprcal study, the data, the measures of the varables and the econometrc specfcatons. Secton 4 presents the results, and Secton 5 offers some conclusons from the study. 2. Theoretcal and emprcal background Many current economc theores on and approaches to nnovaton, to a greater or lesser extent, hold that ndvdual frms are seldom capable of nnovatng ndependently and that a frm s nternal techncal capabltes are nsuffcent to cope wth the challenges of the global market. Lkewse, studes n the feld of busness management ndcate that the search for new product deas, new forms of organzaton and/or solutons to exstng problems goes beyond the frm s boundares n explorng avalable capactes n other frms or nsttutons. In theory, a wder and more dverse search strategy wll provde access to new opportuntes and enable the frm to buld new organzatonal competences based on the ntegraton of complementary knowledge sets from external agents (Teece, 1986; March, 1991). There s sold emprcal evdence that the use of external knowledge sources s both an mportant theoretcal ssue and a growng phenomenon. In most OECD countres, for nstance, the share of busness expendture on external R&D has gradually ncreased snce the 1980s. In countres such as the UK and Germany, busness expendture on external R&D doubled n proporton to total expendture on R&D, over a ten year perod (Howells, 1999; Bönte, 2003). Another clear ndcaton of the hgher use of external knowledge sources s the ncreasng number of nter-frm partnershps. In ths 6

7 respect, Hagedoorn (2002) shows that the number of nter-frm R&D partnershps recorded n the MERIT-CATI database, ncreased from 10 durng most of the 1960s to nearly 600 by the end of the 1990s. Ths ncreased use of external knowledge sourcng has been attrbuted to the ncreasng complexty and nterdscplnary nature of the R&D process combned wth reduced technology lfe cycles and the development of a technology knowledge market (Howells et al., 2003). These trends have been accompaned by a decrease n the number of nternal R&D departments and an eroson of the strategc advantage of n-house R&D actvtes (Chesbrough, 2003). Lnked to these trends, a theoretcal and emprcal lterature has developed on the factors determnng external knowledge acquston and ts effects on frms nnovatve performance. Most of ths lterature focuses on the choce between external sourcng and nternal development, the so-called make or buy decson (Veugelers and Cassman, 1999; Beneto, 2003). A tradtonal approach to the analyss of ths ssue derves from transacton cost theory, whch suggests that n the presence of asset specfcty, uncertanty and opportunstc behavour, transactons take place more effcently and herarchcally wthn the frm than va the market (Wllamson, 1985). Usng the concepts of market and herarchy, several authors have examned the economc arguments for outsourcng versus n-house R&D (Teece, 1988; Kay, 1988; Psano, 1989, 1990). Followng ths lne of nqury, external knowledge sourcng and n-house R&D are consdered as substtutes and, n consderng costs and rsks, frms opt for ether a make or a buy strategy. Frms are thus confronted wth the management of nternal and external nnovaton strateges and must decde whch technologes to develop n-house and whch to source externally. The later resource-based approach, however, emphaszes that competency development requres a frm to have an explct 7

8 polcy on the use of external knowledge sources as an opportunty to learn, rather than as a way to mnmze costs (Robns and Wersema, 1995). Ths suggests that external knowledge should be used to complement rather than substtute for nternal R&D. Mowery (1983) found perhaps the frst evdence of complementartes between external knowledge sourcng and nternal knowledge development. In a study of the contractng behavour of major ndependent R&D laboratores durng the perod , Mowery (1983) and Mowery and Rosenberg (1989) extended the transacton cost perspectve by suggestng that demand for extramural contract R&D was greater when frms possessed the expertse necessary to dentfy ther needs and to utlze external research. Analyss of the complementarty between nnovaton strateges was extended by Cohen and Levnthal s (1989, 1990) semnal work. Buldng on Mowery s work n partcular, these authors emphaszed that a frm s knowledge base enhances the effectveness of external technology sourcng n provdng the means to understand and utlze the nformaton acqured. They suggested that n-house R&D actvtes played the dual role of generatng nnovaton and mprovng the frm s absorptve capacty, that s, the ablty of the frm to dentfy, assmlate and explot the knowledge generated by compettors and extra-ndustry sources (Cohen and Levnthal, 1990). Several studes followed on the relatonshps between external and nternal know-how or, n strategc terms, between external knowledge sourcng and n-house knowledge development. Arora and Gambardella (1990, 1994), for nstance, found that frms that conduct more R&D have larger numbers of external lnks (equty partcpatons, contractual and noncontractual agreements, acqustons) amed at acqurng technology. Lowe and Taylor (1998) found a smlar relatonshp between n-house R&D and technology purchase through lcence agreements, and Freeman (1991) ponts out that frms wth R&D 8

9 departments tend to use external knowledge sources ntensvely. There s evdence of an nverse relatonshp whereby external knowledge acquston encourages nternal R&D actvtes. Veugelers (1997), for example, llustrates that external sourcng can often stmulate nternal R&D actvty, at least for frms wth R&D departments, whle Becker and Detz (2004) found evdence that cooperaton wth external agents enhances nhouse R&D ntensty. Thus, there s emprcal evdence on the mportance of the frm s knowledge base for enablng the frm to dentfy and acqure external knowledge and, vce versa, on the role of externally acqured knowledge n enhancng nternal R&D actvtes. On balance, however, the lterature s not conclusve about the complementarty between nternal and external technology sourcng wth respect to the mpact on frm s nnovatve performance. Such complementarty or synergy s assumed to exst f the mplementaton of one strategy ncreases the margnal returns from another (Mlgrom and Roberts, 1990), for nstance, f performng n-house R&D actvtes enhances the effectveness of externally acqured technologcal knowledge for nnovaton. There has been lttle emprcal analyss along these lnes, and the fndngs from the few studes conducted are mxed. Laursen and Salter (2006) examne the relatonshps between the number of the frm s external knowledge sources (whch they term external search breadth ) and ts nnovaton performance. They fnd an nverse U-shaped relatonshp, ndcatng that the breadth of the frm s external search strateges s benefcal only up to a certan level. They also fnd that nternal R&D negatvely moderates the relatonshp between external knowledge sources and nnovaton performance, suggestng the exstence of a substtuton effect between openness to external search actvtes and nternal R&D. In contrast, Cassman and Veugelers (2006) fnd that n-house R&D and 9

10 external knowledge acquston are complementary wth respect to the mpact on nnovatve performance. They analyse both complementarty among nnovaton actvtes and the contextual varables n the frm s strategy that affect ths complementarty. They conclude that the extent to whch the frm reles on more basc types of know-how (.e., the use of unverstes and research centres as nformaton sources for nnovaton) affects the strength of the complementarty among nnovaton actvtes. In ths paper, we follow a smlar approach n analysng the effect of dfferent external knowledge sourcng strateges on frm s nnovatve performance and explorng the relatonshps between these strateges and n-house R&D. Our study extends prevous research n three ways. Frst, whereas Cassman and Veugelers (2006) focus on make and buy strateges, we nclude an addtonal knowledge sourcng strategy: cooperaton. Although the theoretcal lterature drawng on transacton cost economcs, consders cooperaton to be a hybrd of herarchcal transactons wthn frms (make) and armslength transactons n the market place (buy), several authors see cooperaton as a strategy n ts own rght, whch should be treated as a dstnct form of economc organzaton used for exchangng resources and value-creatng assets (Chesnas, 1996). Cooperaton allows frms to share costs and uncertanty, to realze economes of scale and scope, to explot synerges from complementartes and even to wn government support (Croser, 1998; Becker and Detz, 2004; Veugelers and Cassman, 1999). Moreover, ths strategy may be less vulnerable to transacton costs than contractng, especally when the technology s complex (Shng, 1997). In addton, we dstngush between cooperaton wth ndustral agents and cooperaton wth scentfc agents. Ths dstncton s mportant as knowledge from these types of agents tends to be dfferent n nature and therefore may 10

11 not only serve dfferent purposes, but also may relate dfferently to a frm s nternal capabltes. For nstance, Cohen and Levnthal (1990) suggest that the knowledge drawn from extra-ndustry sources such as government and unversty labs, s typcally less targeted to a frm s requrements and prortes than that drawn from materals and equpment supplers, and therefore requres more expertse from the frm to explot t effcently. Second, most of the exstng studes on the effects of external knowledge sourcng focus on dsemboded knowledge acquston strateges, such as R&D contractng or lcensng agreements. However, there are other means wthn the frm s technology strategy whose role n nnovaton s by no means neglgble, for example, the emboded purchase of machnery and equpment (Evangelsta, 1999; Beneto, 2003). CIS-4 shows that half the European frms reportng product or process nnovaton do not conduct n-house R&D, whle approxmately 70% engage n machnery, equpment and software acquston. In the partcular case of Span, accordng to aggregate ndustral data for 2004 publshed by the Natonal Insttute of Statstcs (INE) approxmately 74% of nnovatve frms engage n machnery and equpment acquston, accountng for 33% of ther nnovaton expendtures. We therefore nclude n our analyss, acquston of technology emboded n machnery and equpment as another external knowledge sourcng strategy. Thrd, n our analyss we consder the possble effects of ndustral dynamcs on the use and explotaton of external knowledge sources. A rch and heterogeneous tradton of studes n ndustral economy shows that nnovaton dffers across sectors n terms of characterstcs, sources, actors, lnks and relatonshps among actors, and the boundares 11

12 of the process (Malerba, 2005). As a consequence, several sectoral classfcatons have been developed, rangng from the tradtonal dstncton between hgh and low R&Dntensty sectors (wdely used n OECD and EU nternatonal studes), to the Schumpeteran-type dstncton based on dfferences n market structure (Schumpeter Mark I and Schumpeter Mark II). Other dfferences across sectors are related to such characterstcs as technologcal opportunty and approprablty condtons, whch shape the technologcal regme (Nelson and Wnter, 1982). All these characterstcs can nfluence the use of external knowledge sourcng. Klevorck et al. (1995) for example, ndcate that the lower the level of technologcal opportunty n an ndustry, the lower the frm s ncentves to draw on external knowledge sources, and therefore the hgher ts relance on nternal sources. On the other hand, a low level of appropraton mght cause the frm to reduce ts n-house nvestment n R&D because t cannot fully nternalze all the benefts from ts nvestment (Spence, 1984). Cohen and Levnthal s (1990) response was to suggest that a low level of approprablty could promote n-house R&D actvtes to develop suffcent absorptve capacty to captalze on the spllovers n the ndustry. To control for these potental varatons, here we adopt Pavtt s (1984) taxonomy of the sectoral patterns of nnovaton, whch classfes frms n terms of the approprablty mechansms and technologcal knowledge sources used to develop nnovaton actvtes. 3. Data and methodology 3.1. Data and Sample The data for the emprcal analyss come from INE s Technologcal Innovaton Panel (PITEC), and Span s Scence and Technology Foundaton (FECYT) and Foundaton for Techncal Innovaton (COTEC). PITEC s a panel survey, based on the 12

13 Technologcal Innovaton n Companes Survey (TICS), nscrbed n the CIS, and desgned to collect detaled nformaton on nnovaton actvtes n Spansh frms n all sectors of the economy. The data are avalable n a set of coordnated yearly fles for 2003 and We consdered TICS data for 2004, whch provdes nformaton on the nnovatve behavour of Spansh frms durng the perod The fnal database for 2004 ncludes 8,800 manufacturng and servce companes; we use data on the 4,445 manufacturng companes, 2 across 31 sectors based on Span s Natonal Classfcaton of Economc Actvtes (CNAE). [Insert table 1 about here] Table 1 shows the sample dstrbuton by number of employees and types of nnovaton actvtes. PITEC comprses two man samples: a sample of frms wth 200 or more employees, whch accounts for 86% of all frms wth 200 or more employees accordng to data from the Central Busness Drectory (DIRCE), and a sample of frms wth ntramural R&D expendture, whch accounts for 56% of all frms engaged n n-house R&D, accordng to data from the Research Busness Drectory (DIRID). These samples are thus very representatve of these populatons (bg frms, and frms wth ntramural R&D). In 2004, a sample of small frms (less than 200 employees) and external, but no nternal R&D expendture, and a sample of small frms wth no nnovaton expendture, were ncluded. In the TICS survey, frms are asked whether they had ntroduced a new product or process, or whether they had ongong or abandoned nnovaton actvtes durng the perod A postve answer to one of these questons classfes them as 13

14 nnovators. We used ths selecton crteron to restrct our analyss to the subsample of nnovator frms. Ths decson s manly drven by the desgn of the questonnare tself, because only the nnovator frms have to answer the full questonnare, ncludng those questons related to cooperaton wth external agents. After deletng observatons wth mssng values, we were left wth a sample of 3,311 frms. We checked that the records excluded for mssng values dd not dffer n some observable dmensons from the fnal sample Sectoral Classfcaton Secton 2 refers to several studes n the feld of ndustral economcs, whch show that the effect of nternal and external knowledge sources on nnovaton may be determned by ndustral dynamcs (Malerba, 2005). In order to control for these potental varatons, we adopt Pavtt s (1984) taxonomy of patterns of technologcal change, whch classfes frms as suppler-domnated, scale ntensve, specalzed suppler and scence-based. Although ths can lead to some smplfcaton, ts applcablty as a crteron for classfyng frms has been demonstrated n several studes (Arundel et al., 1995; Cesaratto and Mangano, 1992). We focused on suppler-domnated and scence-based frms for three reasons. Frst, these sectoral categores nclude those frms for whch the relatve mportance of the two types of external knowledge sources consdered here (scentfc and ndustral sources) s more clearly dstngushable. Pavtt (1984), for nstance, suggests that n suppler-domnated frms (textles, clothng and fur, furnture, etc.), technologcal knowledge s manly emboded n the machnery, equpment and captal assets produced by other sectors, whle n scence-based frms (pharmaceutcs, electronc components, spacecraft), the man sources of knowledge are the frms nternal R&D actvtes and scentfc research carred out by unverstes and publc research nsttutons. Second, 14

15 analyss of these sectoral categores allows us to examne whether, as Cassman and Veugelers (2006) suggest, a frm s relance on more basc types of know-how affects the degree of complementarty between nnovaton strateges. Thrd, these categores substantally dffer n terms of level of technologcal opportunty (Marsl, 2001), whch could affect the use of external knowledge sources. Thus, we can expect hgher use of external knowledge sourcng strateges by scence-based than suppler-domnated frms. We selected a total of 1,329 frms from the group of manufacturng companes wthn the suppler-domnated and scence-based categores. The dstrbuton of the fnal sample s shown n Table 2. The frst two columns (sample, % sample) show the number of frms by ndustral sector and the percentage n the total sample of the respectve sectoral category (suppler domnated or scence-based frms). The last two columns (populaton, % populaton) show the populaton of nnovator frms by ndustry sector and the percentage n the populaton of the respectve sectoral category. [Insert table 2 about here] 3.3 Measures Dependent varables Accordng to Oerlemans et al. (1998), the effects of nternal and external resources on frms nnovaton outcomes vary accordng to the ndustry n whch the frm operates and the type of nnovaton developed. The lterature on the sources and determnants of technologcal change has tradtonally focused on the study of product nnovaton, and neglects process nnovatons (Rechsten and Salter, 2006). In our analyss we dstngush between these two types usng dchotomous varables - related to product 15

16 nnovaton (PRODIN) and process nnovaton (PROCIN) - based on the responses to two questons n the survey that enqure about whether the frm has ntroduced new or sgnfcantly mproved products or processes durng the perod Explanatory varables The frst group of explanatory varables relates to the dfferent external knowledge acquston strateges. Followng Veugelers (1997), we dstngush between bought-n knowledge (BUY) and knowledge acqured through cooperaton (COOPERATION). Wthn the BUY strategy, we further dstngush among external R&D (ERD), technology emboded n machnery and equpment (EQ), and ntangble technology n the form of patents, trademarks, software, etc. (TECNO). These strateges are measured usng dummy varables that take the value 1 f the frm has used the strategy durng the perod and 0 otherwse. The database provdes nformaton on expendture on these actvtes, for We decded on dchotomous varables because they refer to the same perod as the dependent varables, thus avodng relatng knowledge sourcng strateges n 2004 wth nnovatons n prevous years. Generally speakng, R&D outsourcng s assocated wth product nnovaton, partcularly n the case of scence-based frms, and technologcal knowledge emboded n machnery and equpment s tradtonally related to process nnovaton, partcularly for supplerdomnated frms (Von Hppel, 1988). The effect of ntangble technology acquston has been relatvely under researched, although a postve relatonshp between ths varable and the frm s nnovatve performance s lkely. Strctly speakng, cooperaton s not purely related to external knowledge acquston because t bulds on externally suppled knowledge and frm s nternal capactes. 16

17 Cooperaton can take several forms dependng on the characterstcs of the partners, the organzatonal structure of the relatonshp, the scope of the project, the tme horzon, etc. (Howells et al., 2003). Ths has resulted n a number of taxonomes for dfferent modes of nter-frm relatonshps. We can make a basc dstncton between equty-based jont ventures (JV) and contractual partnershps, such as jont R&D and jont development agreements. JVs are organzatonal unts created and controlled by two or more parentcompanes, whch ncrease the organzatonal nterdependence of the parent companes. Contractual agreements refer to technology and R&D sharng among two or more nsttutons, n combnaton wth jont research or jont development projects (Hagedoorn, 2002). We focus on contractual cooperaton, for whch we have nformaton from TICS. We drew specfcally on the responses to the questons about cooperaton wth external agents for R&D and nnovaton actvtes durng the perod Based on prevous classfcatons relatng to the nature of external knowledge sources (Klevorck et al., 1995), we constructed two varables CI and CNI wth the am of reducng the number of varables n the regresson analyss. The frst relates to cooperaton wth ndustral agents (clents, supplers, compettors and sster companes); the second relates to cooperaton wth scentfc agents or wth agents outsde the ndustry chan (commercal laboratores/r&d frms, unverstes, publc research nsttutons and technologcal centres). These varables are measured on an ordnal scale (range 0-4) accordng to the number of collaboratve agents n each category. The Cronbach alpha coeffcents are 0.68 (CI) and 0.77 (CN). The effect of cooperaton wth external agents on nnovaton n frms has been extensvely examned n the lterature On the one hand, these studes dentfed sectoral varatons assocated wth greater relatve mportance of cooperaton wth scentfc agents for scence-based frms, and wth ndustral agents for suppler-domnated frms (Freel, 2003; 17

18 Oerlemans, 1998). On the other hand, although unverstes and R&D nsttutes have tradtonally been recognzed as key actors n new product development, ther role n process nnovaton s far from clear (MacPherson, 1997; Rechsten and Salter, 2006). The second group of explanatory varables relates to the frm s nternal technologcal capabltes. We nclude two varables tradtonally consdered to be ndcators of frms efforts to create and assmlate new knowledge. The frst refers to the development of nhouse R&D. The 2004 TICS database reports whether the frms carred out contnuous or occasonal n-house R&D actvtes n Based on ths, we bult the varable IRD, whch takes the value 0 f frms dd not undertake nternal R&D actvtes n , 1 f they occasonally engaged n R&D actvtes, and 2 f they had contnuous n-house R&D. We chose ths measure rather than a dummy varable as we consder t to be a better proxy for the frm s R&D stock and therefore a better ndcator of technologcal capabltes. The second varable, TRAINING, refers to efforts made to tran those staff nvolved n the mplementaton of a product or process nnovaton. Ths s a dummy varable that takes the value 1 f the frm has carred out tranng durng the perod and 0 otherwse. Both nternal R&D and nnovaton related tranng ncrease the frm s organzatonal knowledge base and ts ablty to utlze ths knowledge (Caloghrou et al., 2004). Emprcal studes demonstrate the mportance of nternal R&D as a determnant of product nnovaton, but are nconclusve about the nfluence of ths varable on new process development. Freel (2003), for nstance, found that nternal R&D expendture by scence-based and suppler-domnated frms was not assocated wth process nnovaton, whereas Rechsten and Salter (2006) found evdence n favour of a sgnfcant and postve relatonshp between these varables. Lkewse, there s no consensus on the 18

19 nfluence of nvestment n staff tranng on new process development or the launch of new products. On the other hand, t has been suggested that a frm s nternal capactes condton the effects of external knowledge sourcng strateges on nnovatve performance. Thus, Harab (1995) and Klevorck et al. (1995) argue that only those frms wth a crtcal mass of knowledge are able to use the knowledge that exsts n ther envronment to expand ther nnovaton capabltes. Also, Cohen and Levnthal (1989, 1990) refer to the two faces of R&D, n terms of the dfferent effects of nternal R&D actvtes on the frm s nnovaton performance. Ths suggests that there s a drect and postve effect, snce these actvtes engender new knowledge, whch can be used for the development of new or enhanced products and/or processes. In addton, there s an ndrect effect resultng from the ncrease n the frm s absorptve capacty, whch facltates the acquston and explotaton of external knowledge, at least f the frm s wllng to overcome the not-nvented-here syndrome (Katz and Allen, 1982; Veugelers and Cassman, 1999; Laursen and Salter, 2006). Ths effect s partcularly relevant for scentfc or technologcal knowledge whose absorpton and use wll requre greater efforts on the part of the frm. Ths apples to knowledge acqured through cooperaton wth scentfc agents or R&D outsourcng. It would be expected, then, that the development of n-house R&D actvtes, especally f they are contnuous, would be lkely not only to ncrease the potental to generate product and process nnovatons, but also to emphasze the role of external scentfc and technologcal knowledge as determnants of nnovaton. Ths mples that the greater the frm s nternal capactes, the greater the effect of R&D contractng and cooperaton wth scentfc agents on the frm s nnovatve performance. 19

20 We also nclude as a control varable a measure for frm sze (SIZE). Although the mportance of sze as a determnant of nnovaton has been extensvely analysed, t s dffcult to determne a pror ts real nfluence. The Schumpeteran hypothess holds that, as large frms own the necessary resources (nfrastructure, fnancal resources, producton and marketng capabltes, R&D) to cope wth the rsks assocated wth nnovaton processes, they are more lkely than ther smaller counterparts to engage n nnovatve actvtes. Some recent emprcal works have found evdence supportng ths hypothess (Freel, 2003; Rechsten and Salter, 2006). Other studes, however, have produced contrastng results. Acs and Audretsch s (1988) work, for nstance, shows that small and medum szed enterprses (less than 250 employees) are more nnovatonntensve than larger frms, due, amongst other reasons, to ther lower degree of rgdty when faced wth nnovatons (Caloghrou et al., 2004; Cohen, 1995). In ths analyss SIZE s measured as the logarthm of the frm s sales volume n Logarthmc specfcaton has been acknowledged to be the most approprate technque for measurng frm sze and testng the Schumpeteran hypothess (see Kamen and Schwartz,1982; Cohen, 1995). 3.4 Econometrc specfcatons and selecton bas control Although our study focuses on the effects of dfferent external knowledge sourcng strateges on the frm s nnovatve performance, restrctng the analyss only to nnovator frms could lead to selecton bas. To address ths potental problem we used two-part logt models (Mannng et al., 1987). In the frst stage of our analyss, we ran a general (selecton) model usng all avalable observatons and consderng the ndependent varable INNOVATOR to ndcate whether or not the frm was nnovatve. 20

21 Ths allowed us to calculate the probabltes of each frm becomng an nnovator, (PINNOVATOR). We ran second-stage models (man models) n whch the dependent varables were whether the frm had ntroduced a new or mproved product or process n the market durng the perod In these second-stage models non-nnovator frms were dropped from the analyss, but the PINNOVATOR varable was ncluded as an addtonal ndependent varable. Accordng to Haas and Hansen (2005), ths procedure s approprate when the dependent varable n the selecton model s observed rather than estmated, and more approprate than a Heckman selecton model snce the dependent varable n the man model s bnary rather than contnuous. The econometrc specfcaton of the frst-stage model s as follow: INNOVATOR + α FACknow 5 = α 0 + α 1SIZE + α 2EXPORT + α 3GROUP + α 4FAC cos + α FACmark 6 + α FACneed 7 t The INNOVATOR varable s a dummy varable that takes the value of 1 f the frm s an nnovator and 0 otherwse. Consstent wth the lterature (Cassman and Veugelers, 1999), we ncluded as explanatory varables, frm sze (SIZE), export orentaton (EXPORT) and belongng to a group (GROUP), as well as ndustry dummes to capture future demand and technologcal opportunty. We also ncluded four varables measurng the obstacles to nnovaton: cost (FACcost), lack of technologcal/market nformaton (FACknow), lack of demand (FACmark) and need for nnovaton (FACneed). For a detaled descrpton of these varables, see Appendx A. The second stage models were estmated usng the varables descrbed n Secton 3.2. and ncludng the PINNOVATOR varable. We can defne the followng specfcatons: d INNOV = α 0 + α1erd + α 2EQ + α3tecno + α 4CI + α5cni + α6 SIZE (model. 1) 21

22 INNOV d = α + α ERD + α EQ + α TECNO + α CI + α CNI + α IRD + α TRAINING + α SIZE (model. 2) INNOV d + α IRD * CNI = α + α ERD + α EQ + α TECNO + α CI + α CNI + α IRD + α TRAINING + α SIZE + α IRD * ERD + α IRD * CI (model. 3) where = 1,...,N (number of occurrences); and d = PRODIN, PROCIN. In the frst model, we analyse the effect of external knowledge sources on a frm s nnovaton performance, regardless of ts nternal technologcal capabltes. In the second model, we nclude IRD and TRAINING as addtonal explanatory varables n order to determne to what extent nternal capabltes nfluence the nnovaton outcome and to ascertan ther mpact on the effects of external knowledge sourcng. To explore ths aspect further, model 3 ncludes three nteractve terms, derved by multplyng IRD (moderatng varable) by the ERD, CI, CNI (moderated) varables. 3 Each of these three models was estmated for both of the two sectoral classes analysed, employng new or sgnfcantly mproved product ntroducton (PRODIN), and new or sgnfcantly mproved process ntroducton (PROCIN) as the dependent varables. Ths analyss yelded 12 logstc equatons, whch, based on the dchotomy of the dependent varables, were estmated usng bnary logstc regresson. 4. Results 4.1 Descrptve results Tables 3 and 4 present the basc statstcs for the varables n the regresson analyss, and ther correlaton coeffcents. [Insert table 3 about here] [Insert table 4 about here] 22

23 In lne wth Pavtt s (1984) conclusons, our fndngs show that suppler-domnated frms nnovate more n processes and scence-based frms nnovate more n products. The descrptve statstcs also show some dfferences n terms of the use of external knowledge sourcng strateges, especally cooperaton. Frst, scence-based frms cooperate more than suppler-domnated frms wth external agents, although the level of cooperaton s stll generally below the European average. 4 Thus, cooperaton s more wdespread n sectors of hgher technologcal ntensty, as suggested by Hagedoorn (1993) and Wang (1994). In partnershps, cooperaton wth scentfc agents s the most frequent form of collaboraton for scence-based frms, but, surprsngly, cooperaton wth ndustral agents s not proportonately greater n the case of suppler-domnated frms. These results concde wth those n Castro and Fernández (2006), and demonstrate that n general Spansh frms engage n low levels of cooperaton, and that those frms that collaborate are more lkely to choose scentfc nsttutons as partners. If we look at the ndvdual categores, we can see that suppler-domnated frms manly cooperate wth supplers of machnery and equpment and scence-based frms manly cooperate wth unverstes. If we consder knowledge acquston as a market transacton (buy strategy), scencebased frms tend towards R&D outsourcng, whle suppler-domnated frms tend to draw on the emboded purchase of machnery and equpment. These results largely concde wth the expected patterns. Other dfferences across the sectoral categores analysed relate to the development of nhouse R&D actvtes. Our fndngs show that 93% of scence-based frms conduct nhouse R&D, 80% of them contnuously, whle the same proportons for supplerdomnated frms are 76% and 58% respectvely. 23

24 The correlaton matrx reveals some nterestng fndngs. In the two sectoral categores analysed, nternal R&D actvtes show strong correlaton wth product, but not process nnovaton. Process nnovaton, nstead, s manly assocated wth the purchase of machnery and equpment, especally n suppler-domnated frms. On the other hand, nternal R&D actvty s postvely related to cooperaton strateges, and especally cooperaton wth scentfc agents. Ths latter result may be an ndcaton of the twofold effect of nternal R&D, that the greater the effort on ths actvty, the greater the ablty of the frm to dentfy and use sources of scentfc knowledge. Ths s not to say that frms that do not cooperate wth scentfc agents fal to perform n-house R&D, but rather that those that do cooperate are generally more actve n ths respect (Bayona et al., 2002). However, ths postve relatonshp s not observed n the case of R&D outsourcng. In fact, the correlaton coeffcent for the ERD and IRD varables s negatve and sgnfcant for suppler-domnated frms. Ths suggests that R&D outsourcng tends to dmnsh f the frm conducts n-house R&D, especally n a contnuous way. Fnally, n contrast to some studes (Martínez-Ros, 2000; Rechsten and Salter, 2006), we fnd that product and process nnovaton are not sgnfcantly correlated. Indeed, the correlaton coeffcent between these varables s negatve although not sgnfcant, for suppler domnated-frms. It seems that for Spansh nnovatve frms, product and process nnovaton are ndependent of each other, and are assocated wth dfferent knowledge sourcng strateges. 4.2 Regresson analyss 24

25 The parameters estmated for the selecton model ndcate that the ndependent varables for whether or not the frm becomes an nnovator have hgh jont explanatory power. The results, whch are dsplayed n Appendx B, ndcate that frm sze has a sgnfcant effect on the probablty of beng an nnovator. Based on ths model, we calculated the PINNOVATOR varable, whch s ncluded n the second- stage models (Tables 5 and 6). Table 5 presents the estmatons for process nnovaton; Table 6 presents the estmatons for product nnovaton. [Insert table 5 about here] [Insert table 6 about here] In general, t can be sad that the econometrc specfcatons have acceptable predctve power, wth an overall percentage of accurate predctons hgher than 68% n all cases. Ch-square values for the degrees of freedom n the models seem to ndcate rejecton of the null hypothess that all parameters except the ntersecton, are equal to zero wth a sgnfcance level of 1%. PINNOVATOR s not sgnfcant n most cases and when t s excluded from the models, the man varables barely change. 5 Thus, the hypothess of sample selecton bas can be rejected. Model 1 reports the baselne model ncludng only the control varables and the external knowledge sourcng strateges. Ths model ndcates that the effect of the dfferent modaltes of external knowledge acquston on the frm s nnovaton performance vares, manly dependng on the type of nnovaton. The results for process nnovaton (Table 5) show that the acquston of technologcal knowledge emboded n machnery and equpment (EQ) has the greatest mpact. In the two sectoral categores analysed, the coeffcents of the EQ varable are postve and hghly sgnfcant, ndcatng that 25

26 purchase of machnery and equpment s an mportant strategy to develop new processes. In contrast, nether of the cooperaton strateges has a sgnfcant effect. It s especally surprsng that cooperaton wth ndustral agents s not sgnfcant, bearng n mnd that machnery and equpment supplers are the ndustral agents wth whch frms are more lkely to cooperate (Tables 3 and 4). These results show that n Span, n contrast to other countres, the establshment of cooperaton agreements wth ndustral agents does not enhance frms producton processes. For the UK, Freel (2003) and Rechsten and Salter (2006) found that the establshment of lnks wth supplers s mportant to enhance process nnovaton, especally for suppler-domnated frms. A lkely explanaton of our results s the low technologcal level of the frms n these sectors, for whch process nnovatons manly consst of mnor ncremental mprovements acheved through the purchase of new machnery and equpment, wth the suppler s role beng reduced to the provson of ths equpment. For product nnovaton (Table 6), the effect of external knowledge sourcng strateges vares dependng on the sectoral category. The acquston of ntangble technology (TECNO) and cooperaton wth ndustral agents (CI) have a sgnfcant nfluence on suppler-domnated frms, whle machnery and equpment acquston (EQ) and cooperaton wth scentfc agents (CNI) are the only strateges that are shown to have a postve and sgnfcant effect for scence-based frms. Two mportant ponts emerge from these fndngs. Frst, cooperaton s a useful strategy for the development of new products. Second, the choce of cooperaton partners depends on the ndustral sector. These results are consstent wth the fndngs from other studes that show that the value of external factors to nnovaton may have been overestmated by the network approach (Sternberg, 2000; Oerlemans et al., 1998), and strongly ndcate the mportance of 26

27 cooperaton n condtonal terms. As Freel (2003, p. 762.) puts t: certan types of cooperaton are assocated wth specfc types of nnovaton, nvolvng certan frms, n certan sectors. Lkewse, contrary to expectatons, R&D outsourcng (ERD) was not found to be sgnfcant, even for scence-based frms. In fact, n most cases, the estmated coeffcents of ths varable were negatve. Ths suggests that R&D contractng s not amed at strengthenng the frm s nnovatve capactes as demonstrated by the servces provded by unverstes to frms, whch are manly occasonal actvtes wth lttle scentfc content. 6 The effects of the frm s nternal capactes are ntroduced n model 2 through the varables IRD and TRAINING. The nfluence of these varables on frms nnovatve performance depends on the type of nnovaton, but s smlar across sectoral categores. In-house R&D (IRD) has a sgnfcant nfluence on product nnovaton n the two sectoral categores, but ts effect s not sgnfcant for process nnovaton. Internal tranng (TRAINING), on the other hand, sgnfcantly affects only process nnovaton. Some addtonal comments are needed to clarfy these results. The hgh sgnfcance of the IRD varable on product nnovaton hghlghts that far from losng relevance, mplementaton of n-house R&D actvtes s the man strategy for developng new products. On the other hand, t s hardly surprsng that IRD was found to be not sgnfcant for process nnovaton. As mentoned n Secton studes on the effect of ths varable on process nnovaton have produced mxed fndngs. In fact, our results concde wth those found by Freel (2003) for the UK. In any case, these fndngs hghlght that n Spansh nnovatve frms wth n-house R&D, these efforts are manly drected towards product nnovaton. Improvements to the productve process are not based on ether research or cooperaton wth external agents, but are largely drven by the purchase of machnery and equpment. Moreover, the acquston of new machnery 27

28 and equpment usually requres some tranng of techncal staff n how to use the new equpment, whch explans the postve and sgnfcant effect of TRAINING. In general, the ncluson of n-house R&D actvtes n the analyss has lttle effect on external knowledge sourcng strateges. Focusng on product nnovaton (where the IRD varable has a sgnfcant effect), only a change n the sgnfcance of the CNI varable s noted for scence-based frms. Ths varable loses explanatory power when n-house R&D s consdered, although t remans sgnfcant at 10%. In addton, the model 3 estmatons show that the nteractve term CNI*IRD has a negatve sgn for scencebased frms, although t s not sgnfcant. These results suggest that nternal R&D efforts nstead of promotng the explotaton of external scentfc knowledge sources for nnovaton development, seem to reduce the mportance of these types of sources for product nnovaton. To summarze, our results do not support the complementarty hypothess between nternal knowledge development and external knowledge sourcng. However, gven the nsgnfcance of the nteractve terms and the problems related to the nterpretaton of these terms n the logt models (Hoetker, 2007) 7, we can not conclude that there are substtuton effects between these strateges. In any case, the above results dffer from those n Cassman and Veugelers (2006), but are closer to the fndngs n Laursen and Salter (2006) on the exstence of substtuton effects between n-house R&D and the openness of frm s external search strateges. Laursen and Salter explan these fndngs by the not-nvented-here syndrome, whch could be equally vald n our case. In-house R&D actvtes ncrease the frm s technologcal capactes leadng the R&D team to beleve that t has a monopoly of knowledge n the feld. Ths makes frms resstant to the use of external deas, especally those close to ts core competences. These crcumstance could lead the frm 28

29 to dsmss the need to cooperate wth external agents or, alternatvely, and as seems to have occurred n our case, to cooperate n actvtes not amed at strengthenng ts nnovatve capabltes. Ths phenomenon s becomng more notceable n the Spansh context, where scentfc agents, especally unverstes, have not tradtonally been consdered to be mportant sources of knowledge for frms nnovatve actvtes. 8 Ths argument s n lne wth Cassman and Veugelers (2006) fndng that a frm s relance on more basc types of know-how affects the strength of the complementarty between nnovaton strateges. Thus, although frms that perform nternal R&D on a contnuous bass tend to cooperate more wth unverstes relatve to other external agents, ths cooperaton does not seem to be orented towards the development of key actvtes for ther nnovaton processes. Ths cooperaton wth scentfc agents mght be motvated more by access to funds through partcpaton n government sponsored programmes, than to mprovng nnovatve capactes based on the ntegraton of complementary knowledge from external agents. The corollary that may be drawn from the above, s that the effectveness of external knowledge sourcng strateges to encourage a frm s nnovatve performance depends not only on the acquston of knowledge, but also on the frm s capablty to set prortes and concentrate resources on the explotaton of relevant external knowledge. In ths context, the dstncton between potental (acquston and assmlaton of external knowledge) and realzed (transformaton and explotaton of external knowledge) absorptve capacty, ntroduced by Zahra and George (2002), becomes very mportant for analysng the dual role of n-house R&D. We can also see that the nfluence of machnery and equpment acquston and cooperaton wth ndustral agents s the same n model 2 as n model 1, confrmng that, unlke scentfc knowledge sources, the effect of ndustral knowledge sources on 29

30 nnovaton performance s largely dependent on the frm s nternal technologcal capabltes. Ths s to be expected f we consder that the knowledge generated by nhouse R&D actvtes, n prncple, s dfferent n nature from that generated through the purchase of machnery or cooperaton wth ndustral agents. Also, as suggested by Cohen and Levnthal (1990), frms can access and explot the knowledge generated by supplers, compettors and customers wth relatve ease and, therefore, do not requre a hgh level of nternal technologcal competences. Fnally, we found that the SIZE varable was not sgnfcant n ether process or product nnovaton; however, n the frst-stage models frm sze had a sgnfcant and postve effect for two of the sectoral categores analysed. Ths suggests that the effect of frm sze s lmted only to the decson to mplement an nnovaton actvty. Once the frm has decded to nnovate, the probablty that t wll ntroduce new products or processes does not depend on sze. 5. Conclusons The mportance of external knowledge sourcng to a frm s nnovaton strategy has been addressed extensvely n the recent lterature. On the one hand, t has been establshed that frms are not self-suffcent wth regard to technologcal resources and that they need to combne ther capabltes wth the capabltes that exst n other companes and nsttutons. On the other hand, followng the noton of absorptve capacty, t has been shown that n-house R&D actvtes not only promote the use of external knowledge sources, but also ncrease a frm s capacty to explot them effcently for the development of new products and processes. To deepen our understandng of the role of external knowledge sources n enhancng frms nnovatve performance, ths study has 30