Are External and Internal R&D Complementary or Substitute for the Product Innovation of International Joint Ventures in China?

Abstract

The product innovation of international joint ventures (IJVs) is often seen as an outcome of the combinative capability to synergize and apply different knowledge components from both foreign and local partners. In the era of open innovation, it becomes more common for the IJVs to conduct the internal (in-house) R&D and external R&D beyond the firm boundaries simultaneously. Such external R&D includes contracting or joint R&D programs with the local business partners and research universities or institutes. In this study, we argue that in an emerging market like China, due to the market ambiguity and cultural barriers, there exists a substitute effect between external and internal R&D for product innovation of IJVs. However, a high combinative capability of IJV will mitigate the substitute effect such as the local partner diversity of IJVs is high and the foreign partners of IJVs are from Hong Kong, Macau and Taiwan (HMT). On the contrary, the local market uncertainty will strengthen the substitute effect. We find support for these hypotheses with a unique dataset of IJVs in China from 2002 to 2006. Discussions will be provided.