Connecting external knowledge usage and firm performance: An empirical analysis

Abstract

Prior research suggests that firms create breakthrough innovations by using external knowledge, but it also underscores the difficulties firms face in acquiring and applying external knowledge. In this paper, we combine these insights to examine the conditions under which external knowledge usage will either enhance or erode firm performance. In particular, we argue that high external knowledge usage has a negative effect on performance when firms enter multiple new product markets, but a positive effect on performance when firms using external knowledge have higher absorptive capacity. We find general support for our hypotheses, which we test using patent citation data from the global integrated circuit manufacturing industry. Our findings have important implications for managers of firms making strategic decisions about their firms’ product portfolios and the degree to which they use external knowledge.