How Can Firms’ Basic Research Turn Into Product Innovation? The Role of Absorptive Capacity and Industry Appropriability

Abstract

We explain why companies seeking superior product innovation should invest in basic research. Our arguments highlight the role of absorptive capacity and examine how industry appropriability influences these relations. Based on a rich dataset of 8416 firms, we argue that basic research in firms increases their knowledge stock and flows, therefore improving their capacity to identify, assimilate, and exploit external knowledge, which allows them to enhance their product innovation performance. We also verify that strong appropriability regimes not only reduce the effect of basic research on absorptive capacity, but also affect the relation between absorptive capacity and product innovation in two ways. In businesses with a high absorptive capacity, strong appropriability regimes exert a negative influence by reducing product innovation; however, businesses with a low absorptive capacity see their level of product innovation increase. This evidence not only throws into question the attitude of many managers toward basic research; it also calls for open reflection on both the net effect of appropriability on innovative performance and the stages of the innovation process to which public resources should be allocated.