Making Up Is Hard to Do: Knowledge Acquisition Strategies and the Nature of New Product Innovation

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Innovation creates significant challenges for firms in high‐technology industries. This article examines how the use of external knowledge acquired from mergers and acquisitions (M&As) and joint ventures (JVs) influence the nature of innovative competence in the global pharmaceutical industry. We create a unique database on never‐before approved products that measure the scientific merit of new, exploratory product innovations, ranging from radical to incremental. We then follow their market success by recording the number of new exploitative product innovations that stem from these product innovations and that are later approved and subsequently marketed. Using a large data set spanning a 15‐year period, we find that firms were able to “make up” for their lack of exploitation or exploration innovative capabilities through the use ofM&As andJVs. These external knowledge acquisition strategies were found to overcome internal processes that otherwise could cause firms to overemphasize exploitation over exploration and vice versa. Our findings suggest that acquiring external knowledge viaM&As is associated with diminished exploratory product innovation, while assimilating external knowledge sourced fromJVsis associated with a reduction in new exploitative product innovation.