The substitute effect of internal R&D and external knowledge acquisition in emerging markets

Abstract

Purpose This paper aims to provide a new perspective in investigating how internal research and development (R&D) and external knowledge acquisition interact regarding their influence on innovation performance in an emerging market context. Building on an attention-based view (ABV), it argues that internal R&D and external knowledge acquisition can be substitutes for each other in emerging markets. Its contingency factors are also discussed according to the principles of the ABV. Design/methodology/approach The proposed hypotheses were empirically tested using a Tobit model approach. The data used was from the enterprise survey and the follow-up innovation survey conducted by the World Bank in 10 emerging market countries. Findings The results indicate that internal R&D and external knowledge acquisition entails a substitute effect among emerging market firms (EMFs). A higher level of manager’s open-mindedness to external knowledge and firm performance and a lower level of firm administrative control help mitigate the substitute effect of internal R&D and external knowledge acquisition. While adequate financial resources may not necessarily mitigate the substitute effect, it is an essential condition for the external knowledge acquisition to play a role in enhancing innovation performance. Research limitations/implications The research uses a set of cross-sectional data. A dynamic study will provide a deeper understanding of the long-term effects of innovation investments. Practical implications To better use innovation investments, EMFs need to assess their specific conditions and the possible substitute effect of internal R&D and external knowledge acquisition activities. Originality/value Previous research discussing the interactive effect of internal R&D and external knowledge acquisition has mostly focused on an absorptive capacity perspective, which represents a firm’s technical ability. This study argues that these investments not only involve in absorbing knowledge technically but also form a challenge for the limited firm resources and can cause cognitive problems in management, especially for EMFs.