The influence of external knowledge sources on innovation performance for emerging market firms

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Master Thesis

The influence of external knowledge sources on

innovation performance for emerging market firms

Sander Oudbier

11428066

23 June 2017

MSc. In Business Administration – International Management Track

University of Amsterdam

Supervisor: Dr. Mashiho Mihalache

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STATEMENT OF ORIGINIALITY

This document is written by student Sander Oudbier who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

Recent studies warned that firms can be too reliant on internal development when innovating. Therefore, multiple studies focused on the influence of external knowledge sources. These studies argue that external knowledge sources can result in higher speed of innovation, higher commercial returns, and shared risks and resources among partners. For emerging economies, the role of external knowledge sources on innovation performance is relatively unexplored. This thesis examines the effect of three different external knowledge sources (market-, science-based and others) on innovation performance measured as the percentage of sales from the main innovative product or service in emerging market firms. Moreover, both the level of technological opportunities and the level of foreign presence in the industry are examined as moderators on this relationship. Using 3492 companies from the World Bank Innovation Survey 2013 in India, the results show that there is only a significant negative relationship between the use of other external knowledge sources and innovation performance for firms in the sample. It is however likely that the relationship between external knowledge sources and innovation performance is negative for the others as well. There is no significant relationship for both moderators with the relationship studied.

Keywords: external knowledge sources; innovation performance; emerging market firms;

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1. Introduction

Emerging market firms (EMFs) have become increasingly important in the global economy, thereby occupying key competitive positions (Bilgili, Kedia, & Bilgili, 2016; Jiatao Li & Kozhikode, 2008; Wright, Filatotchev, Hoskisson, & Peng, 2005). They are even expected to comprise over 45% of the Fortune Global 500 index by the year of 2025 (Dobbs et al., 2013). However, EMFs are latecomers at the global market and therefore face difficulties competing with firms from developed countries (Bilgili et al., 2016). For EMFs to be able to compete domestically and globally they have to gain competitive advantages, whereby innovation is key (Kumar, Mudambi, & Gray, 2013).

Emerging market firms can innovate in different ways compared to firms from developed markets. One of the options that has extensively been studied is the aggressive outward foreign direct investment (OFDI) by EMFs into developed countries (Gammeltoft, Pradhan, & Goldstein, 2010; Jian Li, Strange, Ning, & Sutherland, 2016; Luo & Tung, 2007). The motivation behind this approach is strategic asset seeking. Another way to innovate for EMFs is by conducting internal R&D, which helps them to build up their knowledge base and contributes to their competitive advantage (Chen, Vanhaverbeke, & Du, 2016). However, both ways of innovating (OFDI and internal R&D) have their downsides; for example, OFDI cannot easily transfer firm-specific technological knowledge since this knowledge is usually very tacit and thus hard to interpret and imitate by other companies looking to acquire this knowledge (Nonaka, 1994). A downside of internal R&D is that it can be time consuming, which hinders a firm when attempting to create or imitate technologies fast enough to be able to exploit them (Tsai & Wang, 2008). A complementarity to OFDI and internal R&D or an alternative to counter these downsides, is the use of external knowledge sources by collaborating with other parties (Tsai & Wang, 2008). Some sources a firm can use when

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looking for external knowledge are; suppliers, customers, competitors, and universities or research institutes (Chen et al., 2016).

However, the literature on the relationship between the different knowledge streams and innovation performance is divided. Kafouros and Forsans (2012) found that internal R&D activities have a higher performance effect than the contributions of external knowledge sourcing, while Chen et al. (2016) found that firms benefit from collaborating with several types of external knowledge sources. The latter findings are supported by multiple researchers (Brockhoff, 2003; B. Tether, 2002; Tsai & Wang, 2008). These conflicting results imply that some moderators may exist (Tsai & Wang, 2008). Two possible moderators for this relationship have been researched, being absorptive capacity and the level of internal R&D (Chen et al., 2016). However, these two moderators only cover the internal factors influencing the firm, and not possible factors imposed by the external environment.

A similar relationship as between external knowledge sources and innovation performance has been researched by Wang and Kafouros (2009). The authors research the factors determining innovation performance in emerging economies. They propose a framework with two factors moderating the relationship between international trade, FDI and R&D and innovation performance, which are drawn from industrial organization theory and emphasize the role of the external environment. The moderators they studied are the level of foreign presence in an industry and technological opportunities. The authors find that the level of foreign presence negatively moderates the relationship between internal R&D and innovation performance, while the moderating effect of technological opportunities within an industry on this relationship is positive.

Taking the same perspective as Buckley, Clegg, and Wang (2007), thereby drawing from industrial organization (IO) theory, this paper will focus on the influence of the external

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environment by including the level of technological opportunities in an industry and the foreign presence in an industry as moderating factors on the relationship between the different external knowledge sources and firm innovation performance. This results in the following research question: How does the use of different external knowledge sources

influence innovation performance of emerging market firms?

The contribution of this paper will first be to fill the gap on how emerging market firms tackle the challenge of innovating. It does this by analysing the data from the World Bank Innovation Survey 2013 in India. Furthermore, since there are downsides of aggressive OFDIs into developed countries and internal R&D, it is important to look if external sources can add to the innovation performance of EMFs and if this relationship is moderated by the environment of the firm. The managerial implication of this study will be the knowledge for managers as to what extent external knowledge contributes to innovation performance and whether a certain type of external knowledge would be more beneficial to innovation performance in an industry than others.

This thesis follows the following structure. First of all, in the following section the relevant literature on innovation, external knowledge sources and innovation performance is discussed. Subsequently, hypotheses are developed and combined into a theoretical framework. In section 4, the methodology and variables used will be discussed as well as the results of the data analysis. In section 5, the findings of this thesis will be discussed accompanied with the implications and limitations of this study. Finally, in section 6 concluding remarks are made.

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2. Literature review

2.1 Innovation

In the literature on innovation, different definitions have been brought forth. To come up with an integrative definition, Baregheh, Rowley and Sambrook (2009) have analysed the extant definitions of innovation and propose the following definition of innovation: “Innovation is

the multi-stage process whereby organizations transform ideas into new/improved products, service or processes, in order to advance, compete and differentiate themselves successfully in their marketplace” (Baregheh et al, 2009, p. 1334).

Innovation helps firms to create more economic value and move up in the value chain by producing higher quality and sophisticated products (Singh, 2009). Innovation also depends on the technological capabilities of the firm, as highlighted by the resource-based view of the firm. These capabilities can provide a firm with a long-term competitive advantage. Furthermore, these capabilities also help translating the firm’s tangible and intangible resources into new technologies and innovative products which enhances the firm’s competitiveness (Morck & Yeung, 1991; Singh, 2009).

The most commonly used dimensions of innovation are product- and process innovations (Leiponen & Helfat, 2010). Product innovations are innovations that involve new technology, resulting in new products or services. Process innovations, on the other hand, come from firms that introduce new equipment, methods or elements to the firm’s existing production system to develop a product or service (Camisón-Zornoza, Lapiedra-Alcamí, Segarra-Ciprés, & Boronat-Navarro, 2004). Those innovations can be incremental or radical. The difference between an incremental or radical innovation is determined by whether or not there is new technology incorporated in the innovation that is a risky change from the existing standard (Ettlie, Bridges, & O'Keefe, 1984). In the study of Ettlie et al. (1984) it is

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suggested that the cost or magnitude of the change required by the organization can determine the designation of a radical, instead of incremental, innovation.

Firms from developed economies have two possible sources of knowledge for the development of innovation, namely the transfer of knowledge or own-generation (Frenz & Ietto-Gillies, 2009). For own-generation of knowledge, in-house R&D is regarded as the most established source. The transfer of knowledge is a more diverse range of literature which studies the innovation performance resulting from these knowledge transfers. An example of this is knowledge that lies outside of the firm, such as R&D which is outsourced to another organization. Furthermore, collaborations with institutions and external firms, and the transfer of knowledge between units of the same company are seen as sources for innovation-related knowledge.

2.1.2 Innovation in emerging market firms

Emerging economies are becoming increasingly important in the global economy (Keen & Wu, 2011). Emerging economies can be defined as countries that satisfy two criteria: “a rapid pace of economic development, and government policies favouring economic liberalization and the adaptation of a free-market system” (Arnold & Quelch, 1998, in Hoskisson, Eden, Lau & Wright, 2000). In the literature two groups of emerging economies are distinguished: developing countries in Latin America, Asia, the Middle East, and Africa and the transition economies in China and the former Soviet Union (Hoskisson et al., 2000).

Firms from these emerging economies face difficulties against the firms from developed countries, which were invariably first-movers with cutting edge technology that used that advantage to internationalize (Ramamurti, 2016). Emerging-market firms, on the contrary, are late-movers with weak technology (Luo & Tung, 2007). In order to gain competitive advantages, these firms must develop new competencies on top of continuously

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upgrading their existing capabilities (Keen & Wu, 2011). To develop these competencies, innovation is important (Kumar et al., 2013). Many scholars present evidence that emerging-market firms seek the sources for this innovation overseas. These outward foreign direct investments (OFDI) originate from a strategic asset-seeking motive (Gammeltoft et al., 2010; Jian Li et al., 2016; Luo & Tung, 2007). However, firms can also innovate through the use of internal R&D and external knowledge partners.

2.2 External knowledge sourcing

Knowledge is one of the most important resources of a firm (Grant, 1996). This knowledge can be acquired internally, but also externally. For a long time, the focus of acquiring new knowledge to contribute to the firm’s competitive advantage has been on the internal development through R&D (Chen et al., 2016). At first, innovation was conceived as “a linear process where firms relied almost exclusively on knowledge created internally or acquired at the initial, conceptual, stages, and thus was characterized by a relatively weak need for knowledge integration from external sources” (Shearmur, Doloreux, & Laperrière, 2015).

However, as Chen et al. (2016) discuss, recent studies warned that firms can also be too reliant on internal development. One of the reasons is that learning creates its own traps. A firm can be too focused on familiar, mature and similar solutions when innovating (Ahuja & Katila, 2001). Related to this is the concept of local search, where a firm’s current R&D activity closely resembles its previous R&D activity instead of looking for new ways to innovate (Rosenkopf & Nerkar, 2001). Furthermore, the path dependence nature of internal R&D is another reason why firm can be too reliant on this type of knowledge creation (Rosenkopf & Nerkar, 2001). Lastly, internally developed knowledge can sometimes inhibit product innovation (Anderson & Tushman, 1990; Nelson & Winter, 1982).

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Nowadays innovation is not seen as a linear process anymore, but as an open and distributed process. This view recognises that, next to internal R&D, external knowledge sources are of importance. In the literature, the benefits of external sources have been described in detail. One of the benefits is that the external sources help firms to counter the above-mentioned drawbacks of internal R&D by rejuvenate the existing knowledge base of the firm (Chesbrough, 2006; Teece, 1998). Other benefits are better adaptation of the firm to the needs of dynamic market, faster speed of innovation, higher commercial returns, and shared risks and resources among partners (Du, Leten, Vanhaverbeke, & Lopez‐Vega, 2014; Hagedoorn & Duysters, 2002; Laursen & Salter, 2006). It can be concluded that the firm’s ability to effectively coordinate and integrate a broad range of both internal and external sources of scientific and technical knowledge is a requirement for innovative success.

2.4 Types of external knowledge sourcing

In the literature, many different types of firm partners are mentioned. These partners include clients, competitors, suppliers, research institutions and service firms (Shearmur et al., 2015). Two major types of external knowledge sources are identified, namely science-based knowledge sources and market-based knowledge sources. However, next to those two types, other sources can be identified as well. Those three types of sources will be discussed in the following paragraphs.

2.4.1 Science-based knowledge sources

Science-based knowledge sources refer to sources such as formal research institutes and universities (Chen et al., 2016; Danneels, 2002; Du et al., 2014; Faems, Van Looy, & Debackere, 2005). Those kinds of partners generate scientific knowledge to help firms better understand the underlying mechanisms of basic and fundamental knowledge (Chen et al., 2016). For firms from emerging economies this can be an important source of knowledge, because these firms might not have an understanding of new scientific developments.

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Furthermore, those sources can help them to build up their knowledge base (Belderbos, Carree, & Lokshin, 2004; Klevorick, Levin, Nelson, & Winter, 1995; Mowery, 1998; Veugelers & Cassiman, 2005).

Next to providing a better understanding of mechanisms, those sources can also help with providing solutions to technological problems and contribute to better innovation performance of the firm (Chen et al., 2016).

2.4.2 Market-based knowledge sources

Market-based sources relate to partners such as customers and suppliers. These value chain partners can enable firms with prototyping and further development, closely observe market trends, acquiring new technological skills and expand their innovation networks (Clark, 1989; Lettl, Herstatt, & Gemuenden, 2006). Since the contributing partners are all part of the same value chain, it is a logical result that they will all contribute actively since they will all benefit from the resulting innovation.

2.4.3 Other knowledge sources

Other knowledge sources that can be identified are competitors, companies in other industries, but also technology service providers (Chen et al., 2016). One option is to join with competitors, which is an option when developing a technology may be difficult, costly and time consuming when developed internally (B. Tether, 2002). Technology service providers play a role by providing easier access to external knowledge sources to firms from emerging economies who might have trouble detecting and evaluating potential knowledge sources.

2.5 External knowledge sources and innovation performance

As firms can benefit from external knowledge sources, prior literature has focused on whether this benefit also translates into better innovation and/ or firm performance. The

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results on this relationship are conflicting. For example, Vega-Jurado, Gutiérrez-Gracia, and Fernández-de-Lucio (2009) investigated the effects of external knowledge-sourcing strategies on the development of both product and process innovations, and assessed the degree to which such effects are influenced by the firm's internal technological capacities. Their results show a positive relationship between the use of external knowledge sources and the development of new products. However, the choice of co-operation partner is highly dependent on the industrial sector. The study of Tsai and Wang (2009) found a positive relationship as well, however this time between external technology acquisition and firm performance when looking at the Taiwanese electronics industry. It was found that most of the firms, namely 95%, acquired technology from licensing and usage distribution of the other knowledge sources used varied from 8% to 23%. In the chemicals industry, studied by Ahuja and Katila (2001), the acquisition of knowledge had a positive effect on the innovation performance of the acquiring firms. A study focusing on alliances by Anand and Khanna (2000) found that firms co-operating in alliances experienced learning effects and were able to create more value as a result.

There are also studies that looked at relationships between specific sources and innovation performance, such as the study of Kanama and Nishikawa (2017). When studying the influence of co-operating with universities, the authors found a positive relationship between the use of university knowledge and technological superiority. Furthermore, this relationship depended on the obstacles a firm faces. Another finding was that although the firms in the study accessed university knowledge, which increased their technological superiority, it was unlikely to help the firms achieve an innovation that is profitable. Finding a similar positive influence from science-based partners is the study by Kaufmann and Tödtling (2001). In their study, they demonstrated that science-based partners were more important for the introduction of advanced innovations than a firm’s customers. In terms of

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market-based sources, there have been studies that found results on its effects as well, such as Weck and Blomqvist (2008) who found that co-operating with suppliers and customers improved the innovation performance of inventors.

Furthermore, multiple studies focused on transition, emerging and newly industrialized economies as well. A positive effect from co-operating was found by Koschatzky, Bross, and Stanovnik (2001) who looked at the Slovenian manufacturing industry and found that the companies rely on both internal innovation capacity and co-operation with external partners. Co-co-operation provided the firms with minimisation of uncertainties, access to resources and the ability to enter new fields of technology. The co-operation mainly took place on the level of information exchange. Souitaris (2001) studied firms in Greece, a newly industrialised country, on the influence of multiple external communication determinants of innovation performance. One of those determinants was co-operation with external organisations, for which he found that it positively influenced the firm’s innovation performance. More specifically, co-operating with partnering organisations was found to be more important for innovation than co-operating with assisting organisations.

On the other hand, there are also studies finding an inverted U-shape or negative relationship. When studying the impact of joint R&D on firm’s innovation output in the German manufacturing industry, Berchicci (2013) found that collaboration in R&D increases the chance of developing new products. Furthermore, the number of parties co-operating in R&D improved the chance of realizing product innovations up to a certain extent, resulting in a U-shaped relationship. This is consistent with the outcomes of Kang and Kang (2009) who found a U-shaped relationship as well, between R&D collaboration and technology innovation performance. A negative relationship was found by Jones, Lanctot, and Teegen (2001) who found that all the statistically significant relationships between external

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technology acquisition and firm performance were negative, which would mean that external technology acquisition is detrimental to firm performance.

3. Theoretical Framework

3.1 External knowledge sources and innovation performance

There are conflicting results regarding the relationship between external knowledge sources and innovation performance. Some argue it is positive, whereas some others have found a U-shaped or negative relationship. However, the scholars that have found the U-U-shaped or negative relationship mainly sampled firms from developed economies. As firms from emerging markets on average have limited knowledge and resources to innovate, it is expected that for emerging market firms a more beneficial effect of external knowledge sources is present.

This beneficial effect is expected, because using external knowledge sources helps to increase the knowledge base of the emerging market firm. By co-operating, the firm can reach technological knowledge that is not within its own capabilities (Tsai & Wang, 2009). External knowledge sources can grant firms access to new knowledge that could be inefficient and too costly to develop internally (Becker & Dietz, 2004; Chen et al., 2016; Fey & Birkinshaw, 2005; Grant, 1996; Pisano, 1990). By co-operating with other organizations, both tacit and codified knowledge can be exchanged between the firms (Ahuja, 2000; Eisenhardt & Schoonhoven, 1996; Faems et al., 2005; Lambe & Spekman, 1997). As the transfer of tacit knowledge is very hard for firms as it happens only when acquiring a firm or co-operating with one, it is important to note that this specific transfer of knowledge can also happen by using external knowledge sources (Bierly, Damanpour, & Santoro, 2009). A firm can thus increase its technological knowledge by using external knowledge sources (Cohen & Levin, 1989; Huber, 1991; Tsai & Wang, 2008). This is particularly important for a firm’s

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innovation performance, as knowledge is one of the inputs hereof. The increased and improved knowledge stock will allow the firm to leverage this into improving its innovation performance.

Next to increasing the knowledge base, co-operating with external knowledge sources can lead to the rejuvenation of the knowledge base and the transformation of their expertise. (Chen et al., 2016; Chesbrough, 2006; Teece, 1998). As these firms operate in a dynamic environment, it is important that firms gain access to ‘state of the art’ technology through operation (Chatterji & Manuel, 1993; Jones et al., 2001; Tsai & Wang, 2008). The co-operation also allows firms to acquire technology and facilitate the fast development and deployment of products as well (Jones et al., 2001), improving the firms speed of innovation and facilitating to meet market demands. This new knowledge improves a firm’s innovation performance by allowing it to have better technologies as well as faster time to market with a product that is more fitting to the market needs.

With all three external knowledge sources both a bigger knowledge base is accessed as well as newer knowledge, only the type of knowledge acquired differs. Starting with market-based sources, by partnering up with a firm that has technical knowledge expertise, it can enable firms to better leverage their skills and therefore increase competitiveness (Tsai & Wang, 2008). This partnering can also be useful when developing technologies that are time consuming, costly and difficult to develop internally. For example, when firms face common technological problems, or have a need for technological standards, competitors will collaborate to solve these issues (Chen et al., 2016; B. Tether, 2002). As the co-operation reaps benefits in terms of solving problems and the availability of jointly developed technology, I therefore expect that co-operating with market-based sources will have a direct positive effect on a firm’s innovation performance.

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In the case of science-based sources, universities and research institutes can be important for emerging market firms to build up their knowledge base because these firms have relatively low levels of in-house R&D (Belderbos et al., 2004; Chen et al., 2016; Veugelers & Cassiman, 2005). These science-based sources can provide the firm with a better understanding of the mechanisms that underlie basic, but fundamental knowledge (Chen et al., 2016). As in many industries R&D expenditures are escalating, co-operating with science-based sources is increasingly seen as a low risk and inexpensive source of specialist knowledge (B. Tether, 2002). In addition, universities and research institutions may also provide knowledge to solve the technical problems emerging market firms may be facing. Co-operation with universities also results in a higher competence level for the entire population involved as well as increases the variety of knowledge (Ahrweiler, Pyka, & Gilbert, 2011). The knowledge flows resulting from co-operating with these science-based sources therefore help the firm in gaining the knowledge necessary for product development and better understanding the fundamentals. Therefore, I expect that firms that cooperate with science-based sources will have better innovation performance.

Finally, firms can also benefit from co-operation with other external knowledge sources to increase their knowledge base and gain access to new information. For example, consulting firms are known for their ability to broker knowledge between contexts, leading to an increase in knowledge and innovations (Hargadon & Sutton, 1997; B. S. Tether & Tajar, 2008). A study by Kelley (1999) even shows that the primary reason to hire consultants is their ability to provide new knowledge and insights and as a result innovation. Consultants are also a very suitable option for firms as they have experienced similar innovation projects before and can therefore avoid mistakes made in the past, thus improving the innovation performance (B. S. Tether & Tajar, 2008). Not only are the consultants a very useful source of knowledge, they are also the most accessible of the external knowledge sources, mainly

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because consultants sell knowledge (B. S. Tether & Tajar, 2008). As consultants are excellent providers of verified practical and new knowledge and are very accessible, I expect that other external knowledge sources, such as consultants, have a strong positive effect on innovation performance.

Another benefit of external knowledge sources is that the various partners a firm can cooperate with can provide firms with a wide range of R&D resources that the firm can employ to improve its innovation performance (Chen et al., 2016; Danneels, 2002; Du et al., 2014; Faems et al., 2005). R&D partnerships at the firm level help organisations leverage and access external resources complementary to its own (Eisenhardt & Schoonhoven, 1996; Grant & Baden‐Fuller, 2004; Miotti & Sachwald, 2003; B. Tether, 2002). A study by Grant and Baden‐Fuller (2004) found that as a result of outsourcing and divesting non-core activities, large companies increasingly cooperate with other firms to access resources outside their own boundaries (Grant & Baden‐Fuller, 2004).

One of those resources that a firm can acquire through co-operation is technical competence. By co-operating, the firm can get access to technical resources such as: product and process design know-how, engineering and design know-how, procedures for quality control, and manufacturing facilities and know-how (Danneels, 2002). This acquisition can result in the development and creation of resources that otherwise can be very difficult to develop and mobilize (Das & Teng, 2000; Faems et al., 2005). Gaining technical knowledge expertise by partnering with other firms may allow firms to increase its competitiveness and leverage its skills (Mowery, 1998; Teece, 1992; Tsai & Wang, 2008).

When co-operating with market-based sources emerging market firms can acquire technical competences related to product development, design and manufacturing. This can help the firm to produce improved and innovative products, which in turn can lead to higher

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sales of these products. Co-operation with science-based partners can increase the firm’s know-how on conducting R&D. Furthermore, universities and R&D centres have more suitable facilities for innovation, improving the innovation performance. Finally, co-operating with other-knowledge sources such as consultants allow the firm to use expertise of consultants on problem solving, which can help the firm to solve problems or prevent them. As the knowledge of consultants increases the speed of the R&D process and reduces failure, firms’ innovation performance will increase as a result.

Co-operation can also yield benefits other than know-how and expertise in the form of increased access to capital or a reduced need for capital. In their pursuit for efficiency, the pooling of the resources of two or more firms co-operating can help them achieve economies of scale and scope or other synergistic effects (Belderbos et al., 2004; Das & Teng, 2000; Kogut, 1988). This pooling of resources can thus make firms more efficient in innovating by sharing capital as this will result in firms putting resources to a shared goal without overlapping activities consuming capital. Next to the sharing of capital, co-operation might allow firms to share the costs of research and development among themselves as well (Faems et al., 2005; Hagedoorn & Duysters, 2002; Veugelers, 1997). The added benefit of this approach is that, at the same time, it reduces the risks associated with R&D-intensive innovation considerably (Faems et al., 2005).

When co-operating with market-based sources this will reduce the costs of innovating through this shared capital as well. For science-based partners, firms will mainly benefit from reduced cost of capital resulting from the free knowledge-sharing intentions of for example universities. Co-operating with other knowledge sources such as governments is different from market- and science-based sources, as governments are more likely to provide easier access to capital, in the form of subsidies, instead of sharing capital. This way the firm’s innovation performance benefits from all three knowledge sources as all sources free up

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capital that can be potentially used for more or better innovations. Following this argumentation, the following hypotheses are developed.

Hypothesis 1: The use of market-based knowledge sources by an emerging economy firm positively influences the level of innovation performance of the respective firm.

Hypothesis 2: The use of science-based external knowledge sources by an emerging economy firm positively influences the level of innovation performance of the respective firm.

Hypothesis 3: The use of other external knowledge sources by an emerging economy firm positively influences the level of innovation performance of the respective firm.

3.2 Technological opportunity

The possibilities for innovation differ per industry. This is a result of the different characteristics that each industry has. One of these characteristics is the availability of technological opportunities. As Zahra (1996) found, industries with high levels of technological opportunities are characterized by higher amounts of product and process technology introductions as well as high levels of investment in R&D and patenting. Whereas in industries that are low in technological opportunities, these companies are limited in growth potential and have more modest R&D investments.

Industries with many technological opportunities put a large strain on a firm, because these industries are often having rapidly changing customer demands, a continuous process of new products entering, the rapid entering and exiting of industry competitors and finally, major shifts in market share (Eddleston, Kellermanns, & Sarathy, 2008). As a result of these stress factors, firms in these environments are required to invest in their competencies and try to differentiate themselves from the competition (Eddleston et al., 2008). To do this, these firms need more knowledge and resources in order to be able to successfully exploit the

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opportunities the market has to offer. This is even more important for emerging market firms which are already lacking in terms of resources available to innovate independently.

As firms can not solely rely on their own knowledge and capabilities, they need to use the knowledge and experience of other economic entities (Caloghirou, Kastelli, & Tsakanikas, 2004). In this environment firms that have access to a large knowledge pool gain more innovation performance than firms without access to a large knowledge pool (Wang & Kafouros, 2009). It is therefore expected that industries with a higher level of technological opportunities change the role of external knowledge sources from enhancing innovation performance to being essential for it. As a result, the role of external knowledge sources is becoming even more important and so I expect that the positive effect on innovation performance will become bigger.

When co-operating with market-based sources, the general increase in R&D intensity in the industry will mean that competitors will also be able to contribute more to the R&D of the firm in case of co-operating. Furthermore, the shorter lifecycle of products means it is even more important to stay connected with the market in order to provide the products the market wants in a timely matter. The firm benefits from science-based sources in a similar positive way in that they allow firms to bring new knowledge into the market, in the form of the newest technological developments. Co-operating with universities for example, will allow firms that are able to successfully deploy these new insights a way to differentiate in these intense industries. Finally, I expect that co-operating with other knowledge sources such as consultants will also share the same benefits of technological opportunities. Because of the large turnover and small product lifecycle, it is essential to not make mistakes at each new product introduction. The role of the consultants as knowledge supplier will therefore become even more important. In addition, the guidance of consultants will allow firms to

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capture more of the technological opportunities present in the industry and to successfully capitalise on that.

Hypothesis 2: The level of technological opportunity in an industry positively moderates the relationship between market-based, science-based and other knowledge sources used by an emerging economy firm and the innovation performance of the respective firm.

3.3 Foreign presence in an industry

Foreign MNE’s, especially from developed economies, have strong scientific and technological capabilities (Liu & Wang, 2003). Their entry into developing economies breaks the existing equilibrium, and disrupts the local firms’ monopolistic power (Liu & Wang, 2003). The emerging market firms, as a result, are forced to become more efficient in using both existing resources and technology, or find a way to use new technologies and resources to maintain market share. Another option would be for emerging market firms to learn from the MNE’s and how those firms operate, to achieve better performance (Liu & Wang, 2003). This effect is also called the spill-over effect, as the presence of foreign MNE’s in an industry is likely to produce knowledge spill-overs. This spill-over effect occurring at higher levels of foreign investment has been found in previous studies (Buckley, Clegg, et al., 2007; Buckley, Clegg, Wang, & Cross, 2002; Buckley, Wang, & Clegg, 2007; Buckly, Clegg, & Wang, 2002). On the other hand, if an industry is lacking the presence of these foreign firms, the potential for benefitting from spill-overs is expected to be lower (Wang & Kafouros, 2009).

The ability of a firm to benefit from spill-overs also depends on its absorptive capacity. When emerging market firms use external knowledge sources they interact intensively with their environment, enhancing their absorptive capacity (Caloghirou et al., 2004). This is in line with the enhanced definition of absorptive capacity by Caloghirou et al.

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(2004), which suggests that absorptive capacity is also influenced by the firm’s ability to interact with its environment. Because the firms co-operating with external knowledge sources have a better absorptive capacity, it is likely that they are better able to absorb the knowledge spill-overs from foreign firms and use this to their advantage. As foreign firms have advanced technology, strong scientific and technological capabilities and state of the art knowledge, their spill-overs are very valuable for emerging market firms. This way, the emerging market firms’ knowledge and capabilities can be enhanced to improve their innovation performance even more.

This is likely to be the case for firms that cooperate with market-based sources because, on the one hand, they directly interact with the foreign firms and, on the other hand, have an outward looking orientation which helps them to absorb the spill-overs more efficiently. For science-based co-operation, the interaction between, for example, universities and the firm results in an outward looking firm with a larger absorptive capacity. This in turn results in the same efficient absorption of spill-overs from foreign firms. When co-operating with other knowledge sources, it could be that firms benefit from consultants. As the consultants are serving the industry, they gain experience working with foreign firms and are able to apply this to the emerging market firms, improving their innovation performance as a result. Furthermore, using the knowledge from consultants creates the same intense interaction resulting in increased absorptive capacity as using the other two knowledge sourcing. This will therefore result in an increased ability to absorb spill-overs from the foreign firms as well, which in turn leads to improved innovation performance.

Following this argumentation, I expect that a higher foreign presence in an industry will lead to improved innovation performance for firms using of the three external knowledge sources. This leads to the following hypothesis:

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Hypothesis 3: The level of foreign presence in an industry positively moderates the relationship between market-based, science-based and other external knowledge sources used by an emerging economy firm and the innovation performance of the respective firm.

To illustrate the hypotheses developed in this section, the relationships are depicted in figure 1.

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4. Methodology

4.1 The Sample

The sample used for this study is based on Indian firms from different sizes and industries, covered in the World Bank Enterprise Innovation Survey. This survey is a stratified random sample of the firms in India to make sure every group of firms is adequately represented. Enterprise surveys from the World Bank are used by other studies focusing on emerging economies (e.g. Eifert, Gelb, & Ramachandran, 2008; Clausen, Kraay, & Murrell, 2010; Hudson, Williams, Orviska, & Nadin, 2012). The Enterprise Innovation Survey has been chosen as this survey distinguishes between different external knowledge partners. This way it is possible to separate the influences of the different knowledge sources on innovation performance to get a clear picture of the role of each of them. As previously scholars have found different results on this relationship, the fact that most existing studies have neglected the diversity of external knowledge sources might be a possible reason for this (Chen et al., 2016). Furthermore, India is a suitable country as a sample, because it is an emerging economy with large innovation potential and which has been a target of FDI in recent years (Sauvant, 2005). The dataset is from 2014 and contains 3492 firms that filled in the survey. Of these 3492 included firms, 198 have used external knowledge sources for product development and 378 firms have used external knowledge sources for process development.

4.2 Variables

4.2.1 Dependent variable

The dependent variable that is studied is innovation performance. This is measured by the percentage of total sales derived from new or substantially improved products (Ahuja & Katila, 2001; Chen et al., 2016; Tsai, 2009). This is measured by this ratio as in emerging

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countries not all innovations are patented and it is therefore more reasonable to opt for a sales ratio (Chen et al., 2016; Tsai, 2009; Wang & Kafouros, 2009).

4.2.2 Independent variable

The independent variable will be the type of external knowledge sources. There are two types of external knowledge sources, market-based and science-based knowledge sources, identified in the literature (Chen et al., 2016). These two types will be used next to a third type “other knowledge sources”. The data from the World Bank features the categories domestic firms, foreign firms or foreign-owned firms, domestic academic or research institutions, foreign academic or research institutions, private consulting company or individuals and the government, these will be allocated to the types of knowledge sources. Co-operation with domestic firms, foreign firms or foreign-owned firms can be considered market-based knowledge sources, whereas co-operating with both domestic and foreign academic or research institutions is science-based. Consulting firms and the government cannot be allocated to either market- or science-based, as they are not in the market and their main focus is outside of research, therefore they are allocated to other knowledge sources.

4.2.3 Moderating variables

The moderating variables used will be the technological opportunities within the industry (Jaffe, 1986; Kafouros & Buckley, 2008; Klevorick et al., 1995; Levin, Cohen, & Mowery, 1985; Wang & Kafouros, 2009). Technological opportunities are measured by the ratio of R&D expenditure to capital as technological opportunities in a particular industry are associated with the research intensity in that industry (Wang & Kafouros, 2009).

The other moderator is the level of foreign presence in the industry measured by taking the total foreign capital invested in the industry following the conceptualization of

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Wang and Kafouros (2009). For the regression analyses the log transformed value of foreign presence is used.

4.2.4 Control variables

Following prior innovation studies, one of the factors that has been controlled for is the internal R&D activity of the firm since R&D is the most important input for innovation performance (Belderbos et al., 2004; Chen et al., 2016; Faems et al., 2005; Hottenrott & Lopes‐Bento, 2016; Tsai & Wang, 2008; Wang & Kafouros, 2009). The internal R&D activity is measured as the total amount of spending on internal R&D for one year. This value is log transformed for the regression analyses.

Another control variable, which is commonly used in innovation-related studies, is firm size (Ahuja & Katila, 2001; Chen et al., 2016; Faems et al., 2005; Rothaermel, Hitt, & Jobe, 2006; Tsai, 2009; Tsai & Wang, 2008, 2009; Vanhaverbeke, Duysters, & Noorderhaven, 2002; Wang & Kafouros, 2009). In prior studies, firm size has been found to have a positive, nonlinear effect on innovation (Veugelers & Cassiman, 1999). The largest firms have the highest likelihood of innovating as those firms have more resources. Those firms that benefit from economies of scale in R&D activities, are able to spread the risk over a larger portfolio (Veugelers, 1997), and can more easily acquire complementary assets to ensure the commercial success of innovations (Teece, 1986). Firm size is measured using the four groups that the World bank distinguishes, namely: Micro (<5 employees), Small (>= 5 and <=19 employees), Medium (>=20 and <=99 employees) and Large (>=100 employees).

The third control variable used is firm age because this factor has been identified as important for the innovation performance of a firm (Bantel, 1998). Older firms introduce more innovations (Sørensen & Stuart, 2000). Furthermore, those firms overcome the liability of newness and establish routines, which is likely to enhance their performance (Stinchcombe

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& March, 1965). For these reasons, firm age has been used as control variable by Rothaermel et al. (2006) and Chen et al. (2016). Firm age is measured as the difference between the year the firm was established and the current year. Firm age is log transformed for the regression analyses as well.

Following is table 1 which presents the variables used and their operationalization.

Table 1 Variables and their operationalization Variable Operationalization

Dependent

Innovation performance Percentage of total sales derived from new or substantially improved products Independent Market-based knowledge sources Science-based knowledge sources

Dummy variable indicating whether the firm cooperates with domestic/ foreign firms or foreign-owned firms (1 = Yes; 0 = No)

Dummy variable indicating whether the firm cooperates with domestic/foreign academic institutes or domestic/ foreign (1 = Yes; 0 = No)

Other knowledge sources Dummy variable indicating whether the firm cooperates with private consulting companies/ individuals or the government (1 = Yes; 0 = No)

Moderator

Technological opportunities

Foreign presence

R&D expenditure as a percentage of the sales turnover in the firm’s industry

Log transformation of the amount of foreign direct investment into the firm’s industry

Control

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Size

Age

Categorical variable of the number of employees (>= 5 and <= 19 employees = Small; >=20 and <=99 employees = Medium; >= 100 employees = Large)

Log transformation of the number of years of existence, from establishment until the current year

4.3 Data analysis and results

For the statistical analysis, IBM’s Statistical Package for Social Sciences (SPSS) version 24 is used. To test for multicollinearity all variables have been tested by assessing the correlations between all the predicting variables. In table 1 it can be seen that the only variables that have a small correlation with innovation performance are the science-based knowledge sources and other knowledge sources, however this relationship is so small (0.26 & 0.23) that it is not expected to cause any issues. The other variables do not suggest multicollinearity.

In the dataset, on average 35.9% of the sales come from the main innovative product or service. 12% of the firms use market-based knowledge sources, 1% use science-based sources and 3% use other knowledge sources. For the sample, the average R&D as a percentage of the sales turnover is 0.5%. Furthermore, the mean foreign investment per firm is 4505.85 US$, and firms spent on average 739479.58 INR (11457.50 US$) on internal R&D in a year. As for the composition of the sample, 28% of the firms were small (>=5 and <=19), 46% medium (>=20 and <=99) and 27% large (>=100). Medium size firms are used as the baseline as this is the largest group.

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Table 2 Descriptive statistics and correlations (N = 450)

Mean Std. dev. Min. Max. 1 2 3 4 5 6 7 Innovation performance 1 35.90 23.78 10.00 100.00 1 Market-based sources 2 0.12 0.11 0.00 1.00 0.00 1 Science-based sources 3 0.01 0.11 0.00 1.00 -0.03 0.26*** 1 Other sources 4 0.03 0.16 0.00 1.00 0.01 0.23*** 0.14*** 1 Tech. opportunities 5 0.50 0.44 0.00 1.40 -0.04* -0.050** -0.03 0.01 1 Foreign presence 6 4505.85 4152.88 87.31 15310.70 0.04** -0.01 -0.02 0.03* 0.13*** 1 Internal R&D 7 739479.58 5044976.37 0.00 100000000.00 0.04 0.08** -0.01 -0.01 0.00 -0.02 1 Small firms 8 0.28 0.45 0.00 1.00 0.03 -0.01 -0.04** 0.00 -0.01 -0.09*** -0.05 Medium firms 9 0.46 0.50 0.00 1.00 -0.01 0.02 0.02 0.03 0.00 0.03* -0.08** Large firms 10 0.27 0.44 0.00 1.00 -0.02 -0.01 0.02 -0.03* 0.00 0.06** 0.12*** Firm age 11 2.66 0.83 0.00 7.61 -0.02 0.015 -0.01 0.05** -0.09*** -0.03** 0.06* 8 9 10 11 Innovation performance 1 Market-based sources 2 Science-based sources 3 Other sources 4 Tech. opportunities 5 Foreign presence 6 Internal R&D 7 Small firms 8 1 Medium firms 9 -0.57*** 1 Large firms 10 -0.37*** -0.55*** 1 Firm age 11 -0.06*** -0.02 0.08*** 1 * p < 0.10 (2-tailed). ** p < 0.05 (2-tailed). *** p < 0.001 (2-tailed).

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To test the hypotheses, a multiple linear regression analysis is conducted with innovation performance as the dependent variable. First the control variables are tested, as shown in table 3. None of the control variables hasa significant influence on innovation performance. In model 2, the moderators are added to control for possible direct effects on the dependent variable. Both moderators showed a direct significant effect on innovation performance. Foreign presence a showed a positive effect, whereas technological opportunities showed a negative effect. Next, in model 3 the knowledge sources have been included as independent variables. This way hypothesis 1, 2 and 3 can be tested. The findings suggest that there is no significant relationship between market-based and other external knowledge sources and innovation performance (B = -2.081, SE = 3.033 and B = -7.851, SE = 6.610, respectively). Science-based sources were found to have a negative relationship with innovation performance with significance p < 0.10. It can be noted that the significance of this relationship is not very strong (B = -12.105, SE = 6.777). As a result, hypothesis 1, 2 and 3 are rejected. Furthermore, it is likely that the market-based and other external knowledge sources also have a negative relationship with innovation performance as they are all strongly negative. This is the opposite of what was expected. However, this interesting outcome could not be proved with this dataset, as the relationships were not significant.

To test for hypothesis 4, the interactions between market-based, science-based and other knowledge sources and the technological opportunities in the industry have been included in the regression. In this model, none of the interaction terms are significant. What is interesting is that technological opportunities might have a positively moderating role on the relationship between science-based sources, other sources and innovation performance (B = 0.122, 7.896, SE = 25.288, 15.204 respectively), whereas this role might be negative on the relationship between market-based sources and innovation performance (B = -1.569, SE = 7.823). The positive moderating relationships when using science-based or other knowledge

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sources is in line with my expectations. The negative moderating relationship on market-based sources, however, is the opposite of what I expected. Unfortunately, neither of these moderating effects are statistically significant. Therefore, hypothesis 4 can be rejected.

For hypothesis 5, the interactions of foreign presence with the three different knowledge sources are included in the regression. In table 3 it can be seen that, as a moderator, no statistically significant effect on the relationship between market-based, science-based and other external knowledge sources and innovation performance was found (B-1.660, -1.275, 4.488, and SE 2.488, 5.649, 5.096 respectively). As a result, hypothesis 5 is also rejected. What is interesting to note is that, although insignificant, foreign presence does seem to moderate both market-based and science-based sources negatively, and other sources positively. This is not in-line with the expectations of foreign presence moderating every relationship positively.

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Table 3 Regression models Model 1 B (s.e.) Model 2 B (s.e.) Model 3 B (s.e.) Model 4 B (s.e.) Model 5 B (s.e.) Constant 37.883 (4.100)*** 29.832 (7.733)*** 29.386 (7.718)*** 29.304 (7.741)*** 28.573 (8.076)*** Market-based sources -2.081 (3.033) -1.504 (4.421) 11.769 (20.167) Science-based sources -12.105 (6.777)* -12.036 (11.061) -2.059 (26.339) Other sources -7.851 (6.610) -12.462 (11.116) 12.679 (15.849) Tech. opportunities -4.734 (2.196)** -4.721 (2.196)** -4.748 (2.313)** -4.635 (2.318)** Foreign presence (FP) 1.329 (0.761)* 1.350 (0.759)* 1.352 (0.761)* 1.472 (0.818)* Tech. opportunities x market-based sources -1.569 (7.823) -3.860 (8.167) Tech. opportunities x science-based sources 0.122 (25.288) -2.059 (26.339) Tech. opportunities x other sources 7.896 (15.204) 12.679 (15.849) FP x market-based sources -1.660 (2.488) FP x science-based sources -1.275 (5.649) FP x other sources 4.488 (5.096) Internal R&D 0.013 (0.217) 0.037 (0.216) 0.092 (0.217) 0.095 (0.218) 0.090 (0.218) Small firms -0.0263 (2.571) -0.022 (2.561) -0.047 (2.582) -0.029 (2.590) 0.036 (2.596) Large firms -0.0995 (1.977) -1.084 (1.970) -1.492 (1.969) -1.498 (1.976) -1.569 (1.980) Firm age 0.494 (1.189) 0.350 (1.197) 0.520 (1.196) 0.542 (1.199) 0.484 (1.202 Model fit N 789 789 789 789 789 R2 _0.001 _0.012 _0.022 _0.022 _0.024 Adjusted R2 _-0.005 _0.004 _0.011 _0.007 _0.005 F-value 0.102 4.444 2.729 0.090 0.397 P-value 0.982 0.012 0.043 0.965 0.755 * p < 0.10 (2-tailed). ** p < 0.05 (2-tailed). *** p < 0.001 (2-tailed).

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5. Discussion

Tsai and Wang (2008) stated that using external knowledge sources by collaborating with other parties is increasingly viewed as an alternative or complementarity to OFDI and internal R&D. The findings of the present study, however, show that not in all cases firms benefit from collaborating with other parties. This study looked at the relationship between market-based, science-based and other knowledge sources and a firm’s innovation performance. For all three of these knowledge sources, the results were negative, showing a possible downside of collaborating, resulting in a negative effect on a firm’s innovation performance. However, this relationship was not statistically significant.

This study also looked at the external influences on a possible relationship of firms collaborating and innovation performance. I looked at the moderating effect of technological opportunities on this relationship. It was expected that the level of technological opportunities would positively moderate the relationship between external knowledge sources and innovation performance. The results showed that, even though statistically insignificant, technological opportunities in an industry had a negative moderating effect for firms using market-based sources. This indicates that firms in the dataset were not able to successfully capture the technological opportunities present in the industry. For firms using science-based and other knowledge sources, a positive moderating effect was found. Whereas science-based showed a very slight positive moderating effect, other knowledge sources showed a strong negative tendency which means that it is possible that other sources such as consultants did help the firms capture more value from the increased R&D intensity and use this to its advantage. Technological opportunities also showed to be directly negative related to innovation performance (p < 0.05), which was not expected. It could be that firms in R&D intensive industries do suffer more from the intense competition than anticipated before.

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As for the moderator, foreign presence in an industry, I hypothesized that foreign presence would create knowledge spill-overs that would benefit firms with external knowledge sources positively through their enhanced absorptive capacity. Unfortunately, the results were statistically insignificant as well, but did show the expected positive effect for firms using other knowledge sources. This indicates again that perhaps firms with help of consultants, are able to capture more value from knowledge spill-overs. For market- and science-based sources, a negatively moderating relationship was found. A directly positive (statistically significant p < 0.10) effect of foreign presence on innovation performance was seen, the opposite of the influence of technological opportunities in the industries.

5.1 Academic relevance

This thesis contributes to the existing IB literature on innovation performance of emerging market firms and their use of external knowledge sources, by investigating this relationship and by investigating the moderating role of both the technological opportunities and the foreign presence in an industry. Contrary to the expectations, no significant influence was found for two of types of external knowledge sources (market and other) on innovation performance. Science-based knowledge sources, on the other hand, were only just significant. However, all three types showed a possible negative relationship with innovation performance. This conflicts with previous findings of, amongst others, Vega-Jurado et al. (2009) and Souitaris (2001) who found a positive relationship in their sample. On the other hand, there are studies that found a negative relationship between external knowledge sources and innovation performance or no relationship at all. In the study of Jones et al. (2001), the results showed that firm performance was negatively impacted by the use of external knowledge. It even showed that the presence of internal resources further enhanced the negative relationship found. Tsai and Wang (2009) did not find a significant enhancing effect of external knowledge acquisition on a firm’s innovation performance. This is in line with the

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results of this study. A possible reason for this negative outcome is that when firms cooperate with external knowledge sources they may encounter communication and coordination challenges, because of the difficulties of transferring tacit knowledge (Spender, 1996). However, this negative effect might not be strong enough to result in a significant effect.

When the technological opportunities of the industry are used as a moderator, no significant association is found. Furthermore, when looking at the likely direction of influence of this moderator, the results related to market-based knowledge sources are the opposite of what I expected. It shows that for market-based sources the moderator has a negative tendency. The relationship of science-based knowledge sources and innovation performance was not moderated by technological opportunities. However, when using other external knowledge sources, I found a possible positive moderating effect of technological opportunities. A possible reason for this difference in effect is because in industries with technological opportunities there is a lot of strain on the firms. Adding this strain to the already existing communication and coordination problems that occur when co-operating with external sources this will only be worsened, causing an even bigger negative effect. For firms using other knowledge sources, this is not a problem, as working with for example consultants is more about the firm, instead of co-operating which is more for both. A possible explanation for the fact that the relationship between science-based sources and innovation performance does not profit from more technological opportunities could be that the knowledge that universities produce is does not add enough value to the knowledge base of the firm to compete better or worse in an industry.

The second moderator investigated is the foreign presence in the industry. This moderator showed no significant associations as well. For market- and science-based sources a negative effect was found. For other knowledge sources a positive moderating effect can be seen. Perhaps the firms in the sample were still having issues co-operating with foreign firms

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in the industry and were therefore not able to absorb the spill-overs that foreign firms present. It could be that the foreign firms performed better and therefore the sales of innovative products of Indian firms were lacking, causing a lower result for the measure of innovation performance. For the other knowledge sources, this positive effect could be explained by the co-operating with consultants who on the one hand work with foreign firms, and on the other hand can use this this experience on the firms studied. Furthermore, the consultants can assist the firms in becoming more efficient by advising on operational matters and provide the firms with the means to becoming as efficient as their industry competitors from foreign countries.

5.2 Managerial implications

There are multiple managerial implications coming forth from this research. First, when companies have to decide on the mix between internal and external knowledge sources, it is important to note that this study’s results imply that using external knowledge sources is detrimental to a firm’s innovation performance. Managers should therefore be very considerate on whether external knowledge sources add any value to the firm’s innovation performance or not.

Second, the results show that when there are more technological opportunities in an industry, results on innovation performance vary per external knowledge source. Using market-based sources can even have a detrimental effect to the firm’s innovation performance in an industry characterized by high levels of technological opportunities. Firms using science-based sources are not influenced by the level of technological opportunities. Using other knowledge sources is however more beneficial to innovation performance. Therefore, companies should be even more careful in choosing to use external knowledge sources when operating in industries with many technological opportunities and the safest choice would be using other external knowledge sources.

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Third, the level of foreign presence in an industry also influences the relationship between external knowledge sources and innovation performance. Companies that are operating in industries with high levels of foreign presence should therefore be careful in using market- and science-based sources as foreign presence negatively moderates the influence on innovation performance. Firms can however use other knowledge sources when foreign presence is high as this source is positively moderated by foreign presence.

5.3 Limitations and future research

It should be acknowledged that there are limitations of this research. First of all, the use of a dataset from a third party required solutions to missing variables or data necessary to perform this study. Therefore, not all variables have been measured in the most optimal way. For example, the data used for the height of R&D per industry is from a different year of origin than the world bank dataset. This data did not allow for compensation for the industry sizes as well as only absolute data were available and not the relative numbers. Future research should therefore collaborate more closely with for example the World Bank Group to incorporate the necessary variables in the innovation survey.

Moreover, in this thesis the data of only one country is used for the analysis for the same reasons as mentioned before, namely the availability of data. Emerging economies are plentiful in numbers, and using one country for the analysis decreases applicability to the category as a whole. Therefore, future research should incorporate multiple countries in its data analysis.

Another point that should be made is that this study uses the ratio of sales derived from the main innovative product or service to determine the firm’s innovation performance. As the questionnaire following this metric specifically stated that the questions were applicable only to the main innovative product or service this was measured in a suitable

The influence of external knowledge sources on innovation performance for emerging market firms

Master Thesis