Internal R&D Versus In-licensing Complements or Substitutes

This paper analyzes whether internal R&D and external R&D are substitute or complementary strategies with respect to firm innovative performance. Few studies have evaluated this issue, which is surprising since the combination of internal and external R&D investments have been emphasized extensively in the technology strategy literature. We present a two-step model that starts by testing for the proper functional form of the innovation production function. We then use the estimated specification in a profit maximization model to measure the degree of complementarity or substitutability between internal and external R&D. Using a unique dataset, our results suggest that these two types of R&D are complementary activities. Moreover, the degree of complementarity increases over time and it is accentuated for those firms with a higher level of