Complementarity of internal and external R&D: is there a difference between product versus process innovations?

Previous research on complementarity of research and development (R&D) has generated inconsistent results and focused predominantly on product innovations, neglecting process innovations. Although process innovations are important for firm efficiency, growth, and performance, little is known about complementarity of internal and external R&D activities in process innovations. Because of the different characteristics of knowledge involved in product versus process innovations, firms should benefit less from complementing internal with external R&D for process innovations than product innovations in terms of knowledge creation but should at the same time be less prone to the risks of unwanted knowledge transfer. Our empirical analysis of cross-sectional firm-level data of the German manufacturing sector from 2001, 2005, and 2009 comprises a direct complementarity test for product versus process innovations. The results confirm previous evidence for significant complementarities between internal and external R&D for product innovations but find limited existence of complementarity for process innovations. As implication for R&D management, our study highlights the differences between process and product innovations and how they translate into differences in complementarity of internal and external R&D activities.