Knowledge acquired from regional firms helps the innovation efforts of companies with lower productivity rates and managerial capabilities. High-productivity companies with higher-level capabilities and more resources will increase firm innovation through sourcing partnerships with international firms.
Where should companies source the knowledge and new ideas that will keep them at the forefront of innovation? The answer, according to an extensive study of 18,000 UK firms, depends in large part on the in-firm characteristics of the company—notably in terms of productivity and resources. Productivity is measured as the difference between a company’s sales per employee and the industry average of sales per employee.
For companies with low productivity and fewer resources compared to the industry average, working with local and regional partners increases the likelihood that they will innovate as well as the volume of sales attributed to innovation; attempting to source knowledge from international firms rather than regional firms will have the opposite effect, limiting their attempts to innovate.
The reasons for this productivity-innovation link are varied.
When smaller, low-productivity firms engage with local partners to source new knowledge and ideas, they benefit from being embedded in the community, having developed trusting relationships with their partners. In contrast, knowledge sourcing internationally involves costly coordination and legal requirements, including assessing the strategic goals and technical capabilities of their international partners, participating with business development groups, developing joint agreements, etc.
The financial burden of these global knowledge-sourcing partnerships outweighs the eventual benefits of such partnerships for low-productivity firms. Other complications make such partnerships difficult; for example, the decision-making processes in smaller firms are often incompatible with the decision-making structures in large, multi-national corporations. Also, smaller firms with less resources may be required to pull their resources from profitable sourcing partnerships with local firms, compounding the negative ROI of a global sourcing strategy.
The dynamic is reversed for larger, higher-productivity companies. Having the resources to cover the pressures and requirements of global partnerships and joint ventures, as well the capabilities to assimilate knowledge and adopt new technologies, these companies benefit greatly from working with global sources of knowledge and ideas. Global sourcing of knowledge gives companies a wide pool of knowledge that makes them better able to compete internationally. Knowledge acquired from firms in different countries is also more diverse, complementing knowledge acquired from any firm in the home country. In sum, high-productivity companies that limit themselves to regional partners lose opportunities for greater, more diverse knowledge acquisition that could fuel more innovation.
In addition to partnerships with external firms, a second source of knowledge for innovation is known as ‘spillover knowledge’—that is, knowledge acquired through events and other sources such as conferences and trade fairs; professional and industry associations; technical, industry or service standards; scientific journals; and trade or technical publications. The study results showed that spillover knowledge was equally effective as a source for innovation for both low- and high-productivity firms. The study was based on data from two UK databases, the Business Structure Data, which collects company information, and the UK Innovation Survey (UKIS), which collects data on firm innovation. The data used in the study covered information from nearly 18,000 companies between 2002 to 2014.
For successful innovation, a company’s knowledge sourcing strategies should be aligned with the in-firm characteristics of the company. Sourcing knowledge from partnerships with regional companies is a better fit for smaller, lower-productivity companies in an industry. They don’t have the resources, managerial capacity, or absorptive capacity to profitably partner with global companies. Industry leaders, on the other hand, will limit their innovation efforts if they don’t take advantage of diverse, global sources of innovative knowledge and ideas.
Knowledge Collaboration, Productivity, and Innovation. David B. Audretsch, Maksim Belitski. SSRN (February 23, 2022).
Further Relevant Resources:
David Audretsch’s profile at Indiana University
Maksim Belitski’s profile at Henley Business School
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