The Role of Domestic and Foreign Knowledge Inflows on the Relationship between R&D Portfolio Mix and Innovation Outcomes: An Empirical Study of Manufacturing Firms in an Emerging Economy*

Abstract

Manufacturing firms in emerging economies face research and development (R&D) challenges that are quite different from firms in developed economies. Firms in emerging economies complement their internal R&D capabilities by accessing two forms of external knowledge: domestic knowledge from local partners and foreign knowledge from multinationals. Accessing these knowledge sources requires distinct organizational capabilities, and they may differently moderate the relationship between internal R&D investments on exploration and exploitation and innovation outcomes. Exploitation R&D investments refer to investments made on refining products and processes, while exploration R&D investments refer to investments made on designing new products and processes. We examine this issue by combining two waves of surveys from 155 manufacturing firms in Thailand. Results show that relative exploration (i.e., the ratio of R&D investments made toward exploration over sum of exploration and exploitation) exhibits an inverted U-shaped relationship with the number of process and product innovations developed by the firm. This optimal mix, corresponding to the tipping point of an inverted U-shaped curve, shifts toward a higher level of relative 349 350 An Empirical Study of Manufacturing Firms in an Emerging Economy exploration (i.e., higher exploration and lower exploitation) when manufacturers have more access to domestic knowledge, and shifts toward a lower level of relative exploration (i.e., lower exploration and higher exploitation) when manufacturers have more access to foreign knowledge. Our findings are robust with similar effects on a firm's revenue generated from innovations. Taken together, these results demonstrate how external knowledge flows can moderate, in contrasting ways, the relationship between R&D portfolio mix and innovation outcomes. These findings also imply that inappropriately prioritizing R&D mix can lead to suboptimal innovation outcomes, offering further insights to both practicing managers and academics interested in emerging economy contexts.

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“…However, exploration and exploitation have been understood as contradictory forces (e.g., March, 1991) with paradoxical requirements, competing for organizational resources (March, 1991). Some research argues that firms fail to balance exploration and exploitation when they lack resources (Choo et al, 2020;He & Wong, 2004;Jayanthi & Sinha, 1998). Particularly, Choo et al (2020) conceptualize resource constraint as an even larger challenge to cross-border innovation.…”

“…Particularly, Choo et al. (2020) conceptualize resource constraint as an even larger challenge to cross‐border innovation. To address resource constraint, researchers have proposed approaches including resource allocation strategies (Hutchison‐Krupat & Kavadias, 2015) and new innovation portfolio management frameworks (Si et al., 2022).…”

“…To innovate in a more advanced and competitive market like the United States, emerging‐market firms benefit greatly from slack resources obtained through government support. Compared to firms in developed countries, emerging‐market firms have fewer resources and/or “firm‐specific advantages” (Choo et al., 2020; Gaimon & Ramachandran, 2021), but government support provides economic benefits, increases firms' access to a larger pool of external knowledge from related industries, boosts innovation incentives via social influence, and fosters a competitive environment for innovation. Tan and Peng (2003) examined slack resources in Chinese firms and showed that slack does not inhibit their efficiency or performance.…”

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