The Impact of R&D Sources on New Product Development: Sources of Funds and the Diversity Versus Control Debate

Abstract

We build on the knowledge-based view to study the relative impact of alternative sources of R&D on innovation performance. We contrast two arguments: One is that diversity of knowledge is better for innovation, because the integration of a larger variety of knowledge helps create new products that can fulfill unmet customer needs; another is that control of knowledge is better, because the incentive and contextual system of the firm facilitates employees’ experimentation, which leads to novel products. We clarify this debate by contrasting both arguments and arguing that their relative importance depends on the sources of finance to fund innovation. We find that in general control is relatively better than diversity for the sale of new products. However, we also find that alternative sources of finance moderate the relationships: internal funds strengthen the impact of R&D sources with more knowledge diversity on the sale of new products, while the use of external funds strengthens the impact of R&D sources with more knowledge control on the sale of new products.

Keywords: R&D, innovation, outsourcing, offshoring, finance

JEL Classification: O31, O32