The Role of Openness of R&D, Manufacturing and Marketing in Product and Process Innovation

Abstract

We build on and extend the literature in open innovation and absorptive capacity by showing that a firm’s functional areas are an important locus of innovation and learning, in contrast to most existing literature, which takes the firm as the unit of analysis. In particular, we argue that the innovative contribution of R&D, manufacturing and marketing all rely on external sources of knowledge, while we also expect important differences between these functional areas and across product and process innovation. By using unique survey data and multi-equation regression, we show that there exists an inverted U-shaped relationship between external search breadth and the functional areas’ contribution to product and process innovation, and that firms rely on more external knowledge sources for product innovation than for process innovation. More specifically, when considering seven distinct external knowledge sources, we find that the optimal amount of sources is four for product innovation, while this is limited to three for process innovation. As also expected, we find that, while R&D’s contribution to innovation is generally mostly driven by external sources of knowledge, they are more important in driving marketing’s contribution to product innovation and manufacturing’s contribution to process innovation.

Keywords: Openness, External Search Breadth, Functional Areas, Product Innovation, Process Innovation