Journal of Manufacturing Technology Management

Emerald Article: Complementarity between innovation activities and

innovation performance: Evidence from Spanish innovative firms
Ana Ma Serrano-Bedia, Ma Concepcin Lpez-Fernndez, Gema Garca-Piqueres

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innovation activities and innovation performance: Evidence from Spanish innovative firms", Journal of Manufacturing Technology
Management, Vol. 23 Iss: 5 pp. 557 - 577
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5 pp. 557 - 577
http://dx.doi.org/10.1108/17410381211234408
Ana Ma Serrano-Bedia, Ma Concepcin Lpez-Fernndez, Gema Garca-Piqueres, (2012),"Complementarity between innovation activities
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Complementarity between
innovation activities and
innovation performance
Evidence from Spanish innovative firms
Ana Ma Serrano-Bedia, Ma Concepcion Lopez-Fernandez and
Gema Garca-Piqueres

Complementarity

557
Received December 2008
Revised October 2009
Accepted June 2011

Departamento de Administracion de Empresas (Organizacion de Empresas),

Universidad de Cantabria, Santander, Spain
Abstract
Purpose The purpose of this paper is to analyze the existence of complementarity between
innovation activities (internal innovation, external innovation and cooperative R&D), as well as their
impact on firms innovation performance.
Design/methodology/approach Drawing on the Third Community Innovation Survey (CIS-3) for
Spain, a multiple regression model is used to study the existence of complementarity between
innovation activities and their impact on innovation performance. The sample for the study is
3,964 innovative firms.
Findings First of all, the empirical results propose that the complementarity appears only between
internal innovation and either external or cooperative innovation but not with both together, which
is in-line with the absorption capacity notion. Second, the use of external and cooperation innovation
in isolation does not yield positive effects on innovation performance. This finding contradicts the
substitution argument and supports the absorptive capacity argument. Finally, innovation strategies
do not seem to be dissimilar between industries.
Research limitations/implications The main limitation of the paper is the use of cross-section
data, which implies less robust results as an empirical test.
Practical implications The empirical results allow the authors to recommend company managers
and public administration officials to improve and support internal innovation. These activities should
be combined with the high levels of external acquisitions that Spanish firms have in order to increase
their innovation performance as the absorption capacity theory and this papers empirical results
suggest.
Originality/value The first contribution of the paper is the inclusion of the third form of innovation:
cooperation. The second contribution refers to the inclusion of the service sector in the authors sample.
Keywords Spain, Manufacturing industries, Manufacturing technology, Service sector,
Organizational innovation, Innovation activities, Innovation strategies, Complementarity,
Innovation performance
Paper type Research paper

1. Introduction
Innovation has long been acknowledged as one of the critical driving forces in enhancing
social welfare, as well as being crucial for the long-term survival and growth of the firm
(Schumpeter, 1939; Baumol, 2002). Indeed, faced with increasing international
competition, innovation has become a central focus in the long term strategies of firms
(Veugelers and Cassiman, 1999). However, managing innovation is not a straightforward
exercise (Tushman et al., 1997; Van de Ven et al., 1999), but becomes a complex process

Journal of Manufacturing Technology

Management
Vol. 23 No. 5, 2012
pp. 557-577
q Emerald Group Publishing Limited
1741-038X
DOI 10.1108/17410381211234408

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when designing and implementing an innovation strategy directly related to the

multitude of objectives such a strategy implies (Faems et al., 2005).
Traditionally, the literature has identified two main innovation activities: internal
innovation and external knowledge acquisition (Veugelers and Cassiman, 1999;
Cassiman, 2004; Cassiman and Veugelers, 2006), which has been called in the literature
the make or buy decision (Perrons and Platts, 2005; Chang, 2003; Cassiman and
Veugelers, 2006). More recently, a body of literature has identified the existence of a third
innovation activity, the cooperation with other partners for the development of
innovations (Navarro Arancegui, 2002; Hull, 2003; Chen and Yuan, 2007), which can be
considered a hybrid form between internal and external innovation (Pisano, 1990).
Today, concurrent with performing internal innovation, firms tend not only to buy
but also to cooperate to obtain all the capabilities they need, ranging from research and
design, manufacturing, and marketing to after sale service, in order to profit from their
innovations (Teece, 1986; Hartung and MacPherson, 2000; Rigby and Zook, 2002). In this
context, strategic selection and utilization of resources in the innovation network has
turned into a key factor for firm competitiveness and survival. However, deciding on an
optimal balance between innovation activities is a complicated issue (Chen and Yuan,
2007). Consequently, when deciding which innovation strategy is the optimal one, firms
tend to combine the three innovation activities, a fact which suggests that these
alternatives represent complements rather than substitutes. From a theoretical point of
view a relevant factor that supports the hypothesis of complementarity is the existence
of what Cohen and Levinthal (1989, 1990) called absorptive capacity. According to this
concept, external knowledge is more useful when a company engages in its own R&D, or,
when a firm has a stock of prior knowledge at its disposal (Kamien and Zang, 2000).
Therefore, we can explain that firms that tend to combine internal external and
cooperation will be in the best condition to succeed in its innovative processes (Freeman,
1991; Leiponen, 2005; Tether, 2005). Attempts to empirically compare these ideas have
led to conflicting results, because while some studies confirm the existence of
complementary relationships between some of the sources of innovation
implementation (Becker and Peters, 2000; Casisman and Veugelers, 2002, 2006;
Beneito, 2006; Schmiedeberg, 2008), other studies have found them to be substitutes
(Veugelers, 1997; Jirjahn and Kraft, 2006; Laursen and Salter, 2006). It is therefore
necessary to provide a more detailed examination of the effects of different innovation
activities, and the effects that these strategies have on their innovation performance.
Along these lines, the objective of this paper is to analyze the existence of
complementarity between these three innovation activities (internal innovation, external
knowledge acquisition and cooperative R&D), as well as their impact on firms
innovation performance. The existing empirical literature has mainly focused on the
complementarity between internal and external innovation activities. Our empirical
study, however, also includes the third, or hybrid, form of innovation: cooperation. The
analysis of this innovation activity is one of the contributions of our paper to the existing
literature. The interest of the inclusion of the cooperation activity in the analysis is
justified for the Spanish case because it is used by a significant percentage of firms.
Along this line, although the external innovation activity is the most used activity
(70 percent) followed by the internal one (47 percent), a total of 19 percent of the firms use
cooperation innovation activities. This percentage is high enough to consider the study
of cooperation as a third innovation activity and to include it in our analysis.

The other contribution of this study is the inclusion of the service sector in our sample.
This is in contrast to the bulk of the research carried out to date which has centred almost
exclusively on the manufacturing sector. We study the existence of complementarity by
carrying out a regression of innovation performance on innovation strategies
(combinations of innovation activities) following the Productivity Approach.
To accomplish these objectives the empirical research used firm level data from the
Third Community Innovation Survey (CIS-3) for Spain. The rest of the paper is
organized as follows: in Section 2 we review the literature on complementarity in
innovation strategies. In Section 3 we explain the empirical analysis through the
presentation of the data sources, the methodology and the variables used. The empirical
findings are presented in Section 4, and the final section contains the conclusions,
implications and limitations of the research.
2. Literature review of complementarity in innovation activities
In this section we review the literature that has focused on the study of the
complementarities between innovation activities. Traditionally, the literature has
identified two main innovation activities: internal and external (Veugelers and
Cassiman, 1999; Cassiman, 2004; Cassiman and Veugelers, 2006). As far as internal
innovation is concerned, it represents a traditional innovation activity that mainly
consists on the development of innovation activities based on the use of firms internal
capabilities (Vega-Jurado et al., 2009) where the own-generation of knowledge is fully
internalized (Frenz and Ietto-Gillies, 2007) and can be defined as formal expenditures
inside the firm (Beneito, 2006). The external innovation activities are related to the access
to knowledge external sources trough licensing, R&D outsourcing, company
acquisition, or the hiring of qualified researchers with relevant knowledge (Arora and
Gambardella, 1990). More recently, cooperation on innovation activities has grown
significantly (Navarro Arancegui, 2002; Hull, 2003; Chen and Yuan, 2007). This is a
result of both the importance for companies to developing a body of knowledge in a
context of innovation processes, and the fact that this has become increasingly
uncertain, costly and complex (Chang, 2003). This type of the development of innovative
activities is considered a hybrid form (Pisano, 1990) between internal and external
sources. The strategic alliance literature stresses that it can contribute for a firms
competitive advantage allowing firms to gain access to knowledge and capabilities they
do not possess (Al-Laham et al., 2008).
In more precise terms, this literature review has focused on the effects on performance
of these different possible innovation activities (internal, external and cooperation), and
distinguishes between those that occur when these sources are pursued exclusively,
on the one hand and combined, on the other.
2.1 Effects on performance resulting from the use of individual sources of innovation
development activities
First, as far as the use of internal innovation activities in isolation is concerned,
companies invest a great deal of time and resources in the search for innovation
opportunities that will increase their ability to create, use and recombine knowledge, and
to enable them to operate at the forefront of existing knowledge and develop new
resources and capabilities that will be difficult to imitate. All this may place them in a
better position to both obtain and maintain a long-term competitive advantage

Complementarity

559

JMTM
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(Chen and Yuan, 2007), and to increase the chances of a return on their innovation
activities over time (Roberts and Amit, 2003). From this point of view, the choice of
internal innovation activities can significantly influence innovation performance
(Katila, 2002; Katila and Ahuja, 2002). A positive relationship is confirmed by, for
example, Love and Roper (1999), Mairesse and Mohnen (2001) and Frenz and Ietto-Gillies
(2007). However, and according to March (1991) organizations have to make choices
between exploration of new alternatives, for example, invention of new technologies,
and exploitation of existing ones, and maintaining an appropriate balance between
exploration and exploitation is a crucial factor in firm survival and prosperity. This is
because firms that engage in exploration to the exclusion of exploitation are likely to find
that they suffer the costs of experimentation without gaining many of its benefits,
whereas firms that engage in exploitation to the exclusion of exploration are likely
to become effective in the short run but self-destructive in the long run. Consequently,
an incorrect balance between exploration and exploitation could have a negative effect
on organizational performance.
Based on these arguments regarding the use of internal innovation activities, and
according to the existing empirical evidence we propose the following hypothesis:
H1. The use of internal innovation activities in isolation will have a positive
impact on innovation performance.
Second, according to the absorptive capacity notion the use of external and cooperation
activities in isolation will have a negative impact in terms of innovation performance.
From this point of view, knowledge from outside the company cannot become an input
for internal innovation processes unless it develops at the same time its own internal
innovation activities, thus allowing the company to obtain a stock of knowledge that
enables it to absorb, evaluate and use that outside knowledge (Cohen and Levinthal,
1989; Cohen and Levin, 1989). Therefore, based on this position we formulate the
following hypotheses:
H2. The use of external innovation activities in isolation will have a negative
impact on innovation performance.
H3. The use of cooperation innovation activities in isolation will have a negative
impact on innovation performance.
2.2 Effects on performance resulting from the use of joint sources for the development of
innovation activities
As we have commented in the introduction section, in the literature the analysis of the
relationship between innovation performance and the use of several sources for the
development of innovation activities reveals the existence of various arguments and
empirical evidence. On the one hand, some authors give significant support to the
hypothesis of a positive effect on performance, which would indicate that these activities
are complementary (Becker and Peters, 2000; Cassiman and Veugelers, 2002, 2006;
Schmiedeberg, 2008; Frenz and Ietto-Gillies, 2007). On the other hand, a negative and
therefore substitutive relationship is found by other scholars (Love and Roper, 2001;
Jirjahn and Kraft, 2006; Laursen and Salter, 2006; Vega-Jurado et al., 2009). These mixed
empirical results indicate that we consider how to adjust our models of innovation to
resolve these conflicting findings (Table I).

Author
Becker and
Peters (2000)

Data source

Mannheim
Innovation Panel
(MIP)
Love and Roper Product
(2001)
Development
Survey (PDS)
Cassiman and
Community
Veugelers (2002) Innovation Survey
(CIS)
Beneito (2006)
Survey of
Entrepreneurial
Strategies (ESEE)
Cassiman and
CIS
Veugelers (2006)
Jirjahn and
Hannover Panel
Kraft (2006)
Laursen and
CIS
Salter (2006)
Schmiedeberg
MIP
(2008)
Vega-Juradoetal. CIS
(2009)
Frenz and Ietto- CIS
Gillies (2007)

Sample

Results

Complementarity

Manufacturing firms Internal and cooperation are

(Germany)
complements
Manufacturing firms
(UK, Germany and
Ireland)
Manufacturing firms
(Belgium)

Internal and external are

complements, and internal and
cooperation are substitutes
Internal and external, and internal,
external and cooperation are
complements
Manufacturing firms Internal and external are complements
(Spain)
Manufacturing firms
(Belgium)
Manufacturing firms
(Germany)
Manufacturing firms
(UK)
Manufacturing firms
(Germany)
Manufacturing firms
(Spain)
Manufacturing and
service firms (UK)

561

Internal and external are complements

Internal and cooperation are
substitutes
Internal and external are substitutes
Internal and cooperation are
complements
Internal and cooperation are
complements
Internal and external and internal and
cooperation are complements (without
statistical confirmation)

Starting with the arguments supporting the hypothesis of complementarity between the
means of innovation, a relevant factor is the existence of what Cohen and Levinthal
(1989, 1990) called absorptive capacity. According to this concept, knowledge from
outside the company cannot become an input for internal innovation processes unless it
develops into an internal investigation, thus allowing the company to obtain a stock of
knowledge that enables it to absorb, evaluate and use that outside knowledge (Cohen
and Levinthal, 1990; Rosenberg, 1990; Kamien and Zang, 2000). First, under this
approach, the combined use of internal innovation activities with external and/or
cooperation can positively contribute to innovative performance in a number of ways: by
allowing the company to better assess the quality of potential partners in innovation
while reinforcing its attractiveness as a partner (Veugelers and Cassiman, 1999), by
assisting the company in attaining more profitable innovation projects through greater
access to resources and knowledge through the various sources (Haour, 1992; Arora and
Gambardella, 1994), by improving communication and coordination between internal
and external activities, thereby increasing the likelihood of successfully completing
collaboration projects (Bougrain and Haudeville, 2002), and in the case of the
combination of external innovation and cooperation, by maximizing incoming
spillovers[1]. Along this line, March (1991) suggests that organizations that develop
effective instruments of coordination and communication can be expected to have better
performance and to become more reliable, less likely to deviate significantly from the
mean of their performance distributions. Second, according to the absorptive capacity
notion the combined use of external and cooperation activities will have a negative

Table I.
Summary of the empirical
literature about
complementarity

JMTM
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impact in terms of innovation performance unless firm develops at the same time its own
internal innovation activities. As far as empirical evidence is concerned, the existence of
a complementary relationship has been confirmed empirically for the case of internal
innovation and cooperation in Schmiedeberg (2008), Becker and Peters (2000), Becker
and Dietz (2004) and Tsai and Wang (2009); for internal and external innovation in
Beneito (2006) and Cassiman and Veugelers (2002, 2006); and for the three activities
together in Cassiman and Veugelers (2002).
Against these theoretical and empirical arguments in favor of complementarity
Transaction Cost Economics (Coase, 1937; Williamson, 1985) considers that external and
internal innovation activities are substitutes (Arrow, 1962; Pisano, 1990). This literature
has focused particularly on the choice between internal and external development,
which is known as Make or buy decision (Veugelers and Cassiman, 1999; Beneito,
2003). According to this theory, on the one hand, the external innovation enables
companies to eliminate the costs and risks associated with internal development
(Chen and Yuan, 2007; Huang et al., 2009), which are generally higher than those derived
from acquisition (Beneito, 2003) as well as to access externally available specialist
know-how, and to attain the economies of scale associated with specialization (Veugelers
and Cassiman, 1999; Chen and Yuan, 2007). On the other hand, the presence of high levels
of complexity, specificity and uncertainty associated with R&D, and the possibility of
opportunistic behaviour in transactions, reduce the potential benefits of the external
innovation, making the source of internal hierarchy to the market more efficient
(Williamson, 1985). These arguments support the hypothesis of a substitutability
relationship between internal and external activities (Vega-Jurado et al., 2009), although
they could also suggest the use of cooperation to achieve the best balance between cost
and risk. According to this, innovation can be understood like other activity that costs
less when firms develop it through a relational contract. Spillovers also strengthen the
argument for the existence of substitutive innovation activities. In the case of incoming
spillovers, companies that put great effort into R&D and therefore occupy a position at
the frontier of knowledge may not gain any advantage from the possibility of having
greater external knowledge. In the case of outgoing spillovers, the problem is the
difficulty for the company in maintaining the control and ownership of its R&D results
(Cassiman et al., 2002; Amir et al., 2003; Belderbos et al., 2004a, b).
From an empirical point of view the substitutive relation between internal and
external innovation finds support in Veugelers (1997), Love and Roper (2001) and
Laursen and Salter (2006). Jirjahn and Kraft (2006) for their part, empirically
demonstrated that internal innovation and cooperation are substitutes.
Assuming the proposals of the absorptive capacity notion and taking into account
that the majority of the available empirical evidence supports the hypothesis of
complementarity between internal and external, internal and cooperation and for the
three activities together we propose the following hypotheses:
H4. The use of internal and external innovation activities together will have a
positive impact on innovation performance.
H5. The use of internal and cooperation innovation activities together will have a
positive impact on innovation performance.
H6. The use of external and cooperation innovation activities together will have a
negative impact on innovation performance.

H7. The use of internal, external and cooperation innovation activities together
will have a positive impact on innovation performance.

Complementarity

Once the hypotheses have been formulated we turn into the empirical study of the
paper in order to test them.
3. Empirical study
This section presents the data sources and the methodology that includes the
explanation of the variables and the empirical model.
Data sources
The empirical analysis was carried out by using firm level data contained in the Survey on
Technological Innovation in Firms conducted by the National Statistics Institute of Spain
(INE) as part of the CIS-3. The Community Innovation Surveys (CISs) are one of the main
instruments developed by the EU in order to obtain data on innovation indicators and to
access national innovation performance. Results were gathered via a postal questionnaire
asking questions on topics such as effects of innovation, factors hampering innovation
and innovation-related expenditure. The survey goes out to a sample of enterprises in
each country. Within each country the sample is designed to be representative of all
regions, all industrial sectors and all enterprise sizes. The survey was carried out in
accordance with the methodological directives defined in the Oslo Manual (OECD, 1997).
The survey includes data on 11,778 firms belonging to both the manufacturing and
service sectors which represents a response rate of 73 percent of the total sample.
However, the sample used in this study is restricted to firms that innovate. These firms
are differentiated from those that do not innovate based on their answer to the survey
question of whether they had actively engaged in innovation (by introducing new or
improved products or processes) in the period comprising 1998-2000. In summary, our
sample consists of 3,964 manufacturing and service firms that responded that they had
innovated in products or processes during this period. Regarding the differences
between innovating and non-innovating firms our data show that innovating firms are
more specialized in services activities, smaller and operate more in international markets
than non-innovating firms.
Methodology
Variables.
Dependent variable. Our phenomenon of interest is the effect of different innovation
strategies on innovation performance in order to determine if these strategies are
complementary. Therefore, our dependent variable, TURNOVER, is an innovation
performance measure that indicates the percentage of the firms turnover generated by
new or substantially improved products during the period 1998-2000. This variable is
similar to the ones used in numerous other papers (Klomp and van Leeuwen, 2001;
Criscuolo and Haskel, 2003; Monjon and Waelbroeck, 2003; Faems et al., 2005;
Cassiman and Veugelers, 2006; Cetindamar and Ulusoy, 2008).
Independent variables. The independent variables indicate different innovation
strategies utilized by the firm. The construction of these variables has been determined
for two main reasons. On the one hand, we have followed procedures employed in
several other papers (Veugelers, 1997; Belderbos et al., 2004a, 2006; Veugelers and
Cassiman, 2005; Cassiman and Veugelers, 2006). On the other hand, the construction has

563

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been conditioned for the kind of the available data. In the survey firms answered if they
have developed or not innovation through internal, external or cooperation activities in a
categorical way. Thus, we have constructed the following dummy variables:
.
ONLY_INTERNAL. A dummy variable that takes value 1 if firms innovated only
through internal innovation activities in the period 1998-2000, and 0 otherwise.
.
ONLY_EXTERNAL. A dummy variable that takes value 1 if firms innovated
only through at least one of the following external activities in the period
1998-2000, and 0 otherwise: acquiring R&D services, acquiring machines or
equipment, or acquiring intangible technology (licenses, know-how, etc).
.
ONLY_COOPERATION. A dummy variable that takes value 1 if firms
innovated only through cooperation with other partners in R&D and innovation
in the period 1998-2000, and 0 otherwise.
.
INTERNAL&EXTERNAL. A dummy variable that takes value 1 if firms
innovated by combining internal and external innovation activities, and 0
otherwise.
.
INTERNAL&COOPERATION. A dummy variable that takes value 1 if firms
innovated by combining internal and cooperation innovation activities, and 0
otherwise.
.
EXTERNAL&COOPERATION. A dummy variable that takes value 1 if firms
innovated by combining external and cooperation innovation activities, and 0
otherwise.
.
INTERNAL&EXTERNAL&COOPERATION. A dummy variable that takes
value 1 if firms innovated by combining internal, external and cooperation
innovation activities, and 0 otherwise.
.
OTHER. For some innovation activities the Innovation Technological Survey did
not differentiate if they are internal or external, and then, it would be impossible to
assign them as either purely internal or purely external activities. For this reason,
we have created the variable OTHER for the empirical study as a reference
category which is a dummy variable that takes value 1 in this case and 0 otherwise.
Control variables. Furthermore, we have included two additional variables in our
analysis to control for firm characteristics that have been identified in the empirical
literature: firm size (Veugelers, 1997; Faems et al., 2005; Cassiman and Veugelers, 2006;
Arbussa and Coenders, 2007) and industry dummies (Veugelers, 1997; Beneito, 2003;
Belderbos et al., 2006; Faems et al., 2005; Cassiman and Veugelers, 2006; Arbussa and
Coenders, 2007; Chen and Yuan, 2007):
.
SIZE. This variable measures de size of the firm and has been used traditionally as
a control variable (Beneito, 2006; Jirjahn and Kraft, 2006; Laursen and Salter, 2006;
Schmiedeberg, 2008; Frenz and Ietto-Gillies, 2007) since the work of Schumpeter
(1943). In the paper the author proposed that the size of a company can be a
determinant of its innovative activity. However, approaches to this theme in the
literature have not demonstrated concurrence. On the one hand, small firms have
more flexible structures, which can be an advantage to innovation (Damanpour,
1992), so we should expect greater innovative performance in these firms.
However, large companies can achieve economies of scale in their innovation
activities (Cockburn et al., 2008), and therefore greater innovative performance.

Other authors, however, suggest that the relationship between size and innovation
is not necessarily linear (Kamien and Schwartz, 1982; Cohen and Levin, 1989;
Evangelista et al., 1997) and may be affected by other characteristics of the
company and sector (Veugelers and Cassiman, 1999). To measure firm size we
construct a variable that takes value 1 if the number of employees of the firm is
under 45, value 2 if this number is between 45 and 500, and value 3 if the firm has
over 500 employees. This way of constructing the variable is determined by the
type of data supplied in the survey.
INDUSTRY_DUMMIES. These variables indicate the industrial sector of the
firm, which is considered to reflect, among other things, the technological
opportunity and the appropriability conditions that the firm faces (Beneito, 2003).
The use of industry dummies was introduced by Scherer (1965) and they are
usually used to eliminate industry differences (Chen and Yuan, 2007).
We construct our industry dummies at two-digit NACE, following Beneito
(2003) and Belderbos et al. (2004a, 2006). The NACE code system is the European
standard for industry classifications and stands for General Name for Economic
Activities in the European Union. This renders a total of 21 sectors, as labelled in
Table IV. Therefore, 21 dummy variables have been constructed with the sector
other manufacturing taken as the category of reference.

Empirical model. To evaluate the existence of complementary relationships between

innovation activities we follow the Productivity Approach[2], as have several other
researchers on innovation (Cassiman and Veugelers, 2002, 2006; Belderbos et al., 2006;
Schmiedeberg, 2008). According to the Productivity Approach, the existence of
complementarity can be tested by carrying out a regression of a measure of innovation
performance on exclusive combinations of innovation activities (innovation strategies).
If innovation activities are complementary, the effect of their complementarity will
show up in measures of innovation performance.
The equation:

 



Pi Ai1 ; Ai2 ; Ai3 ; Xi ; u; b 1 2 Ai1 1 2 Ai2 1 2 Ai3 u000 Ai1 1 2 Ai2

 

1 2 Ai3 u100 1 2 Ai1 Ai2 1 2 Ai3 u010





1 2 Ai1 1 2 Ai2 Ai3 u001 Ai1 Ai2 1 2 Ai3 u110 1




Ai1 1 2 Ai2 Ai3 u101 1 2 Ai1 Ai2 Ai3 u011
Ai1 Ai2 Ai3 u111 Xi b 1i
shows the relation between innovation performance and innovation strategies, and
where:
i refers to firm i.
Aij [ {0; 1};j 1; 2; 3 indicates the innovation activity choices of firm i.
ukl are the coefficients on the firms innovation strategy choice.
Xi is a vector that includes other firm characteristics as control variables.
1i is the error term.

Complementarity

565

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and the conditions for complementarity between the practices A1, A2 and A3. These
conditions imply that higher returns are achieved when the practices are used together
compared to a situation when they are used in isolation (Belderbos et al., 2006; Cassiman
and Veugelers, 2006).
We have that if ONLY_INTERNAL is A11, ONLY_EXTERNAL is A21, and
ONLY_COOPERATION is A31, then INTERNAL&EXTERNAL A1A2(1 2 A3),
INTERNAL&COOPERATION A1(1 2 A2)A3, EXTERNAL&COOPERATION
(1 2 A1)A2A3, INTERNAL&EXTERNAL&COOPERATION A1A2A3 and
NOINTERNAL&NOEXTERNAL&NOCOOPERATION(1 2 A1)(1 2 A2)(1 2 A3).
To test the existence of complementarity by analyzing how different
innovation strategies (combination of innovation activities) affect the performance of
the innovation process following the productivity approach, we use a a linear
regression by OLS over the dependent variable. Our empirical model has been specified
as follows:
TURNOVER a bXi d1 ONLY _INTERNAL d2 ONLY _EXTERNAL
d3 ONLY _COOPERATION j1 INTERNAL&EXTERNAL
j2 INTERNAL&COOPERATION
j3 EXTERNAL&COOPERATION
j4 INTERNAL&EXTERNAL&COOPERATION
j5 NOINTERNAL&NOEXTERNAL&NOCOOPERATION 1i
where the X-vector consists of the firm-level control variables included in our analysis
(firm size and industry dummies at the two-digit NACE level).
4. Empirical results
Frequencies of innovation strategies
Table II presents data showing the frequency of the various innovation strategies. It
shows that the most common innovation strategy selected by firms is the use of external
activities alone to seek innovations (33.22 percent of firms use this strategy), followed by
the strategy that combines internal and external activities (21.97 percent). The
innovation strategies employed by the least number of firms are those that contain
cooperation activities (ONLY_COOPERATION, INTERNAL&COOPERATION and
Innovation strategy

Table II.
Frequencies of
innovation strategies

ONLY_INTERNAL
ONLY_EXTERNAL
ONLY_COOPERATION
INTERNAL&EXTERNAL
INTERNAL&COOPERATION
EXTERNAL&COOPERATION
INTERNAL&EXTERNAL&COOPERATION
OTHER
Total

Frequency of innovation strategy

Share (%)

412
1,317
35
871
127
132
468
602
3,964

10.39
33.22
0.88
21.97
3.20
3.33
11.81
15.19
100.00

EXTERNAL&COOPERATION). Furthermore, in Table II we find that 15.19 percent

of firms develop some kind of innovative activity that cannot be classified as internal or
external.
Descriptive statistics and correlations of innovation strategies
In the first place, Table III shows that strategies combining internal innovation with any
other innovation activity are positively correlated with the measure of innovation
performance as expected. This result is in line with the notion of absorptive capacity
(Cohen and Levinthal, 1989). Second of all, we can see that other kinds of innovation
strategies that do not include internal innovation are either negatively correlated with
the turnover variable (ONLY_EXTERNAL and ONLY_COOPERATION strategies),
or not correlated with it (EXTERNAL&COOPERATION strategy).
Distribution of firms across industries and innovation strategies
The comparison across industries shown in Table IV indicates that the innovation
strategies selected are not dissimilar between services and manufacturing industries,
and are in line with the results presented in Table III for the total of the sample. Thus,
the ONLY_EXTERNAL strategy is the most frequent strategy used by all the
manufacturing and services sectors at two-digit NACE level, in the same way as for
the whole sample. At the other extreme, and in line with the general results of Table III,
the ONLY_COOPERATION strategy is the one followed by the fewest firms of each
sector at two-digit NACE level.
Regression results
With respect to the regression results, the significance of the F-value at the 0.01 level
indicates the existence of a linear relation between the dependent variable of the model
(TURNOVER) and the independent variables, as can be seen in Table V.
The regression equation preserves 4.2 percent of the variance of the model. This
relatively low value can be explained for the use of cross-section data, because it has
been established that analyses carried out for temporal series of data obtain, in general
terms, higher values for R 2 (Uriel and Aldas, 2005).
Additionally, the last column of Table V presents the values for the variance inflation
factor (VIF) associated with each independent variable in the regression equation. This
is an analysis typically used to deal with the issue of multicollinearity, especially when
explanatory variables are strongly correlated (Dielman, 1991). The maximum VIF value
shown in Table III is 2.15, which falls far short of 10, the cut-off considered by Neter et al.
(1983) or Hair et al. (1999) as a limit. Therefore, the multicollinearity problem does not
seem to exist for our variables.
As far as the independent variables are concerned, all of them are statistically
significant with the exception of the SIZE control and the EXTERNAL&COOPERATION
innovation strategy variables. And, with respect to the industry dummies, only the
variable for the Machines and equipment sector proves to be statistically significant
( p , 0.1), and in this case, with a negative sign.
Beginning with the variables that prove to be statistically significant in the multiple
regression equation, the Table V shows on the one hand, the significant and
positive
effect
that
ONLY_INTERNAL,
INTERNAL&EXTERNAL,
INTERNAL&COOPERATION and INTERNAL&EXTERNAL&COOPERATION

Complementarity

567

Table III.
Descriptive statistics and
correlations of innovation
strategies

Note: The correlation is significant at: * 0.05 and * * 0.01 levels

1.73
0.22
0.10
0.33
0.01
0.22
0.03
0.03
0.12
0.15

Mean

SD
0.462
0.291
0.305
0.471
0.094
0.414
0.176
0.179
0.323
0.359

V1

V2

V3

1
2 0.007
1
2 0.011
0.044 * *
1
0.008 2 0.173 * * 2 0.240 * *
*
2 0.032 *
0.003 2 0.037
0.000
0.102 * * 2 0.181 * *
2 0.016
0.05 * * 2 0.062 * *
0.019 2 0.001
2 0.063 * *
2 0.013
0.051 * * 2 0.125 * *
0.008
0.008
2 0.144 * *
1
2 0.067 * *
2 0.374 * *
2 0.128 * *
2 0.131 * *
2 0.258 * *
2 0.298 *

V4

V6

V7

V8

V9

1
2 0.050
1
2 0.017
2 0.097 * *
1
2 0.018
2 0.098 * * 2 0.034 *
1
2 0.038 *
0.194 * * 2 0.067 * * 2 0.068 * *
1
2 0.40 * 2 0.224 * * 2 0.077 * * 2 0.079 * * 2 0.155 * *

V5

568

V1: SIZE
V2: TURNOVER
V3: ONLY_INTERNAL
V4: ONLY_EXTERNAL
V5: ONLY_COOPERATION
V6: INTERNAL&EXTERNAL
V7: INTERNAL&COOPERATION
V8: EXTERNAL&COOPERATION
V9: INTERNAL&EXTERNAL&COOPERATION
V10: OTHER

JMTM
23,5

12.69
7.00
11.48
12.04
11.16
13.19
12.07
9.68
9.31
8.33
8.33
8.73
3.64
10.23
10.17
12.75
12.50

134 (3.38)
(6.48)
(3.08)
(2.72)
(5.42)

257
122
108
215
182 (4.59)
290 (7.32)
186 (4.69)
494 (12.46)
36 (0.91)
96 (2.42)
229 (5.78)
55 (1.39)
176 (4.44)
118 (2.98)
447 (11.28)
168 (4.24)
3,964 (100)

7.90
10.32
9.31
7.58

(0.96)
(7.57)
(6.23)
(1.66)

38
300
247
66

Note: Percentages of subsector sample

Mining
Food
Textile
Paper
Printing and
publishing
23, 24 Petroleum and
chemicals
25
Rubber and plastic
27
Metallurgy
28
Metal products
29
Machines and
equipment
30-33 Electronics
34, 35 Cars and transport
20, 26, Other manufacturing
36, 37
40, 41 Utilities
45
Building
50-52 Repair of motor
vehicles, wholesale
and retail trade
55
Hotels and
restaurants
60-64 Transport, storage
and communication
65-67 Financial
intermediation
70-74 Business services
90-93 Environmental and
other services
No. of total observations in
the sample (%)

10-14
15, 16
17-19
21
22

NACE Sector

27.98

29.66
32.44

31.25

36.36

31.44

40.08
44.44
33.33

28.00
33.79
28.49

38.13
30.33
34.26
31.63

29.85

39.47
33.00
30.77
37.86

1.79

0.85
0.45

1.70

1.82

0.87

0.61
0.00
2.08

0.55
1.38
0.00

1.56
1.63
0.00
0.93

0.00

0.00
0.67
1.21
0.00

20.83

17.80
23.26

26.14

16.36

19.65

17.80
19.45
17.71

24.18
22.76
24.19

20.23
25.41
18.52
25.58

20.90

21.05
27.67
19.84
27.27

4.17

5.08
3.36

2.27

3.64

3.93

3.24
0.00
1.05

3.85
3.45
2.69

2.33
3.28
0.93
1.86

5.22

2.63
3.67
4.05
1.52

4.76

1.70
3.80

3.98

9.09

3.93

3.85
0.00
6.25

3.30
1.38
1.08

1.95
1.64
4.63
3.26

2.24

2.63
3.67
4.05
4.55

13.68

19.49
13.65

10.23

12.73

13.55

11.34
5.56
14.58

12.64
15.52
9.14

7.00
6.56
11.11
12.56

13.43

10.53
6.00
17.00
1.52

100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100

15.79
15.00
13.77
19.70
15.67
21.80
19.67
18.51
13.02
14.29
9.65
24.73
13.77
22.22
16.67
17.90
16.36
14.20
15.25
10.29
14.29

ONLY_
ONLY_
No. of
ONLY_
observations INTERNAL EXTERNAL COOPERATION INT&EXT INT&COOP EXT&COOP INT&EXT&COOP OTHER Total
(%)a
(%)a
(%)a
(%)a
(%)a
(%)a
(%)a
(%)a
in sample (%)
(%)a

Complementarity

569

Table IV.
Distribution of firms
across industries and
innovation strategies

JMTM
23,5

570

Table V.
Regression results:
dependent variable
% turnover from new
or substantially
improved products

Variable
SIZE
ONLY_INTERNAL
ONLY_EXTERNAL
ONLY_COOPERATION
INTERNAL&EXTERNAL
INTERNAL&COOPERATION
EXTERNAL&COOPERATION
INTERNAL&EXTERNAL
&COOPERATION
INDUSTRY DUMMIES
Constant
R2
F
No. of observations

B (no standardized
coefficients)
2 0.002
0.033 *
2 0.077 * * *
2 0.120 * *
0.051 * * *
0.090 * * *
2 0.002
0.037 * *
Included
0.242 * * *
0.042
6.143 * * *
3,964

SE

b (standardized
coefficients)

t-value

VIF

0.010
0.018
0.014
0.050
0.015
0.028
0.02

20.003
0.034
20.125
20.039
0.073
0.055
20.001

2 0.189
1.783
2 5.469
2 2.418
3.355
3.221
2 0.069

1.053
2.146
1.053
1.925
1.179
1.188
1.594

0.018
Included
0.024

0.041
Included

2.064 1.053
Included
10.074

Note: Significant at: *p , 0.1, * *p , 0.05 and * * *p , 0.01

innovation strategies have on innovation performance. For this reason, we accept our
hypotheses H1, H4, H5 and H7 (Table VI). The positive effect of the three first variables
on innovation performance, due to they are the combination of internal innovation
activities with external, cooperation, and external and cooperation activities their
significant and positive coefficients support the argument of the complementary nature
of different innovation activities. These results suggest that the complementarity only
occurs when combining internal innovation activities with any other innovation activity
(external, cooperation or both). This argument is supported by the absorptive capacity
theory, as well as by empirical evidence (Rothwell et al., 1974; Freeman, 1991; Arora and
Gambardella, 1994; Veugelers, 1997; Cassiman and Veugelers, 2006). The positive
coefficient of the ONLY_INTERNAL innovation strategy indicates that the performance
of internal innovation activities by the firm positively affects the innovation
performance measure.
On the other hand, the coefficients of ONLY_EXTERNAL and
ONLY_COOPERATION are negative. Thus, our working hypotheses, H2 and H3,
are accepted. These results mean that the use of these innovation strategies negatively
affects the firms innovation performance. This negative relation could be due to the
necessity of internal innovation activity in firms in order to make external and
cooperation activities successful in terms of innovation performance. This result is
supported by the absorption capacity notion.
Finally, as far as the EXTERNAL&COOPERATION strategy is concerned its effect
on innovation performance is negative but not significant, so H4 is rejected.
5. Conclusions, implications limitations and future research
This study aims to find empirical evidence for the idea that various innovation activities
are, by nature, complements rather than substitutes, and that the use of different
innovation activities is related with innovation performance. We differentiate between
the type of innovation strategy (only internal innovation, only external innovation,
only cooperation and all the possible combinations of them) and consider a performance

Hypotheses

Variable

Empirical results

H1. The use of internal

innovation activities in isolation
will have a positive impact on
innovation performance
H2. The use of external
innovation activities in isolation
will have a negative impact on
innovation performance
H3. The use of cooperation
innovation activities in isolation
will have a negative impact on
innovation performance
H4. The use of internal and
external innovation activities
together will have a positive
impact on innovation
performance
H5. The use of internal and
cooperation innovation activities
together will have a positive
impact on innovation
performance
H6. The use of external and
cooperation innovation activities
together will have a negative
impact on innovation
performance
H7. The use of internal, external
and cooperation innovation
activities together will have
a positive impact on innovation
performance

ONLY_INTERNAL

( ) *

ONLY_EXTERNAL

(2) * * * Accepted

ONLY_COOPERATION

(2) * * * Accepted

INTERNAL&EXTERNAL

( ) * * * Accepted

INTERNAL&COOPERATION

( ) * * * Accepted

EXTERNAL&COOPERATION

(2)

Complementarity

Accepted

571

Rejected

INTERNAL&EXTERNAL&COOPERATION ( ) * * * Accepted

Notes: Signigicant at: *p , 0.1, * *p , 0.05 and * * *p , 0.01; () positive effect of the variable on
innovation performance; (2) negative effect of the variable on innovation performance

measure: the percentage of the firms turnover generated by new or substantially

improved products in the period 1998-2000. The empirical study is carried out using data
on Spanish manufacturing and service firms from the CIS-3 for Spain.
Theoretical and research implications
The results of the empirical study confirm the proposals put forward by the absorptive
capacity notion. Therefore, our results, which support previous empirical literature,
confirm the existence of complementarity between internal innovation and external
innovation as well as between internal innovation and cooperation. However, the
arguments from transaction cost theory that suggest a more substitutive relationship do
not find empirical support in our analysis.
Beginning with the innovation strategies based on the use of only one innovation
activity, our results indicate that internal innovation activity positively affects
innovation performance, which is defined as the percentage of the firms turnover

Table VI.
Hypotheses, variables
and empirical results
of OLS regression

JMTM
23,5

572

generated by new or substantially improved products during the period 1998-2000.

However, when firms seek to innovate by using only external or only cooperation
activities, innovation performance decreases. This result is supported by the absorptive
capacity notion. Along this line, the use of external innovation or cooperation does not
yield positive effects in terms of innovation performance if firms do not simultaneously
invest in their own innovation activities that allow them to internalize and select external
knowledge.
Turning to the results obtained for the combination of innovation strategies of
different innovation activities, they indicate complementarity for all combinations with
the exception of the EXTERNAL&COOPERATION strategy, for which was
non-significant. Due to the fact that the remaining innovation strategies include
internal innovation activity, we can conclude that complementarity appears only
between this innovation strategy and any other. Thus, our results confirm the existence
of complementarity between different innovation activities, when these include internal
innovation activity, which is in line with the absorption capacity point of view.
Management implications
These results have important implications for managers and public policy makers. The
results suggest that innovation management requires the integration of various innovation
activities with the aim of maximizing the positive effects of each one. This management
approach is in contrast with the profile of innovation strategies for Spanish firms, in which
the most frequent strategy is the only external acquisition of innovations (33.22 percent),
followed by the combination of internal and external activities (21.97 percent). Spanish
firms should invest more in creating their own internal innovation activities, which,
combined with the high levels of external acquisitions characteristic of Spanish firms,
would increase their innovation performance. This outcome is supported by both the
absorptive capacity theory and our empirical results. Along these lines, given that the
majority of Spanish firms are small or medium-sized, with few resources to carry out
internal innovation, the design of concrete policies aimed at promoting internal innovation
activities in these types of firms, would have great relevance. Armed with this knowledge,
public officials could draw up policies to assist small firms, e.g. through the granting of
financial assistance, the provision of employee training programs or supplying strong
supports for education of middle management in innovation which would increase the
human and social capital of Spanish firms, and contribute positively to their innovativeness.
Limitations and future research
The main limitation of the paper is the above mentioned use of cross-section data, which
yields less robust results in the empirical test. Therefore, it would be worthwhile to use
the methodology employed in this study using a temporal series of data. The use of
temporal series in the case of this study would be very interesting due to the dynamic
nature of the innovation processes which made necessary to use this kind of data and
because the use of panel data methodology could deal with the problems regarding to the
cross-section estimations.
Furthermore, we propose to continue the study presented here by analyzing the
determinants of firm selection of one innovation strategy over another. This research
would be supported by the literature proposals presented in this paper.

Notes
1. Spillovers are the non-appropriable amount of knowledge that is produced by a firms
innovation efforts (Kaiser, 2002) and arise due to failures in the protection mechanism of
knowledge generated in an innovating firm. More precisely, the industrial organization
literature analyzes the effect of two kinds of spillovers (Belderbos et al., 2004b): incoming
spillovers (external information flows into the firm that increase the attractiveness of
cooperation for the firm) and outgoing spillovers (information flows out of the firm that limit
the appropriability of results from its innovation process).
2. This approach is based on the theory of supermodularity developed by Milgrom and Roberts
(1990, 1995). This theory consists of a mathematical theory that states the necessary
conditions for activities to be complementary. These conditions can be summarized as follows
(Cassiman and Veugelers, 2006): suppose that there are two activities, A1 y A2, and each
activity can be performed by the firm (A1 1) or not (A2 0). The function P (A1, A2) is
supermodular and A1 and A2 are complementary only if P(1, 1) 2 P(0, 1) $ P(1, 0) 2 P(0, 0),
i.e. adding an activity while the other activity is already been performed has a higher
incremental effect on performance than when doing the activity in isolation.
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About the authors
Ana Ma Serrano-Bedia received her PhD in Business Administration from the University of
Cantabria, Spain, where she has been Assistant Professor of Operations Management since 1996
at the Department of Business Administration. She has co-authored more than 35 journal articles
on a variety of topics. Her primary interests are the effects of quality and environmental
management systems on organizational strategies, and R&D and innovation management.
Ana Ma Serrano-Bedia is the corresponding author and can be contacted at: serranoa@unican.es
Ma Concepcion Lopez-Fernandez is an Assistant Professor in Business Organization at the
Department of Business Administration of the University of Cantabria, where she received her
PhD. She has been the Dean of the Faculty of Business-Economics (1996-2004) and is currently
the Vice-Rector for Academic Affairs. She has co-authored more than 50 journal articles related
to business strategy and structure, innovation, and natural environment and tourism.
Gema Garca-Piqueres is a Teaching Assistant in Business Organization at the Department of
Business Administration of the University of Cantabria where she received her PhD. Her main
line of research is the study of the innovation processes from both firms and innovation systems
perspective, focusing on the relations between their partners as well as on sectoral differences.

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