Working Paper: NBER ID: w25051
Authors: Ashish Arora; Wesley M. Cohen; Colleen M. Cunningham
Abstract: We study how the inventive capability of a firm conditions its participation in a division of innovative labor. Capable firms are, by definition, able to invent; for them, external inventions substitute for their own R&D. However, external knowledge is an input into internal invention, and thus, more valuable to firms with inventive capability. Using a simple model of innovation and imitation, we explore how inventive capability affects a firm’s R&D investments, and thus whether and how it innovates, imitates, or does neither. Further, we study how these outcomes are conditioned by the supply of external knowledge as well as the supply of external inventions. In an advance over the literature, we treat firm inventive capability as unobserved, and use a latent class multinomial model to infer its value. Using a recent survey of product innovation and the division of innovative labor among US manufacturing firms, we find that high capability firms tend to use internal, rather than externally generated inventions, to innovate, and they use external knowledge to enhance their internal inventive activity. By contrast, lower capability firms are more likely to introduce “me-too” or imitative products, and when they innovate, are more likely to rely on external sources of inventions. Our findings suggest the successful pursuit of R&D-led growth depends both on firm inventive capability and the external knowledge environment.
Keywords: Inventive Capability; Innovation; Division of Labor; External Knowledge; R&D
JEL Codes: O31; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm inventive capability (O31) | innovation strategy (O35) |
| external knowledge supply (O36) | internal inventive activity (O36) |
| external inventions (O36) | innovation strategy (O35) |
| firm size + firm inventive capability (L25) | innovation rates (O39) |
| external knowledge supply + firm inventive capability (O36) | innovation outcomes (O36) |
| low capability firms (L25) | responsiveness to external invention supply (O36) |
| high capability firms (L25) | benefit from external knowledge supply (O36) |