Create or Buy? Internal vs. External Source of Innovation and Firm Productivity


Innovation outsourcing is a rapidly increasing trend, as technological convergence, declining transaction costs of acquiring external R&D inputs, and shortening product cycle times have driven firms to utilize external sources of knowledge. Despite this, there is little systematic research and analysis of the effects of innovation outsourcing, and specifically on whether outsourced innovation has a different effect from in-house innovation on firms’ productivity. Existing research on innovation outsourcing focuses largely on its impact on firms’ innovation performance, such as the number of new products or registered patents, rather than on firms’ overall performance, such as final output and productivity. A firm invests in innovation primarily to enhance its final output and productivity; however, up to now little has been known about the wider effects of innovation outsourcing beyond its direct effect upon a firm’s innovation performance.

Research on representative firms in developing countries is particularly rare. Existing research has focused mainly on developed economies and on selected industries, even though these may not be the most innovative industries in developing countries. Also, research using innovation survey data was usually conducted for those firms that are more likely to invest in innovation or had responded in the affirmative for innovation outputs — which might lead to biased estimates of the effect of innovation for more general firms.

Although widely recognized as a determinant of productivity, innovation’s role might vary according to a country’s relative position in technology advancement: countries close to the technology frontier will grow faster by investing in innovation, while the follower group of countries will benefit more by adopting existing technology from the frontier. Therefore, according to the level of technological advancement, the growth rate of the economy will depend not only on innovation but also on the ability to adopt or diffuse technology throughout the economy. Frontier countries might benefit more from policies that promote firms’ internal innovation (create), while follower countries would gain more from policies favouring efficient adoption of existing technologies through innovation outsourcing (buy).

Particularly in a developing country like Tunisia, where firms are constrained by limited resources and skill levels, it is important to understand which source of innovation is more efficient in improving final outputs. However, the effect of innovation outsourcing on firm productivity is under researched (even in developed economies).

This paper addresses the gap in knowledge on innovation outsourcing’s effect on productivity from more general industries in developing countries, by examining representative firms in the manufacturing sector in Tunisia. It analyses the determinants of a firm’s decision to invest in different sources of innovation, and the effects of these different sources on a firm’s final output, via productivity. By doing so it seeks to answer the following questions: are there any differences in determinants of a firm’s decision to create and to buy, are the effects on productivity different between create and buy, and, if so, which source of innovation is more effective in increasing final output, via productivity?


Choi, J. Create or Buy? Internal vs. External Source of Innovation and Firm Productivity. TMCD, Oxford, UK (2015) 54 pp. [TMCD Working Paper: TMD-WP-67]

Create or Buy? Internal vs. External Source of Innovation and Firm Productivity

Published 1 January 2015