Core complementarities of the corporation: organization of an innovating firm

Despite the proliferation of arrangements to outsource or cooperate in Research and Development, the benefits and costs of alternative organizational forms are not very well understood. This paper develops a supermodularity model to highlight the conditions under which internal or external modes of organizing innovation activities are likely to occur. The technological and institutional environment drives firms' decisions to organize innovation and invest in learning, which determine firm performance in terms of innovation and growth. Internal organization is beneficial when complementarities among activities are strong. However, independent governance of complementary activities may become optimal when depreciation of knowledge is rapid due to radical technical change. Copyright © 2005 John Wiley & Sons, Ltd.