Is there complementarity or substitutability between internal and external R&D strategies?

The mixed picture of extant research on the relationship between internal and external R&D prompts us to ask such a question: under what conditions is there complementarity or substitutability between different R&D strategies? The goal of this paper is to contribute to the empirical literature by advancing and testing the contingency of the relationship between internal and external R&D strategies in shaping firms‘ innovative output. Using a panel sample of incumbent pharmaceutical firms covering the period 1986-2000, our empirical analysis suggests that the level of in-house R&D investments, which is characterized by decreasing marginal returns, is a contingency variable that critically influences the nature of the link between internal and external R&D strategies. In particular, internal R&D and external R&D, through either R&D alliances or R&D acquisitions, turn out to be complementary innovation activities at higher levels of in-house R&D investments, whereas at lower levels of in-house R&D efforts internal and external R&D are substitutive strategic options. These findings are robust to alternative specifications and estimation techniques, including a dynamic perspective on firm innovative performance.