Determining how a firm can best be organized to facilitate innovation is a topic of central importance to managers and academics alike and is thus the focus of this paper. Specifically, this paper focuses on two important components of organizing for innovation: design of R&D resource allocation systems and the use of external sources of technology. The study makes a theoretical contribution by developing the metaphor of the "internal market" as useful mechanism for resource allocation inside the firm. In addition, the research benefits from using a two-phase empirical approach. The first phase consists of four in-depth case studies of HP, ABB, Ericsson, and Xerox's global R&D organizations. For the second phase of the study, a questionnaire was developed to test the study's hypotheses on a sample of 103 large firms. The study's key findings are that increased use of external sources of technology results in increased efficiency, but decreased effectiveness. However, results also indicate that it is always important to perform environmental scanning activities. No strong relationships were observed between the use of internal markets as a resource allocation system and firm performance. The case studies reveal that this lack of relationship is likely because leading firms have learned to develop checks and balances to help overcome the weaknesses that their resource allocation system possesses.
