The Roles of R&D and networking for innovation by Irish and foreign-owned firms: evidence from the Irish CIS 2006-08

This paper provides an empirical test of Cohen and Levinthal’s (1990) hypothesis that undertaking R&D and collaborating with external networks together enhance the probability that firms engage in product and process innovation. Following Doran, Jordan and O’Leary (2013) we test this hypothesis separately for Irish and foreign-owned firms based in Ireland using data from the Irish Community Innovation Survey 2006-08. In order to control for potential endogeneity of the external networking variables a two-step procedure is used with predicted probabilities used as instruments in the estimated production functions. The results suggest that Irish-owned firms which engage in external networks with public knowledge sources while simultaneously undertaking R&D are more likely to innovate than firms which perform these two activities individually. However, Irish-owned firms which engage in backward networking for product and forward networking for process innovation while also undertaking R&D are less likely to be innovative, perhaps suggesting a substitution effect. These results for Irish-owned firms provide some support for Cohen and Levinthal’s (1990) hypothesis. However, foreign-owned firms seems to be largely self-contained, relying exclusively on intramural R&D for innovation as the external networking variables, both individually and when interacted with R&D, have no effect on innovation likelihood.