Opening the black box of innovation in R&D-intensive industries: The role of internationalization and institutional development

Abstract

This study draws from the learning by exporting literature and institutional theory in predicting innovation behaviour of firms. On the one hand, we examine how the level of internationalization of a firm affects its innovative efforts. We expect international firms to be able to access information not available in their home countries and expect them to use such knowledge in developing their products, processes and business models. On the other hand, we explore how a firm’s home country institutional development influences its level of innovation. We expect firms from countries with more developed market intermediaries, political systems and business regulations to be more innovative than firms from less institutionally developed nations. We test our hypotheses on a sample of 441 pharmaceutical and biotechnology firms from 34 developed, emerging and developing countries. These industries offer an interesting setting for our study as they are characterized by increasing globalization and extensive investments in research and development (R&D). Our results provide empirical support for both internationalization and home country institutional development as drivers of innovation at the firm-level. Our study has various implications for theory and practitioners. We extend current understanding by showing that the theories of learning by exporting and stronger institutions as innovation drivers hold true for firms in the R&D-intensive, global pharmaceutical and biotechnology industries. We show that by increasing their degree of internationalization, firms may be able to gain new knowledge and as a result become more innovative. In relation to government policies, we suggest that governments can enhance the level of R&D investments and innovation among domestic firms not only through policies that promote innovation but also through those that foster international trade.