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The mixed picture of extant research on the relationship between internal and external R&D prompts the authors 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, the 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.
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