How much is enough? The role of R&D investment in the innovation process

Abstract

While both production function (PF) and Absorptive Capacity (AC) explanations have played an important role in explaining the relationship between a firm's Research and Development (R&D) and its innovation, each has developed independently of the contributions of the other. The purpose of this study is to theoretically and empirically develop a concept of AC that incorporates the role of diminishing returns and external spillovers (i.e., strategic alliances) into a biotechnology firm's R&D‐innovation process. In using count estimations, this study finds that a firm's R&D‐innovation process is subject to a nonlinear ‐U‐shaped‐ learning process and that this process is moderated by its strategic partnerships. The contribution of this study is that it challenges the linearity assumptions and findings of AC research and that it offers a greater openness to PF explanations of the R&D‐innovation process.