Technology sourcing, appropriability regimes, and new product development Kai Xu a, *, Kuo-Feng Huang b , Shanxing Gao a a School of Management, Xi’an Jiaotong University, No. 28 West Xianning Road, Xi’an, Shaanxi, 710049, China b Department of Business Administration, College of Commerce, National Chengchi University, No. 64, Sec. 2, Zhi-Nan Road, Taipei, 116, Taiwan Introduction Technology sourcing refers to a firm’s approach to developing new technological capabilities, in terms of both the implementation of in-house research and development (R&D) activities and the use of external technology sourcing ‘‘linkages’’ (Auster, 1990). The concept of technology sourcing is receiving increased attention from management studies for two reasons. First, the importance of external technology linkage, as compared with firm-internal development, has been increasing throughout the past two decades. There is a growing awareness that important technological sources are often obtained beyond a firm’s boundaries (Von Hippel, 1988; Corey, 1997; Niosi, 1999). Correspondingly, a number of firms have adopted an increasing proportion of external sources of J. Eng. Technol. Manage. 29 (2012) 265–280 A R T I C L E I N F O JEL classification: O32 Keywords: Technology sourcing Appropriability regimes Technology protection New product development A B S T R A C T This paper tests the influence of technology sourcing and appropriability regimes on new product development, using data from a survey of 254 Chinese firms. Our results demonstrate that both internal technology development and external technology sourcing can improve a firm’s new product development. Further- more, although both legal appropriability regimes and strategic appropriability regimes have positive relationships with new product development, their moderating effects are different. Specifically, it is suggested that firms incorporate legal appropria- bility regimes when using external technology development and strategic appropriability regimes when using internal technology sources, to improve new product development. ß 2012 Elsevier B.V. All rights reserved. * Corresponding author. E-mail addresses: [email protected](K. Xu), [email protected](K.-F. Huang), [email protected](S. Gao). Contents lists available at SciVerse ScienceDirect Journal of Engineering and Technology Management journal homepage: www.elsevier.com/locate/jengtecman 0923-4748/$ – see front matter ß 2012 Elsevier B.V. All rights reserved. doi:10.1016/j.jengtecman.2012.03.003
Transcript
J. Eng. Technol. Manage. 29 (2012) 265–280
Contents lists available at SciVerse ScienceDirect
Technology sourcing, appropriability regimes, and newproduct development
Kai Xu a,*, Kuo-Feng Huang b, Shanxing Gao a
a School of Management, Xi’an Jiaotong University, No. 28 West Xianning Road, Xi’an, Shaanxi, 710049, Chinab Department of Business Administration, College of Commerce, National Chengchi University, No. 64, Sec. 2,Zhi-Nan Road, Taipei, 116, Taiwan
A R T I C L E I N F O
JEL classification:
O32
Keywords:
Technology sourcing
Appropriability regimes
Technology protection
New product development
A B S T R A C T
This paper tests the influence of technology sourcing and
appropriability regimes on new product development, using data
from a survey of 254 Chinese firms. Our results demonstrate that
both internal technology development and external technology
sourcing can improve a firm’s new product development. Further-
more, although both legal appropriability regimes and strategic
appropriability regimes have positive relationships with new
product development, their moderating effects are different.
Specifically, it is suggested that firms incorporate legal appropria-
bility regimes when using external technology development and
strategic appropriability regimes when using internal technology
sources, to improve new product development.
� 2012 Elsevier B.V. All rights reserved.
Introduction
Technology sourcing refers to a firm’s approach to developing new technological capabilities, interms of both the implementation of in-house research and development (R&D) activities and the useof external technology sourcing ‘‘linkages’’ (Auster, 1990). The concept of technology sourcing isreceiving increased attention from management studies for two reasons. First, the importance ofexternal technology linkage, as compared with firm-internal development, has been increasingthroughout the past two decades. There is a growing awareness that important technological sourcesare often obtained beyond a firm’s boundaries (Von Hippel, 1988; Corey, 1997; Niosi, 1999).Correspondingly, a number of firms have adopted an increasing proportion of external sources of
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technologies during their R&D process (Hagedoorn, 2002). Second, due to intense competition andincreasing complexity of technologies, it has become essential for firms to tap into technologicalknowledge outside their institutional and geographical boundaries (Hsu, 2005).
Nevertheless, technology sourcing may lead to over-dependency on external technology sources.The costs of technology outsourcing include external dependence, functional mismatches, andcoordination difficulties, along with the gradual loss of internal innovation, design, manufacturing,and other knowledge-based capabilities (Kotabe and Helsen, 1999). Therefore, a firm makes use ofboth external technology sourcing and internal technology development in order to better develop itscore technology and R&D capability and to adopt appropriability regimes for protection. Followingincreasing recognition of the importance of technology sourcing, a considerable number of studieshave addressed this topic, particularly since 1990 (Swan and Allred, 2003; Kotabe, 1992; Murray et al.,1995; Noori, 1990). Schumpeter (1950) framed the appropriability problem in ‘‘Capitalism, Socialismand Democracy’’ by sharply highlighting the apparent contradiction between perfect competition andthe historical progressiveness of the capitalist system, i.e., its innovative performance. Only somedegree of innovator departure from perfect competition can afford the opportunity to appropriate thegains of innovation. After Schumpeter, the appropriability problem has become one of the criticalresearch issues in innovation literature. Although prior research has discussed the relationshipbetween knowledge characteristics and choice of appropriability regimes (Li and Tsai, 2009;Gonzalez-Alvarez and Nieto-Antolin, 2007), the existing literature has not fully investigated the jointeffect of appropriability regimes and technology sourcing (Hagedoorn et al., 2005). This issue,however, is very important, especially in transitional economies.
In a transitional economy such as China, intellectual property regulation may be different from thatin developed countries, because of the absence of reliable and formal institutional systems such asconstitutions, laws, and rules (Peng and Luo, 2000). In a context of such ‘‘institutional voids’’ (Khannaand Palepu, 1997), firms are inclined to depend on different solutions to avoid hazards (Peng andHeath, 1996). For example, in an environment with comparatively less protection of intellectualproperty rights, firms protect their core technologies from competitor imitation by using differentappropriability regimes. This suggests that a firm’s internal and external technology sourcing needs tobe integrated with viable appropriability regimes to enhance innovation outcomes. In other words, theeffort of appropriability is regarded as an important interactive factor in the new product developmentprocess, because it actually stimulates as well as secures the outcome of product development.According to prior research, different types of appropriability regimes are used to protect innovationoutcomes in different circumstances (Gonzalez-Alvarez and Nieto-Antolin, 2007; Li and Tsai, 2009).Appropriability regimes can be categorized into legal regimes, such as patent, trademark, andcopyright, and strategic regimes, such as business secrecy, lead-time innovation and complexity ofproduct (Amara et al., 2008). In this study, we attempt to explore how legal regimes and strategicregimes affect the impact of technology sourcing on new product development.
By examining 254 firms involved in R&D activities in various industries in China, this paperattempts to provide a different perspective on the relationship between technology sourcing and theappropriability regimes. We find that strategic regimes are mainly used to protect internallydeveloped technology, and that legal regimes, in contrast, are used mainly to protect knowledgederived from external sources. This paper contributes to existing theory by examining the joint effectof appropriability regimes and technology sourcing on a firm’s new product development.
Theory development and hypotheses
Knowledge can be classified as explicit knowledge and tacit knowledge (Lane and Lubatkin, 1998;Polanyi, 1967). Explicit knowledge can be codified and written and thus easily transferred (Liebeskind,1996), whereas tacit knowledge cannot be transferred easily. The difference between tacit knowledgeand explicit knowledge determines the type of technology sourcing: explicit knowledge can be moreeasily obtained from external sources since knowledge transfer easily takes place among differentorganizations due to the explicit and codified nature of knowledge, whereas tacit knowledge is mostlydeveloped internally by a firm, mainly through ‘‘learning by doing’’ (Arrow, 1962), because of thestickiness of the knowledge. Thus, firms tend to use different appropriability regimes to protect tacit
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knowledge developed internally and explicit knowledge acquired externally (Li and Tsai, 2009;Gonzalez-Alvarez and Nieto-Antolin, 2007).
Technology sourcing
Technology sourcing is a method by which firms acquire the R&D-related technologies both via in-house research and development activities and via external technology sourcing, such as fromsuppliers, customers, and competitors (Belderbos et al., 2004).
Internal technology development
Internal technology development is widely defined as R&D activities undertaken for a firm’sinternal technological development, activities which also ensure greater control over the firm’sdistribution and serve to maintain a viable technical capability for the firm (Pisano, 1990). Although aproportion of internal technology development can be embodied as explicit knowledge, the tacitknowledge built through ‘learning by doing’ (Pisano, 1994) is the most valuable and competitiveresource for a firm’s product development (Hitt et al., 2001). Since tacit knowledge is often embeddedin uncodified routines (Liebeskind, 1996) and is not articulable, it cannot be easily transferred (Teeceet al., 1997). As a result, tacit knowledge is often unique and difficult to imitate, and it has a higherprobability of creating strategic value than articulable knowledge (Lane and Lubatkin, 1998).
Particularly for conducting complex research projects or new product development, internaltechnology development is more likely to meet this objective since internal tacit knowledge and skillsperfectly satisfy the demand for interaction and information exchange among various functionswithin the firm (Beneito, 2006; Mowery and Rosenberg, 1989). These ‘‘information exchanges’’ aremore easily undertaken inside a firm not only because the firm possesses better internal knowledge(especially tacit knowledge) regarding the technical details of its own products and productionprocesses, but also because firms are reluctant to exchange their core technologies, or at least part ofthem, with external contractors who might use such technologies in research projects with otherfirms. Based on the above argument, we expect that there will be a positive relationship betweeninternal technology development and new product development.
External technology sourcing
For the past few decades, firms have been increasingly making use of complementary resourcesfrom external sources, since a single firm will find it hard to have enough of the resources it needs tokeep its current competitive advantages at the same time that is trying to create new competitiveadvantages (Harrison et al., 2001). Chesbrough (2003) suggests that many innovative firms haveshifted to an ‘‘open innovation’’ model, using a wide range of external actors and sources to help themachieve and sustain innovation. Particularly for new product development, even large firms find itdifficult to maintain research efforts simultaneously along all technological fronts (Luo, 2007). As aresult, firms may seek to acquire technology from external sources (Thorgren et al., 2009; Langner andSeidel, 2009). A steady increase in utilizing external sources to acquire and develop technologicalcapabilities is well documented in the prior literature (Chatterji, 1996).
Particularly, supplier and customer relationships play a vital role in knowledge transfer(Hakansson, 1987; Takeishi, 2001). Moreover, ties with industry members, including competitors,are also helpful in the exchange of knowledge related to effective methods for rapidly improvingproduct innovation (Luo, 2007). Even supportive institutions, such as accounting and law firms andalso university and governmental agencies, can provide valuable knowledge for a firm’s new productdevelopment. Therefore, external technology sourcing must be built with such actors to access thedesired knowledge (Hislop, 2002).
Appropriability regimes
Appropriability regimes for innovation results are very important for firms since they can enablefirms to appropriate the profits generated by their innovation. Given the probable moral hazard andopportunistic behavior (Williamson, 1985) in R&D collaboration, there is always a risk of
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unanticipated knowledge leakage. Appropriability regimes in technology acquisition are thereforeexpected to be a very important appropriability mechanism to protect firms from hazard or risks(Hagedoorn et al., 2005). Firms can protect their technology through legal appropriability regimes,such as patent and copyright, or through strategic appropriability regimes, such as business secrecy,lead time advantage and complexity of product designs.
The moderating role of legal appropriability regimes
The protection of innovation and intellectual property rights may influence a firm’s investment ininnovation activities. For instance, a nation’s technology protection laws influence a firm’s decision ontiming to conduct collaborative R&D projects (Katila and Mang, 2003; Kim, 2009; Waguespack andBirnir, 2005). Accordingly, nations with strong patent regimes can enhance well-established controlmechanisms which allow firms to exploit their innovation investments. In contrast, nations that offeronly a limited technology protection discourage firm-level innovation activities, since such aninnovation can easily be appropriated by others. Both Varsakelis (2001) and Kanwar and Evenson(2003) support the above argument and have found that patent rights are positively associated withnational levels of R&D investment.
This relationship also holds at the firm level. In addition to two motivations of appropriabilityregimes, protection from imitation and blocking competitors (Levin et al., 1987; Blind et al., 2006),strategic motivation plays an important role in the relationships between internal R&D and newproduct development or external technology sourcing and product improvement, respectively. First,for the relationship between internal technology sourcing and new product development, the numberof protected technologies, such as the number of intellectual property rights, represents an objectivemeasure for R&D personnel performance (Levin et al., 1987; Harabi, 1995; Cohen et al., 2002; Blindet al., 2006). Use of this objective measure will greatly stimulate the innovative activities among R&Dpersonnel and thereby improve the new product development in a firm. Similarly, the number ofprotected technologies also increases a firm’s reputation, which in turn requires firms to develop newproducts through internal technology development (Cohen et al., 2002; Blind et al., 2006).
In contrast, for the relationship between external technology sourcing and new productdevelopment, legal appropriability regimes improve a firm’s position in negotiations with othercompanies that help the firm to improve development of new products by taking advantage ofexternal technology sources (Cohen et al., 2002; Blind et al., 2006). Furthermore, when a firm intendsto extend its boundaries and enter a new market, the firm can gain competitive advantage byintegrating external technology sources and improving its existing products. The protectedtechnologies allow firms to gain access to certain markets which require firms to have licensingcontracts with other firms (Blind et al., 2006). In contrast, in jurisdictions lacking adequate protection,firms will be reluctant to grant partner firms access to their technologies, since their technicalcapabilities are vulnerable to appropriation by the receiving firm. Thus, in an environment wheretechnology is not well protected, the supply of accessible external technology is curtailed.
As a result, the level of legal appropriability regimes afforded to participating firms should have apositive impact on the relationship between technology sourcing, both internally and externally, and afirm’s innovation. Thus, we can hypothesize the above argument as follows:
Hypothesis 1a. A firm’s internal technology development is more strongly positively related to its newproduct development as the firm is in a higher level of legal appropriability regimes.
Hypothesis 1b. A firm’s external technology sourcing is more strongly positively related to its newproduct development as the firm is in a higher level of legal appropriability regimes.
The moderating role of strategic appropriability regimes
Strategic appropriability regimes mainly stem from secrecy, lead-time advantages and complexityof the new product (Gonzalez-Alvarez and Nieto-Antolin, 2007; Li and Tsai, 2009; Lee and Park, 2006).Secrecy consists of keeping the information secret, thus preventing any essential element of thatknowledge, such as formulas, know-how, processes, and information about customers, employees,and sales strategies, from spilling over outside the firm.
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Lead-time advantage is defined as the advantage that a firm gains when it develops a new productor technology before other firms. The rationale of lead-time advantage for firms is that innovatingmore quickly than other firms permits them to manage the followers’ imitation by releasing anothernew product onto the market. If the innovating firms continue to accumulate knowledge and innovateconstantly over time, they can maintain their leading position in terms of technology over theirpotential imitators and thereby achieve appropriability benefits obtained from innovation.Furthermore, firms can use complexity of product design to protect their innovations from imitators.Complexity of product design implies that the imitators have to reproduce the entire innovationprocess, and to devote much time, greater investment and more resources to imitation (Pavitt, 1984).
Another strategic appropriability regime arises from the learning effect, which refers to the fact thatthe manufacturing time of a product becomes progressively shorter as more units are produced, andtherefore total product cost can be reduced. The learning effect has been observed in most industries fordecades (Hirshmann, 1964; Abernathy and Wayne, 1974). Firms that have reduced their costs via thelearning effect will have advantages over their potential imitators, since these imitators are newcomersand cannot benefit from the advantages associated with this learning effect. Thus, potential imitatorsmay be dissuaded from imitation due to the learning effect advantage of leading firms.
Appropriability is related to the inherent characteristics of knowledge assets (Li and Tsai, 2009). Forthe tacit knowledge in the new product development process, regardless of whether it is obtainedfrom internal development or external sources, appropriability of knowledge will decline as theknowledge becomes more mature and codified, making it easier to transfer. To prevent this effect, afirm should strive to advance its knowledge frontier fast enough to keep rivals behind (Saviotti, 1998;Collins and Hitt, 2006). For example, Howells et al. (2003) suggest that for development of newproducts which depend on tacit knowledge, firms can protect their innovations from imitation byprotecting the firm’s trade name and by relying on strategic appropriability regimes such as secrecy,lead-time innovation and complexity of products. As a result, strategic appropriability regimes canhelp firms to further enhance the effect of their internal technology development or externaltechnology sourcing on new product development. We therefore offer the following hypotheses:
Hypothesis 2a. A firm’s internal technology development is more strongly positively related to its newproduct development as the firm is in a higher level of strategic appropriability regimes.
Hypothesis 2b. A firm’s external technology sourcing is more strongly positively related to its newproduct development as the firm is in a higher level of strategic appropriability regimes.
Fig. 1 is our research framework in this study. As shown in Fig. 1, our primary objective is to explorethe moderating effect of legal appropriability regimes and strategic appropriability regimes on therelationship between technology sourcing (both internal and external) and new productdevelopment.
Method
Sample and survey
Our investigation mainly focused on firms operating in China in the manufacturing sector (seeTable 1). We used two methods to collect the data. First, half of the questionnaires were filled out byExecutive MBA (EMBA) students who took courses at a management school in China. All EMBAstudents participating in our survey were volunteers. The respondents were top managers in theirfirms. In order to take into consideration the economic development variance between eastern, centraland western China (Zhang et al., 2009), we collected the data from five different course locations,including QingDao in Shandong province (East China), SuZhou in Jiangsu province (East China),Zhengzhou in Henan province (Central China), Xi’an of Shaanxi province (West China), and Tianshui inGansu province (West China). Second, we also collected data in several big and representative citieswhich are different from the first-method locations and in different provinces considering theeconomic development differences in Chinese regions, such as Fushun (Northeast China), Guiyang(Southwest China), Shenzhen and Guangzhou in South China, and Nanjing, Tianjin and Yangzhou in
Internal
Technology
Development
Exte rnal
Tec hnology
Sourcing
Legal
Appropr iabilit y
Regimes
New Produc t
Development
H1a & H1b: +
H2b & H2b: +
Strate gic
Appropr iabilit y
Regimes
Fig. 1. Framework of this study.
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East China. These cities are either provincial capitals or the important cities in technologydevelopment in the provinces. We randomly selected the firms and called them to ascertain that topmanagers would answer our questionnaire. We then sent the questionnaires to the firms by post or byemail. We believe that our sample is well representative of China.
Pilot test
First of all, we developed our questionnaire based on prior literature, which will be discussed laterin this section. The detailed literature-based construct measurement is also explained in a later part ofthis section. We translated the English questionnaire into Chinese and back-translated itindependently into English to confirm consistency and accuracy (Brislin, 1986). Then we conductedour pilot test with three firms located in Xi’an, Shannxi province.
There were two purposes for the pilot test in this study. First, it enhanced our questionnaire bymaking its description more comprehensive and accurate in describing the questions to the samplefirms. Second, it overcame any shortcomings of the questionnaire that might not have provided in-depth understanding regarding the firms’ perspectives. Each pilot test was processed by professors orgraduates as interviewers. The interviewer had a 2-h conversation with the vice president (or vicefactory director) and top manager of the firm. Based on our pilot test, our questionnaire was revised asthe final version of the questionnaire.
Table 1Sample description.
Classification The number
of firms (N=226)
Percentage
Main industry Chemicals and allied products (SIC 28) 16 6%
Petroleum refining and related industries (SIC 29) 18 7%
Fabricated metal products (SIC 34) 38 15%
Electronic and other electrical equipment
and components (SIC 36)
24 9%
Electric, gas, and sanitary services (SIC 49) 13 5%
Business services (SIC 73) 29 11%
Others 116 46%
Distribution East China (Qingdao in Shandong province, Suzhou in Jiangsu province, Nanjing and Yangzhou in
Jiangsu province, and Tianjin), West China (Xi’an in Shaanxi province and Tianshui in Gansu
province), South China (Shenzhen and Guangzhou in Guangdong province), Central China
(Zhengzhou in Henan province), Southwest China (Guiyang in Guizhou province), and Northwest
China (Fushun in Liaoning province).
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Survey
The survey was carried out during the period between June 2007 and March 2008 by professors andgraduate students of a big university in the northwest of China. The survey was conducted by face-to-face interviews for all randomly selected firms. The questionnaire was answered entirely by the topmanagers of the sample firms. The interviewers recorded the answers and took note of the questionswhich were not answered completely or were omitted.
Large sample size is helpful to improve the statistic validity (Cohen, 1990). Thus, by consideringstatistical validity, significance testing, effect size, and our research budget to decide the appropriatesample size (Austin et al., 1998), we selected 650 firms selected as our sample. Out of 650questionnaires, 254 completed ones were collected by 2008, for a total respondent rate of 39.08%. Thisquestionnaire validity was acceptable since the respondent rate for CEOs or top managers of the firmswas higher than 20% (Gaedeke and Tootelian, 1976).
Variables measurement
Dependent variable
To characterize the degree of innovation in firms, Kleinknecht et al. (1993) and Santarelliand Piergiovanni (1996) suggest that innovation should be presented in terms of its degreeof complexity and type of novelty. Thus, product development activity is measured by therelative amount of new product development and product improvement compared withcompetitors (‘‘Please indicate the amount of new product development as compared with yourcompetitors in the past three years’’) (Li et al., 2008). It has been suggested that this comparativemethod is more effective at avoiding non-response than a direct method which asks respondentsto provide exact figures of innovation performance (Lau and Ngo, 2001; Tomaskovic-Devey et al.,1994).
Independent variables
Technology sourcing. The types of technology sources were operationalized by rating how ofteninternal technology development and three different types of external technology sources were usedby each firm (seven-point Likert scale, 1=‘‘the company does not use them’’, 7=‘‘the company alwaysuses them’’). Three types of external technology sources considered in our measurement weresuppliers and customers, competitors, and universities and institutions (Segarra-Blasco and Arauzo-Carod, 2008; Belderbos et al., 2004). The Cronbach’s a was .64, which supported the use of these itemstogether to measure external technology sourcing.
Legal appropriability regimes. Legal appropriability regimes include patents, copyrights, and trade-marks (Amara et al., 2008). These legal appropriability regimes were measured by using binaryvariables (1 for the firm using the regimes and 0 for otherwise) to evaluate each mechanism (patent,confidentiality agreement, and copyright), as suggested by previous studies (Hurmelinna et al., 2007;Galende, 2006).
Strategic appropriability regimes. Strategic appropriability regimes include lead-time innovation,complexity of product, and business secrecy (Amara et al., 2008). The strategic appropriability regimeswere measured by using ordinal scales from 1 (‘‘the company does not use them’’) to 7 (‘‘the companyalways uses them’’) to evaluate each mechanism (lead-time innovation, complexity of product, andbusiness secrecy), as suggested by previous studies (Hurmelinna et al., 2007; Galende, 2006).Cronbach’s a was .79 for these three items, which also supported the reliability of using these itemstogether to measure the construct of strategic appropriability regimes.
Control variables
Since prior studies have suggested that both organizational and environmental factors may affectinnovative activities (Luo, 2003; Park and Luo, 2001; Xin and Pearce, 1996), we controlled for these
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effects in our analyses. Firm size was used to control the organizational factor while competitiveintensity and industry type were used to control the environmental factor.
Firm size. Large firms are usually deemed more powerful compared with small and medium size firms,and thus they have scale advantages in gaining resources for their business operations and innovationactivities (Ettlie and Rubenstein, 1987). In our study, we used the logarithms of employees in eachsample firm as the indicator of firm size.
Competitive intensity. As Zahra (1993) states, ‘‘When rivalry is fierce, companies must innovate in bothproducts and processes, explore new markets, find novel ways to compete, and examine how they willdifferentiate themselves from competitors.’’ Thus competitive intensity may affect aggregateinnovative activities of firms. To assess the extent of competition in different areas, we used aquestionnaire item: ‘‘Competition is intense in our local environment’’ (1=‘‘strongly disagree’’,5= ‘‘strongly agree’’).
Industry difference. Industry difference is related to innovation outcomes, since the competitiveintensity and R&D activities may vary across industries (Lichtenthaler, 2007). Industry classificationwas measured by the two-digit primary SIC code. This measurement was available for 135 of the 254sample firms. A majority of the sample firms were in the fabricated metal products industry (SIC 34,15%) followed by business services (SIC 73, 11%), electronic and other electrical equipment andcomponents (SIC 36, 9%), petroleum refining and related industries (SIC 29, 6%), chemical and alliedproducts (SIC 28, 6%), electric, gas, and sanitary services (SIC 49, 5%), and others (47%). To avoidmulticollinearity of the dependent variable in regressions, we consolidated the industry classificationvariable by creating dummies for the six aforementioned industry segments and grouping theremaining industry segments into a non-available data category (119 observations).
Results
Reliability and validity
As shown in Table 2, all variables displayed satisfactory levels of reliability, as indicated by thecomposite reliabilities as .64 and .79.
Convergent validity, which measures construct identity (Campbell and Fiske, 1959), can be judgedby looking at the item loadings. Each loading for the multi-item variables of technology protection,and external technology sourcing was significantly related to its underlying factor. All standardizeditem loadings were well above the cutoff of .60 (Hildebrandt, 1987), supporting convergent validity.
We collected most of our data using a single survey instrument and a single informant per firm. Toaddress the potential concerns of common method bias and single informant bias, we used severalprocedural and statistical remedies. Specifically, we undertook the procedural remedies of reducingitem ambiguity, separating scale items for the independent and dependent variable measures andobtaining data from different sources for several control variables. Our statistical remedies includedlogarithms of survey data and Harman’s (1967) one-factor test. Factor analysis results show that the
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measures loaded cleanly on separate factors; all factor loadings were above .55, which is much higherthan the common threshold for acceptance. The above analyses indicated that neither a single factornor a general factor accounted for the majority of the covariance in the measures. The providedevidence, together with Harman’s one-factor test, suggests that common method bias is not a seriousconcern in our study (Podsakoff and Organ, 1986).
Descriptive statistics
Table 3 shows the mean values, standard deviations, and correlations for all the measured variablesin our study. The correlation results show that there were some moderate correlations among thevariables, but this multicollinearity problem should not significantly influence the stability of theparameter estimates since most correlations among variables were less than .5. These results areconfirmed by the variance inflation factors (VIF), which are all far below 10 (Neter et al., 1990).
Tests of hypotheses
Table 4 shows the regression results estimating the direct effect of internal technologydevelopment on new product innovation, external technology sourcing on product improvement,and the mediating effects of the technology protection on the relationship between technologysources and product development. Model 1, with only control variables, provided a benchmark againstwhich to test the effects of independent variables on product development. Models 2, 3, 4, and 5 testedinternal technology development, while Models 6, 7, 8, and 9 tested external technology sourcing. Asshown in Table 4, Model 2 and Model 4 indicate that internal technology development, legalappropriability regimes and strategic appropriability regimes are significantly positively associatedwith new product development (p< .001). Model 6 and Model 8 show that external technologysourcing is also significantly positively associated with new product development (p< .001).
To demonstrate moderation effect for a specific relationship, we multiplied internal technologydevelopment and external technology sourcing with legal appropriability regimes and strategicappropriability regimes separately and entered the multiplicative interaction items into theregression. Following Aiken and West (1991), we mean-centered the variables (transforming thedata into deviation score form with means equal to zero) and re-ran the regression to minimize anydistortion due to high correlations between the interaction term and its component variables. InModel 3, the coefficient of the interaction of internal technology development and legalappropriability regimes was not significant. Hence, Hypothesis 1a is not supported. In Model 5,the coefficient of the interactive relationship of internal technology development and strategicappropriability regimes was positive and significant (p< .01), indicating that the impact of internaltechnology development on new product development is more strongly positive dependent on a
Table 4Regression results.
Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9
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firm’s strategic appropriability regimes. Hence, Hypothesis 1b is supported. Furthermore, in Model 7,the coefficient of the interaction of external technology sourcing and legal appropriability regimes wassignificant (p< .01), indicating that the impact of external technology sourcing on new productdevelopment is more strongly positively dependent on a firm’s legal appropriability regimes. Thus,Hypothesis 2a is supported. In Model 9, the coefficient of the interaction of external technologysourcing and strategic appropriability regimes was negative and significant (p< .05). Thus, Hypothesis2b is not supported.
Discussion
In this paper, we propose that product development may be related to the sources of internal andexternal technology acquired by firms. Internal technology development and external technologysourcing such as suppliers and customers, competitors, and universities and institutions maycontribute to a firm’s new product development. By examining 254 firms operating in several largeChinese cities, we have determined that both internal technology development and externaltechnology sourcing are positively associated with a firm’s new product development. Furthermore,our results show that the appropriability regimes are positively associated with new productdevelopment. More specifically, a moderating role of the different appropriability regimes is observedunder different technology development situations.
Our results provide empirical evidence that strategic appropriability regimes interacting withinternal technology development can improve new product development, and that legalappropriability regimes interacting with external technology sourcing also can improve new productdevelopment. This finding is, to some extent, consistent with previous studies showing that differentappropriability regimes provide different protection mechanisms for different knowledge (Hurme-linna et al., 2007; Saviotti, 1998). The direct and interactive effects of legal appropriability regimes inthis study suggest that the intellectual property rights in China have become increasingly important,particularly in the coastal areas. In order to verify this finding, we further compared respondents in theinterior area with those in the coastal areas in China, since the coastal regions are more likely to havebetter access to the machinery of intellectual enforcement. The results of one-way ANOVA show thatthe effects of legal appropriability are stronger in the coastal areas than in the interior area (p< .05).This finding provides evidence that intellectual property protection has caused legal appropriability tospread over China starting from the coastal areas.1
The reason why legal appropriability regimes cannot further enhance the impact of internaltechnology development on new product development is related to the nature of the internaltechnology development. Tacit knowledge regarding the technical details of a firm’s own productsmore likely takes place in internal technology development since interaction and informationexchange among various functions perfectly satisfy the criteria for internal tacit knowledge and skillscreation (Beneito, 2006; Mowery and Rosenberg, 1989). Moreover, firms are reluctant to exchangecore technologies with external contractors, who might use such technologies in research projectswith other firms. Under these situations, as Hurmelinna et al. (2007) indicate, in the case of intellectualproperty rights, patent applications and granted patents often reveal a vast amount of informationregarding innovation that competitors can easily access through patent mapping or reviewing.Moreover, knowledge also has a cumulative nature which implies path-dependence and the creationof barriers by imitators (Saviotti, 1998). Therefore, legal appropriability regimes cannot furtherenhance the impact of internal technology development on a firm’s new product development.
Strategic appropriability regimes, on the other hand, seem to be a viable way to improve theeffect of internal tacit knowledge on new product development. Since codification of internal tacitknowledge is difficult and risky, strategic appropriability regimes play a more important role in therelationship between internal technology development and new product development. Strategicappropriability regimes such as lead-time advantages and complexity of the new product(Gonzalez-Alvarez and Nieto-Antolin, 2007; Li and Tsai, 2009; Lee and Park, 2006) can moreeffectively prevent competitors from imitating if the knowledge is relatively tacit. Similarly, recent
1 We acknowledge the helpful comments from an anonymous reviewer on this point.
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researchers also emphasize the importance of absorptive capacity, which is defined as a set oforganizational routines and processes by which firms acquire, assimilate, transform, and exploitknowledge to produce a dynamic organizational capability (Cohen and Levinthal, 1990; Zahra andGeorge, 2002). This absorptive capacity, which can be regarded as a type of strategic appropriabilityregime, can help firms sustain their competitive advantage. Thus, strategic appropriability regimescan improve a firm’s new product innovation when the knowledge (especially tacit knowledge) iscreated inside the firm.
In contrast, since knowledge from external sources is relatively explicit and easy to obtain andimitate (Hitt et al., 2001), firms have to use strong legal appropriability regimes to protect these typesof knowledge (Cuervo-Cazurra and Un, 2007; Arora and Ceccagnoli, 2006; Gans et al., 2008). As theresource-based view of the firm argues (Penrose, 1959; Barney, 1991), only those resources with thecharacteristics of rareness, value, inimitability, and non-substitutability can create a firm’scompetitive advantage. For knowledge which does not have the virtue of imitability, legalappropriability regimes can maintain the exclusive right of use for a specific firm. Furthermore,transaction cost theorists assume that any inter-firm cooperation may induce opportunistic behaviors(Williamson, 1985). Particularly for explicit knowledge obtained from external sources, firms aremore likely to be opportunistic and take advantage of their partners by protecting their coreknowledge from imitation (Hamel, 1991). Thus, legal appropriability regimes are more useful toprotect a firm’s explicit knowledge obtained from external sources, and then to help the firm innovatenew products.
In contrast, two reasons explain why strategic appropriability regimes are not a good protectionmechanism when firms acquire knowledge from external sources. First, since explicit knowledge fromexternal resources is relatively easy to obtain and imitate (Hitt et al., 2001), such a condition does notsatisfy the prerequisite for using strategic appropriability regimes. To protect this type of knowledge,firms can achieve better protection against their rivals in the legal way (Li and Tsai, 2009). Second,transaction cost theorists assume that any inter-firm cooperation may induce opportunistic behaviors(Williamson, 1985). Firms are more likely to be opportunistic and take advantage of their partner firmsand protect their core knowledge from imitation by their partners (Hamel, 1991). Therefore, a firmtends to use the legal approach instead of the strategic approach to protect its core competence ininter-organizational collaborations (Gonzalez-Alvarez and Nieto-Antolin, 2007).
Particularly in emerging economies such as China, legal appropriability regimes face the dilemmathat while encouraging innovation activities to help firms benefit from technology diffusion, they haveto provide reassurance that intellectual property rights are well protected. This dilemma leads tostronger legal appropriability legislation in an emerging economy but ineffective enforcement of thisvery same legislation (Reisman, 2006). Although stronger intellectual property right legislation shouldstimulate innovation activities and thus stimulate economic development, the benefits of strongerlegal appropriability legislation may be offset by the costs of enforcement, such as higher prices ofinformation products, foreign exchange outflows, job losses, reduced production of derivativeinformation goods and administrative costs (Correa, 1995; Primo, 1989).
Furthermore, since a majority of developing countries tend to perform adaptive or imitativeinnovation, enforcing intellectual property rights increases the cost of technological inputs andthereby limits the possibility of local agents to use these technologies (Keupp et al., 2010). Under thiscircumstance, firms in emerging economies prefer to use legal appropriability regimes when thepotential infringement is related to explicit knowledge and easy to observe, but a policy of usingstrategic appropriability regimes when the potential infringement is related to tacit knowledge isdifficult for a legal authority to judge and to enforce its decisions. In contrast with our results, priorstudies have suggested that firms in developed economies often use both legal appropriability regimesand strategic appropriability regimes simultaneously to protect their technology (Arora, 1997;Arundel, 2001). Our result provides a different perspective from these prior studies and furtherenriches our understanding.
Our results highlight an important issue of strategic management. While the resource-based viewemphasizes how to create competitive advantage by leveraging external resources with internalresources, our results suggest that in addition to leveraging external collaborative resources intointernal capability, firms need to accomplish their strategic objectives by protecting the resources
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developed internally or acquired from external technology sources by using different types ofappropriability regimes.
Conclusion, limitations, and directions for future research
This study helps us to revisit and to examine the emerging theories of technology and innovationmanagement and provides empirical evidence for these developing concepts. Our results suggest thatboth internal technology development and external technology sourcing pave the way for newproduct development. This study contributes to our understanding of the effects of technologysourcing and appropriability regimes on improving a firm’s new product development. Our findingsshow that both internal technology development and external technology sourcing are positivelyassociated with new product development. More importantly, they show that firms should choosedifferent types of appropriability regimes (legal or strategic) to protect their knowledge developedinternally and obtained externally. Our study also provides empirical evidence for linking technologysourcing, appropriability regimes, and new product development, and thus enriches the empirical andtheoretical development of this important stream of research.
From a practical perspective, our study indicates that both internal and external technologysourcing offer significant resources for a firm’s new product development (Nicholls-Nixon and Woo,2003; Beneito, 2006). Entrepreneurs may be able to actively manage their firms’ internal technologydevelopment and external technology sourcing to improve new product development. Furthermore,appropriability regimes play an important role as firms nurture their new product development.Choosing the right appropriability regimes can further enhance the effect of internal technologydevelopment or external technology sourcing on new product development.
A number of limitations may constrain our study. First, the uniqueness of sample firms in the early2000s in China may limit the applicability of our results to the general context. As suggested by Primoet al. (2000), appropriability regimes are a situated process embedded in a firm’s social, cultural, andphysical setting. The institutional environment in emerging countries, such as China, makestechnology imitation more likely to take place due to intense competition (Ginarte and Park, 1997),thus implying that our results may be most appropriately interpreted in countries with lessintellectual protection.
Second, since our sample firms are specifically manufacturing- and R&D-oriented, it may bedifficult to generalize the findings to other types of firms. Though our narrow focus on specificindustries helps us to control for the empirical investigation, industry-specific differences mayotherwise mask significant effects. Thus, future studies might wish to use a broader scope of industrysettings in order to improve the generalization of the theoretical positions.
Third, there might be a time lag between technology sourcing and new product development, aconsideration which was not estimated in this study. Future studies therefore should further examineour model with a time-lag effect.
Finally, in this study we employed self-reported measures because of their potential for concept-specific accuracy, as suggested by Lau and Ngo (2001) and Tomaskovic-Devey et al. (1994). Futureresearch might wish to replicate our model and test it with objective data, which can further enhancethe generalizability of our findings. Although these limitations may constrain this study to someextent, these constraints do not lessen the contribution of this research in the area of technologysourcing, appropriability, and new product development studies.
Acknowledgements
We acknowledge the financial supported from NSFC Program for National Natural ScienceFoundation of China No.70772111 and No.71172187.
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