Internal and outsourced research and development: are they complements or substitutes?

A theoretically ambiguous relationship exists between internal and outsourced research and development (R&D). Along these lines, previous empirical studies report mixed results regarding the nexus between these two broad forms of R&D activity. Using a firm-level unbalanced panel dataset from South Korea for the period 2006–2018, this study investigates the relationship between internal and outsourced R&D while considering the sunk cost of internal R&D activity and the technology level of firms. We find that the relationship between internal and outsourced R&D depends on the level of industry technology and the size of firms. A complementarity exists between internal and external R&D for larger firms in high-technology industries, while a substitutive relationship is discovered for small and medium-sized firms in medium- and low-technology industries. The results suggest that the complementary or substitutive nature of the relationship between internal and external R&D depends on the industry’s technology level and firm size.