Abstract

There is a dearth of empirical research on the impact of external knowledge search on innovation performance in different categories of service firms. This study explores the effectiveness of the breadth of external search on product and process innovations in German firms. In particular, we model a non-linear relationship between the breadth of knowledge and product and process innovations. Drawing on the Mannheim Innovation Panel (MIP) data for the German service firms in the period 2014-2016, we report findings from a bivariate probit model, which takes into account mutual interdependence between product and process innovations. Moreover, the model is separately estimated for knowledge-intensive business services (KIBS) and other services. For comparative purposes, we also estimate the model for manufacturing firms. Empirical findings uniformly show an inverted U-shaped effect of the breadth of knowledge on both product and process innovations. Furthermore, the results demonstrate that using up to three knowledge sources increases the probability of a joint implementation of product and process innovations. These findings hold for both KIBS firms and other services. However, those service firms that focus on a single type of innovation experience diminishing returns to external knowledge when exploiting more than one source of knowledge. These results suggest that a simultaneous introduction of different types of innovation requires diverse knowledge sources. In contrast, when focusing on a single type of innovation, service firms experience diminishing returns when using multiple sources. However, this finding is only partially found for manufacturing firms. Accordingly, our findings provide support for the demarcation approach, insofar as the breadth of knowledge has a heterogenous impact on innovation in manufacturing relative to service firms. Previous studies on the breadth of knowledge search mostly examined its influence on innovation performance without separately analysing manufacturing and service firms. The present study focuses on service firms, that are further divided into KIBS and other service firms. By investigating potentially non-linear relationships between knowledge breadth and product and process innovations, it illustrates how different innovation strategies are affected by a diverse pool of external knowledge sources.