Balancing Internal and External Knowledge Acquisition: The Gains and Pains from R&D Outsourcing

abstract The outsourcing of research and development (R&D) activities has frequently been characterized as an important instrument to acquire external technological knowledge that is subsequently integrated into a firm's own knowledge base. However, in this paper we argue that these ‘gains’ from R&D outsourcing need to be balanced against the ‘pains’ that stem from a dilution of firm‐specific resources, the deterioration of integrative capabilities and the high demands on management attention. Based on a panel dataset of innovating firms in Germany, we find evidence for an inverse U‐shaped relationship between R&D outsourcing and innovation performance. This relationship is positively moderated by the extent to which firms engage in internal R&D and by the breadth of formal R&D collaborations: both serve as an instrument to increase the effectiveness of R&D outsourcing.