Inventive Capabilities in the Division of Innovative Labor

Innovation and Economic Growth

Article Snapshot


Ashish Arora, Wesley Cohen and Colleen Cunningham


NBER Working Paper No. 25051, 2018


Data shows that the availability of external sources of raw knowledge and finished inventions affects firms differently, depending on the firm’s size and technical capabilities.

Policy Relevance

Management growth strategies should vary depending on a firm’s characteristics.

Main Points

  • About half of product innovations introduced by firms based in the United States are derived from innovations external to the firm; innovation relies on a division of labor among firms.
  • A firm's inventive capability includes the technical expertise that enables it to generate inventions; often, a firm’s capability is measured by the firm’s investment in research and development (R&D) and by past patenting activity.
  • In a survey of U.S. manufacturing firms, firms were asked whether they had introduced a new product from 2007 to 2009, and where they had acquired the invention underlying their new product; some firms acquired inventions from external sources such as customers, R&D contractors, or universities.
  • Smaller, less capable firms are about nine percent more likely to acquire inventions from outside sources than large, more capable firms.
  • Low capability firms innovate mainly by commercializing inventions made by others; large, high capability firms mainly generate revenue from internal inventions.
  • Increasing the external supply of fully finished inventions contributes more to innovation by less capable firms, compared to more capable firms; external fully finished inventions can substitute and compensate for the inability of firms to invent internally.
  • Whether managers should seek growth through R&D depends on their firm's inventive capabilities and the availability of inventions and raw knowledge in their area.
  • An external supply of raw knowledge within a given region affects innovation and imitation positively for both high and low capability firms; however, more capable firms make greater use of external raw knowledge to enhance internal inventive processes.

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