ARTICLE IN PRESS

Technovation 29 (2009) 155–169

www.elsevier.com/locate/technovation

R&D sourcing strategies: Determinants and consequences

Yu-An Huanga, Hsien-Jui Chungb, Chad Linc,
a
Department of International Business Studies, National Chi Nan University, 1, University Road, Puli, Nantou 545, Taiwan
b
Department of Business Administration, National Chung Cheng University, Min-Hsiung, Chia-Yi 621, Taiwan
c
CBRCC, Curtin Health Innovation Research Institute, Curtin University of Technology, GPO Box U1987, Perth 6845, Western Australia, Australia

Abstract

Achieving the desired outcomes of research and development (R&D) sourcing remains the most critical but yet elusive agenda for all
firms. Relevant literature continues to debate on how different R&D sourcing strategies can have different impacts on firms. This study
aims to examine: (1) how different R&D sourcing strategies (via a combination of different R&D sourcing arrangements and types of
product innovation) are influenced by organizational determinants (i.e. technological complementarity, technological codification, and
technological competency) and (2) the impact of such strategies on organizational consequences in terms of development costs and
financial profits during the new product development (NPD) process. Results from 121 Taiwanese IT firms indicate that R&D
outsourcing is effective in lowering development costs and in lifting financial profits when products are developed under adaptive
innovation. The results also demonstrate that in-house R&D sourcing brings in more financial profits for firms when products are
developed under incremental innovation. A key contribution of the paper is the development of a R&D sourcing strategy matrix model.
The model can be used to assist firms in selecting the right combination of R&D sourcing arrangements and product innovation types at
the outset of NPD projects in order to obtain the intended outcomes.
r 2008 Elsevier Ltd. All rights reserved.

Keywords: R&D sourcing strategies; Technological complementarity; Codification; Competency; Costs; Profits

1. Introduction these strategies on their performance in the face of

Research and development (R&D) managers and senior
executives are becoming increasingly aware of challenges
and opportunities in order to be more efficient and effective
in delivering products and services to customers (Piachaud,
2002; Santoro and Chakrabarti, 2002). While the changing
nature of competition has placed firms under heavy pres-
sure to rapidly develop and commercialize new innovations
to ensure their survival, the successful release of new
products undoubtedly brings firms plenty of profits and
revenue growth (Caputo and Palumbo, 2005). To remain
competitive, firms must also pursue product innovation
through both internal and non-internal R&D activities
(Santoro and Chakrabarti, 2002). Thus, there is a growing
interest in understanding how firms select their R&D
sourcing strategies as well as in examining the impact of
Corresponding author. Tel.: +61 8 9266 1872; fax: +61 8 9266 1642.
E-mail addresses: yahuang788@gmail.com (Y.-A. Huang),
hjchung@ccu.edu.tw (H.-J. Chung), elin123au@yahoo.com.au (C. Lin).
aggressive competition from new technologies.
While in-house R&D was favored in the past, it has now
come to fulfill a scanning role and is important as a
purchaser and adaptor of the technology of other firms
(Howells, 1999a; Narula, 2004; Santoro and Chakrabarti,
2002). R&D outsourcing, on the other hand, is emerging as
a new trend. When properly planned and executed, R&D
outsourcing can help to maximize innovation and overall
company performance (Caudy, 2001; Howells, 1999a;
Watanabe and Hur, 2004) as well as to bring in requisite
complementary technologies from external partners (Noh-
ria and Garcia-Pont, 1991). In addition, R&D outsourcing
can be treated as an external learning process and has
direct implications regarding how effectively firms can
apply existing knowledge from outside sources to produce
innovation performance (Kessler et al., 2000).
A review of the relevant literature reveals that main
reasons for firms to undertake R&D outsourcing include:
reduce costs (Bounfour, 1999; Caudy, 2001; Kumar and
Snavely, 2004; Piachaud, 2002); minimize business risks

0166-4972/$ - see front matter r 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.technovation.2008.08.002
 ARTICLE IN PRESS
156 Y.-A. Huang et al. / Technovation 29 (2009) 155–169
(Caudy, 2001; Narula, 2001; Piachaud, 2002); hasten
product market entry (Caudy, 2001; Piachaud, 2002;
Teresko, 2003); focus on their core activities (Bone, 1996;
Piachaud, 2002; Zhao and Calantone, 2003); bring in
resource flexibility (Ernst, 2000; Kumar and Snavely, 2004;
Narula, 2001; Piachaud, 2002; Zhao and Calantone, 2003);
and build expertise by exposing the internal development
staff to new knowledge, technology, and organizational
development processes (Ernst, 2000; Howells, 1999a;
Piachaud, 2002; Zhao and Calantone, 2003). For example,
many Taiwan small and medium-sized enterprises (SMEs)
have been successful in contracting out some of their R&D
capabilities in order to combine the scale advantages of
large firms with the speed and flexibility of smaller firms
(Ernst, 2000).
Despite this, relevant literature continues to debate on
whether or not R&D outsourcing can improve firms’
financial performance as ‘‘less than half of the alliances
studied can be said to have performed satisfactorily’’ (Das
and Teng, 2000b, p. 78). Several studies have found that
R&D outsourcing may not increase a firm’s profitability or
performance (e.g. Coombs, 1996; Gilley and Rasheed,
2000; Kessler et al., 2000). For example, Bounfour (1999)
has found that R&D outsourcing may be negatively
associated with financial performances. Many studies have
indicated that R&D sourcing decisions made without
appropriate technology strategies are often made with
little consideration for the firms’ long-term organizational
competitiveness, goals, and risks (Gonzalez et al., 2005;
Hoecht and Trott, 2006; McIvor, 2000). Firms need to
identify, define, and establish appropriate strategies for
undertaking R&D outsourcing as well as assess their own
capabilities to implement these strategies (Caudy, 2001;
Piachaud, 2002). As indicated by Kessler et al. (2000),
different types of R&D sourcing strategies have different
impacts on innovation performance. This study aims to
examine how the selection of R&D sourcing strategies (via
a combination of different R&D sourcing arrangements
and types of product innovation) can be influenced by
firms’ technological determinants in terms of technological
complementarity, technological codification, and techno-
logical competency. In addition, this study will also discuss
the impact of such strategies on organizational conse-
quences in terms of development costs and financial profits
during the new product development (NPD) process.
2. Background
2.1. Outsourcing and in-house R&D
R&D outsourcing begins with selecting contractual
modes for undertaking either some or all of the R&D acti-
vities by external firms during the NPD process (Howells,
1999a; Radosevic, 1999; Shefer and Frenkel, 2005). The
establishment and growth of firms serving this contract of
R&D market have various sources, including primarily
private ‘‘Contract Research and Technology Organiza-
tions’’ (CRTOs) and some private non-profit and related
hybrid organizations (Howells, 1999a). The identification
of contracting-out part of NPD to outside firms represents
the first stage of R&D outsourcing.
The motivation of R&D outsourcing can be examined
from three perspectives. First, from the perspective of core
competence viewpoint, firms repeatedly performing a
specific type of function can nurture associated competency
(Prahalad and Hamel, 1990). That is, firms with high levels
of in-house R&D are likely to enhance their technological
competency. Similarly, firms adopting decentralizing and
outsourcing R&D portfolios would subsequently be likely
to undermine or weaken their core technological compe-
tencies (Coombs, 1996; Hoecht and Trott, 2006). For
example, Kessler et al. (2000) have found that external
sourcing is positively related to lower competitive success
and slower innovation speed. However, other researchers
disagree with this viewpoint and claim that R&D out-
sourcing is a better and quicker option than building the
required skills internally where suitable in-house capabil-
ities are lacking (Tidd and Trewhella, 1997). They suggest
that R&D outsourcing enables firms to maximize the
value of their resources through pooling and utilizing
complementary resources from their partners (Nohria and
Garcia-Pont, 1991; Teece, 1986; Yasuda, 2005). In return,
the partners usually receive financial resources from the
outsourcing firms as a form of compensation. Utilizing
external expertise may cover technology that firms do not
possess or areas in which their technology is very
inadequate (Howells, 1999a; Howells and James, 2000).
Thus, firms should make full use of R&D outsourcing since
it enables firms to access resources and capabilities that are
internally unavailable or not easily elaborated in their
efforts to accumulate critical resources to complement their
technological competency (Santoro and Chakrabarti,
2002). R&D outsourcing can also assist firms to obtain
the required complementary resources and competencies
(Chung et al., 2000; Das and Teng, 2000a; Johnson et al.,
1996).
The motivation of R&D outsourcing can also be
examined from another perspective, transaction cost
analysis (TCA). According to TCA, R&D outsourcing is
difficult or impossible to be implemented due to high
degree of complexity and uncertainties associated with this
activity (Howells, 1999b). However, this will not be the
case if R&D outsourcing’s ‘‘degree of product and
component interdependence can be predicted’’ (Brusoni
et al., 2001, p. 609). In such cases, the cost involved with
R&D outsourcing will be lower than cost required for its
own in-house R&D. In other words, the more the
technology can be codified (i.e. described in terms of
formulae, blueprint, and rules) the easier it is to be
contracted out (Narula, 2001; Tidd and Trewhella, 1997;
Yasuda, 2005). In contrast, technology that cannot easily
be codified often embeds a high degree of tacit knowledge
and, therefore, is much more preferable to be developed
via in-house R&D since it can be acquired effectively only
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Y.-A. Huang et al. / Technovation 29 (2009) 155–169
H1
Technological
Complementarity
H2 R&D Sourcing Strategies
Technological
Codification R&D Sourcing arrangements
Types of Product Innovation
H3
Technological
Competency
Fig. 1. A research framework for determinants and consequences of R&D sourcing strategies.
by face-to-face interactions (Narula, 2001; Tidd and
Trewhella, 1997).
The third perspective is concerned with the notion of
cost advantage. Several researchers have argued that R&D
outsourcing would decrease NPD cost (e.g., Chesbrough,
2007; Kumar and Snavely, 2004; Piachaud, 2002; Quinn,
1992, 2000). For example, Quinn (1992, 2000) points out
that partners are often more efficient in running and
managing R&D operations than outsourcing firms. Firms
undertaking R&D outsourcing are able to not only prevent
the accumulation of internal bureaucracies and inefficien-
cies but also obtain technological support at a lower cost
from their partners (Quinn, 1992). Outsourcing firms
usually choose to continue with this type of cooperative
arrangement because it is more efficient than performing
these operations internally (Cote and Latham, 2003).
According to Chesbrough (2007), using external technol-
ogies in internal product development is an efficient way of
offsetting the rising development cost. However, Kessler et
al. (2000) reveal that R&D outsourcing can create two
types of hidden cost. The first type of hidden cost is
coordination cost, which is created when firms attempt to
integrate external knowledge into their knowledge base.
The costs of acquiring and understanding the knowledge
will be high if the external technology is difficult to
coordinate. The other hidden cost is related to the
complexity of R&D outsourcing. Outsourcing partners
are more likely to delay the completion of the contract
when the complexity of R&D outsourcing is high. This will
have a significant impact on the costs of R&D outsourcing.
In other words, development cost of R&D outsourcing is
closely related to the hidden costs of outsourced technol-
ogy. Hidden costs and, therefore, development costs are
likely to be low if the outsourced technology can be easily
coordinated and accelerated.
Therefore, firms need to carefully consider undertaking
R&D sourcing strategy. This research argues that there are
three major determinants for R&D outsourcing strategies,
namely technological complementarity, technological
codification, and technological competency as well as two
major consequences (development cost and financial
profit). The first determinant, technological complemen-
tarity, helps firms to concentrate on developing their own
valuable and unique technology in order to increase each
157
H4 Development
Costs
H5
Financial
Profits
partner’s interdependency and collective strength on
technology sourcing (Das and Teng, 2003; Lambe et al.,
2002; Sarkar et al., 2001). Technological codification, the
second determinant, influences the costs of acquiring the
requisite technology by firms (Yasuda, 2005). Technologi-
cal competency, the last determinant, is also critical as it
determines what products and services firms can provide
and what competitive advantages firms can achieve (Patel
and Pavitt, 2000; Prahalad and Hamel, 1990). The two
consequences have a direct influence on firms’ financial
position and they often drive the objectives of R&D
sourcing decision. The research framework for this study is
depicted in Fig. 1. The next five sub-sections will discuss
and analyze the behavior of these determinants and
consequences of R&D sourcing strategy across various
types of innovations and sourcing arrangements.
2.2. Types of product innovation1: marginal and adaptive
Product innovation involves the introduction of a newly
marketed product or service with its main characteristics
changed or an existing or new product whose technical
characteristics have been enhanced or improved (Neely and
Hii, 1998). It has been traditionally classified into two
types—radical and incremental (Shenhar, 2001; Song and
Montoya-Weiss, 1998). Incremental product innovation
aims at improving the features and functionality of an
existing product, making it cheaper, more practical, and
suited for its purpose (Tushman and O’Reilly, 1996). On
the other hand, radical product innovation is the process of
developing a wholly new product that incorporates a
substantially different technology in order to provide
significantly higher customer benefits relative to other
products in the industry (Hamel, 2000).
However, radical product innovation is generally related
to new developments within a sector or economy and is
usually adopted by large firms (Neely and Hii, 1998; North
and Smallbone, 2000). There is some doubt as to whether
the radical–incremental product innovation dichotomy
would apply to SMEs in developing economies (e.g.
Taiwan; Ernst, 2000). We argue that SMEs in developing
1
The authors would like to thank the reviewers for pointing out these
two sub-categories of incremental product innovation.
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158 Y.-A. Huang et al. / Technovation 29 (2009) 155–169
countries are mainly involved in the incremental product
innovation (Hobday, 2003; Siu, 2005). Since 1995, Taiwan
has been among the top producers of electronic products.
The adaptive capacity of Taiwan’s IT sector derives from
its network of SMEs (Tung, 2003). The majority of
Taiwanese IT firms are SMEs, which undertake mostly
original equipment manufacture (OEM) or own design
manufacture (ODM) for transnational corporations
(TNCs; Ernst, 2000; Hobday, 2003; Lin, 2004). In other
words, the levels of product innovation undertaken by
these Taiwanese IT firms are generally low. With respect to
OEM, for example, some adaptive R&D may be required
by the Taiwanese IT firms to finish the product specifica-
tions of the TNC customers. ODM requires a higher level
of product innovation than OEM. In this case, Taiwanese
IT firms need to carry out most of the detailed product
designs after receiving overall design layouts from their
TNC customers (Ernst, 2000; Hobday, 2003).
Therefore, two sub-categories of incremental product
innovation need to be proposed in order to explain the
special structure of the Taiwanese IT industry and its
position in the global value chain. According to Shenhar
(2001), technological uncertainty of innovation project can
be categorized into four levels: low tech, medium tech, high
tech, and super-high tech. However, the majority of
Taiwanese IT firms do not undertake super-high tech,
which ‘‘integrate key technologies that do not exist at the
time’’, as well as high tech, which ‘‘integrate many new,
but existing, technologies’’ as described in Shenhar (2001)
(Tan and Hwang, 2002). Therefore, it can be said that most
Taiwanese IT firms undertake innovative activities that are
somewhere between low tech and medium tech. We refer to
these two sub-categories of incremental product innova-
tions as marginal and adaptive. The main feature of
marginal product innovation is to improve limited features
and functionality of an existing technology that are well
known and established (e.g. OEM; Laranja and Fontes,
1998; Shenhar, 2001). It also concerns with new changes to
an individual firm but which other firms have already
adopted (Neely and Hii, 1998; North and Smallbone,
2000). As mentioned earlier, very limited changes to the
blueprints supplied by the TNC customers are required by
the Taiwanese IT firms to put them into production. On
the other hand, adaptive product innovation is the process
of developing a limited new product that incorporates
existing, but some new, technologies in order to provide
competitive advantages of the product (Shenhar, 2001).
Taiwanese IT firms often obtain value-added design and
manufacturing benefits via undertaking ODM from their
TNC customers. In summary, both marginal and adaptive
product innovations are the sub-categories of incremental
product innovation, with marginal product innovation
being less innovative and more marginal than adaptive
product innovation.
Furthermore, SMEs generally prefer R&D outsourcing
than other forms of non-internal R&D activities because of
lower risks and costs involved in undertaking this type of
sourcing strategy (Narula, 2004). R&D outsourcing is a
very attractive alternative for SMEs, which are character-
ized as having limited resources (compared to large TNCs;
Narula, 2004). Therefore, this study suggests that R&D
sourcing efforts by Taiwanese IT firms should focus on
‘‘products developed under marginal product innovation’’
(hereafter referred to as marginal innovation) and
‘‘products developed under adaptive product innovation’’
(hereafter referred to as adaptive innovation). Both
marginal and adaptive innovations should be examined
under two main types of R&D sourcing—in-house R&D
sourcing and R&D outsourcing arrangements. In total,
there are four possible combinations or sourcing strategies:
(1) in-house R&D sourcing under marginal innovation; (2)
R&D outsourcing under marginal innovation; (3) in-house
R&D sourcing under adaptive innovation; and (4) R&D
outsourcing under adaptive innovation. More details about
these four different sourcing strategies will be further
elaborated later.
2.3. Technological complementarity
Technological complementarity in R&D sourcing has
been defined as the extent to which the R&D sourcing
partners bring valuable and unique competencies to the
focal firms (Hill and Hellriegel, 1994; Sarkar et al., 2001).
Clearly, one of the reasons for firms to choose R&D
outsourcing is because they lack certain resources needed
to be successful in a certain area such as R&D (Lambe
et al., 2002). As noted by Varadarajan and Cunningham
(1995), all partners in R&D outsourcing have complemen-
tary technologies and each partner is able to focus on one
part of the value chain where it can make the biggest
contribution. Those partners who are interested in R&D
outsourcing will insist on the bilateral contributions of
unique and symmetric technologies to create mutual
interdependence and facilitate the establishment, growth
and collaborative effectiveness of R&D outsourcing
(Parkhe, 1991). However, with respect to lower uncertainty
of technology, firms are often able to obtain requisite
resources without external partners. Only those firms that
undertake higher uncertainty of technology are more likely
to seek R&D outsourcing in order to secure necessary
resources. Therefore, the following hypothesis is proposed:
H1. Technological complementarity will have greater
influence on R&D outsourcing of adaptive innovation
than on three other types of R&D sourcing strategies.
2.4. Technological codification
According to the TCA perspective, the more the
technology can be codified the easier it is to be contracted
out (Narula, 2001; Tidd and Trewhella, 1997; Yasuda,
2005). After all, the degree of ease with which the
technology can be replicated affects the firms’ sourcing
strategies. Marginal innovation, by its nature, is related to
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Y.-A. Huang et al. / Technovation 29 (2009) 155–169
technologies that are well known and established. Marginal
innovation is often involved with ‘‘standardized technol-
ogy’’ that is ‘‘clearly defined’’ (Narula, 2001, p. 368). The
technology involved is easily codifiable and has non-tacit
inputs to the R&D process (Narula, 2001; Yasuda, 2005).
In such cases, firms undertaking R&D activities can easily
secure the required resources via decentralized market
transactions by involving each component that is built
around standardized interfaces (Brusoni et al., 2001). On
the other hand, adaptive innovation is often associated
with higher level of technological uncertainty and, there-
fore, is more expensive to be contracted out since it is
usually more difficult to be codified (Howells, 1999b).
Hence, this study argues that technology that is highly
codifiable can be easily contracted out and is often
regarded as marginal innovation.
H2. Technological codification will have greater influence
on R&D outsourcing of marginal innovation than on three
other types of R&D sourcing strategies.
2.5. Technological competency
According to Narula (2001), the decision to undertake
R&D outsourcing is determined by the extent of strategic
importance of technology. In other words, R&D out-
sourcing is the preferred option when firms perceive that
they possess low level of competence with respect to the
technology (Narula, 2001). On the other hand, firms tend
to develop the technology in-house when they possess high
level of competence. This is because those firms possessing
high level of competence usually involve with various
leading-edge technologies that are highly related to the core
competitiveness of the firms (Howells, 1999a; Narula,
2001). Rather than trying to develop them externally under
the risk of dilution of competence, firms may consider
developing via in-house R&D to strength internal integra-
tion of technological competency (Kessler et al., 2000;
Narula, 2004; Teece, 1986). Similarly, marginal innovation
is often associated with lower level of technological
uncertainty and therefore, is not considered by firms to
be their source of technological competence. It is a suitable
candidate for R&D outsourcing. In contrast, adaptive
innovation is often regarded as the main source of
technological competence by the Taiwanese IT firms,
which are dominated by SMEs. In this case, in-house
R&D is a better strategic option for these firms.
H3. Technological competence will have greater influence
on in-house R&D sourcing of adaptive innovation than on
three other types of R&D sourcing strategies.
2.6. R&D sourcing, development cost, and profit
According to Bounfour (1999) and Kessler et al. (2000),
development cost of outsourcing is usually the difference
between benefits gained from outsourcing partners’ effi-
ciency and hidden costs associated with this arrangement.
159
Firms undertake R&D outsourcing only if they perceive
that gains from outsourcing partners’ efficiency are higher
than gains from internal efficiency (Quinn, 1992, 2000;
Chesbrough, 2007). The key is whether or not firms can
minimize the hidden costs. Since marginal innovation
relates mainly to standardized and clearly defined techno-
logy (Narula, 2001), it is usually easier and quicker to
coordinate the integration of external knowledge with the
firm’s knowledge base than technologies based on adaptive
innovation (Bounfour, 1999). Therefore, hidden costs can
be minimized via R&D outsourcing of marginal innova-
tion. In contrast, adaptive innovation usually pertains to
higher level of complexity and uncertainty. As a result, the
coordination costs for integrating external and internal
knowledge will be higher and firms will have less control
over the external R&D outsourcing partners with respect
to the completion time. Thus, R&D outsourcing in this
case will be a more expensive exercise.
H4a. R&D outsourcing of marginal innovation will be
associated with lower development cost than in-house
R&D sourcing of marginal innovation.
H4b. R&D outsourcing of adaptive innovation will be
associated with higher development cost than in-house
R&D sourcing of adaptive innovation.
Previous studies demonstrated that R&D outsourcing
could accelerate NPD but may not increase competitive
success (Kessler et al., 2000). Kessler et al. (2000) showed
that outsourcing yields different effects on innovation
performance. For instance, Gilley and Rasheed (2000)
indicated that the relationship between outsourcing
and innovation performance depends on firm strategy.
However, it remains unclear whether or not the selection
R&D sourcing strategy affects the impact on NDP
performance. This impact is a key concern for managers,
because they must consider several factors in developing
marginal and adaptive innovation. This study argues
that marginal innovation should be concerned about the
cost-effectiveness and R&D outsourcing is a good way of
maximizing profits by lowering R&D costs (Narula, 2001;
Quinn, 1992, 2000). On the other hand, adaptive innova-
tion has potential unique competencies and, therefore,
in-house R&D is a better choice for firms in terms of
generating profits (Kessler et al., 2000; Narula, 2001).
H5a. R&D outsourcing of marginal innovation will be
associated with higher financial profit than in-house R&D
sourcing of marginal innovation.
H5b. In-house R&D sourcing of adaptive innovation will
be associated with higher financial profit than R&D
outsourcing of adaptive innovation.
3. Methodology
This research study targeted Taiwanese firms in the IT
industry. Notably, the Taiwanese economy has prospered
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160 Y.-A. Huang et al. / Technovation 29 (2009) 155–169
during the past four decades, and has become the world’s
third-largest supplier of computer products after the
United States and Japan (Chen, 1999; Hung, 2003). There
is growing evidence to suggest that R&D sourcing plays an
important part in maintaining the competitiveness of
Taiwanese firms, especially IT firms. In addition, Taiwan
is among a number of countries in Asia Pacific that are
making a push to attract R&D investments from firms
abroad. This is often driven by lower costs and deduction
of 35% of their R&D investment (Thibodeau and Lemon,
2004). To achieve these goals and objectives, firms have to
acquire sufficient resources from external technology
sources (Rhode, 2004). R&D sourcing allows firms to
obtain necessary complementary resources (Ernst, 2000;
Yasuda, 2005). In this regard, Taiwanese IT firms offer an
appropriate context for this research.
3.1. Data collection
While there is a clear indication in the literature of a
greater reliance on R&D sourcing by firms, the importance
of the relationship between technological determinants and
R&D sourcing strategies has received relatively limited
attention, as has the impact of such strategies on
organizational consequences during the NPD process.
The aim of this research was to collect data that filled this
gap by addressing issues relating to: (1) how the selection
of R&D sourcing strategies (via a combination of different
R&D sourcing arrangements and types of product
innovation) can be influenced by firms’ technological
determinants (i.e. technological complementarity, techno-
logical codification, and technological competency); and
(2) how such strategies can impact on organizational
consequences in terms of development costs and financial
profits during the NPD process. This needed both: (a) a
broad overview of such environments obtained from a
smaller number of organizations and (b) a detailed
examination of these issues and relationships collected
from a large number of organizations.
Eisenhardt (1989) argues that multiple data collection
methods and sources provide stronger substantiation of
constructs and hypotheses, strengthening convergence of
results. Mingers (2001) indicates that ‘‘research results will
be richer and more reliable if different research methods,
preferably from different (existing) paradigms are routinely
combined together’’. In addition, the use of both qualita-
tive and quantitative data can be used to construct
theoretical models (Remenyi and Williams, 1996) such as
the model for examining the relationships between
technological determinants, R&D sourcing strategies, and
their organizational consequences. Therefore, a mixed-
method (and paradigm) approach was taken in combining
case study and survey.
3.1.1. Case study
In-depth case studies were first conducted to examine the
broader issues of R&D sourcing strategies and their
relationships with organizational determinants and con-
sequences in three Taiwanese IT firms involved in R&D
sourcing projects. The three cases were deliberately chosen
in order to focus efforts on theoretically useful cases
(following the theoretical, non-random sampling strategy
by Eisenhardt, 1989). All three IT firms had adopted
several R&D sourcing arrangements for their NPD
projects. The first firm (hereafter referred to as Electronic
Co.) interviewed had employed more than 80 workers and
had an annual turnover of more than US$25 million. It
specialized in developing, designing, and manufacturing an
array of electronic and electrical devices for home and
office. In response to a growing market in the Greater
China region for its hi-tech products, Electronic Co. had
outsourced some of its R&D projects.
For example, its Chief Scientific Officer (CSO) said: ‘‘We
cannot afford to stand still because we have a lot of
competitors out there in the market. We are constantly in
need of new ideas and resources in developing new
products to cater for growing demands in the Greater
China regiony. That’s why we have outsourced some of
our recent NPD projects to other vendors.’’ (Interview
Transcript, CSO, Electronic Co., January 27, 2005.)
The second IT firm (hereafter referred to as PC Co.)
specialized in designing, manufacturing, and marketing
personal computer (PC) cards for notebook computers. It
had annual turnover of around US$90 million and had
about 300 employees. Although PC Co. had developed
most of its NPD projects in-house, it had also outsourced a
few of its R&D projects to external partners. For example,
its R&D manager stated: ‘‘We have received a lot of
orders from our North American and European customers.
We act as contract manufacturers for these customersy
However, we also do design, manufacture, and market
our own PC cards and other related electronic products
for notebook computersy We have outsourced some of
our R&D to external contractors.’’ (Interview Transcript,
R&D manager, PC Co., March 24, 2005.) The third IT
firm (hereafter referred to as SCSI Co.) specialized in
designing and developing SCSI chipset for PCs. It had
approximately 100 employees and had annual gross
revenue of US$65 million. SCSI Co. was involved with
several R&D sourcing arrangements both internally and
externally. SCSI Co.’s Chief Technology Officer (CTO)
said: ‘‘Yes, we have been involved with both outsourcing and
in-sourcing of our R&D. We are quite happy with these
arrangements.’’ (Interview Transcript, CTO, SCSI Co.,
February 23, 2005.)
In total, 17 participants were interviewed, including
some from their external outsourcing partners. For
Electronic Co., four key participants were interviewed
and these included its CSO (responsible for carrying out
R&D sourcing decision), R&D manager (responsible for
managing all R&D projects), senior project manager
(responsible for coordinating R&D projects), and senior
contract coordinator from one of its external outsourcing
partners. For PC Co., seven key participants were
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Y.-A. Huang et al. / Technovation 29 (2009) 155–169
interviewed and these included its CEO (responsible for
making R&D sourcing decision), Deputy CSO (responsible
for carrying out R&D sourcing decision), R&D manager
(responsible for managing all R&D projects), senior
contract manager (responsible for implementing R&D
projects), and three senior contract coordinators from
three of its external outsourcing partners. For SCSI Co.,
six key participants were interviewed and these included its
CTO (responsible for carrying out R&D sourcing deci-
sion), R&D manager (responsible for managing all R&D
projects), senior project manager (responsible for imple-
menting R&D projects), senior project coordinator (re-
sponsible for coordinating R&D projects), and two senior
contract coordinators from two of its external outsourcing
partners. The data collection at these three cases continued
until a point of theoretical saturation, which is when the
value of an additional interview was considered to be
negligible (Eisenhardt, 1989).
The interviews focused on these IT firms’ R&D
processes, R&D sourcing arrangements, types of product
innovation involved, NPD processes, sourcing contracts,
and determinants and organizational consequences of
sourcing strategies. Participants interviewed were from
different levels of management to provide different
perspectives on these issues. Each interview lasted approxi-
mately 1 h. All interviews were taped and the transcripts
were sent to the participants for validation. Only four
participants had minor amendments to their transcripts. In
cases where there were differences in opinion between
participants, either follow-up interviews were conducted or
e-mails were sent to clarify their positions. In some cases,
further explanation from the participants improved the
mapping of the responses to the research constructs (Miles
and Huberman, 1994).
The case study approach allowed the researchers to
interview a range of R&D specialists in each firm,
observing practice and analyzing company reports. The
findings from these information gathering approaches were
analyzed iteratively by the researchers on an individual
level, differences reconciled, and then a judgment made on
each of the major constructs. Questions relating to a
particular research theme, for example, product innovation
type, were examined as a cluster. Divergent views within
the same firm were assessed in terms of the relative strength
of the perspective. This was done as a form of in-case
analysis and to develop general explanations and inter-
pretations (Eisenhardt, 1989). These steps enhance the
construct validity, reliability, and overall quality of the
research (Yin, 2002).
Multiple data sources provided a form of data triangula-
tion and validity in that strategies and key issues identified
formally in reports and internal documents could be
compared with the responses from interviewees (Yin,
2002). Qualitative content analysis (Miles and Huberman,
1994) was used to analyze the data from the case study
using the constructs (Appendix A) identified in the
literature analysis. These included: technological comple-
161
mentarity, technological codification, technological com-
petency, development costs, and financial profits. The
researchers evaluated the responses from the interviews and
classified them according to the research themes. The
Cohen’s Kappa statistic was used to analyze the level of
correspondence between the researchers and there was a
high degree of reliability between the researchers in relation
to the interpretation (0.89). This is well above the 61%
level suggested for a substantial strength of agreement
(Fleiss, 1981). The analysis of the case study results was
also conducted in a cyclical manner and the results were
checked by co-researchers and other R&D sourcing experts
(Klein and Myers, 1999). External experts were asked to
trace the logical flow of the research study, research
questions, case findings and analysis, and identification of
constructs, thereby identifying any gaps in the chain of
evidence (Yin, 2002).
3.1.2. Survey
Prior to determining the sample size for the survey,
a pilot survey of R&D managers and CSOs/CTOs of
10 IT firms was conducted. Some valuable feedback
was received and the questionnaire was slightly adjusted
for the main survey. For the main survey, 500 firms in
the IT industry were randomly selected from a list
published by the Industry, Commerce and Service Census
of Taiwan. Then the questionnaire, accompanied by a
covering letter to explain briefly the purpose and aim of the
survey and a reply-paid return envelope, was hand-
delivered to the R&D managers of 500 Taiwanese IT firms
in 2005. Two follow-up mailings or phone calls were
carried out to increase the response rate. A total of 153
samples were returned but 32 of these indicated that they
had no experience in R&D in-house sourcing and/or
outsourcing arrangements. Therefore, these 32 samples
were discarded. In the end, a total of 121 complete and
usable responses were obtained, giving an overall response
rate of 24.2%. These 121 samples all had prior experience
in dealing with both in-house sourcing and outsourcing
of R&D.
The potential problems inherent in a survey make the
analysis of nonrespondents a crucial exercise in order to
avoid non-response bias (Keats and Bracker, 1988). One of
the key assumptions in such an approach is that later
respondents to a survey are more similar to nonrespon-
dents than are earlier respondents (Armstrong and Over-
ton, 1977). An ANOVA analysis was performed to
compare late returns with earlier responses in order to
check for non-response bias (Armstrong and Overton,
1977; Tikoo, 2002). No significant differences were
detected between the two samples on total number of
employees (p ¼ 0.119).
Of these respondents, 74 (61.2%) were SMEs, with fewer
than 250 full-time employees; 29 (24.0%) firms had more
than 250 employees but less than 1000 employees. The
remaining 18 (14.8%) firms possessed over 1000 employees.
When asked about their single most important NPD
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162 Y.-A. Huang et al. / Technovation 29 (2009) 155–169
project implemented in the last 3 years, the respondents
indicated that 53 (44%) NPD projects identified were
involved with marginal innovations and 66 (55%) NPD
projects were developed via in-house R&D activity.
3.2. Questionnaire
The questionnaire was designed to obtain information
on Taiwanese IT firms’ R&D sourcing processes and
strategies. Most of the respondents were R&D managers
(90.0%) and CSOs/CTOs (5.8%). Respondents were asked
to indicate, using a seven-point Likert-scale, the extent to
which they agreed or disagreed with the sourcing factors
listed in the questionnaire, based on their single most
important NPD project implemented during the last 3
years. On this scale, one indicated ‘‘totally disagree’’ and
seven indicated ‘‘totally agree’’.
3.3. Measures
The scales used to operationalize the constructs in
this investigation were adapted from the existing litera-
ture (Appendix A). A dichotomous one-item scale was
employed to measure R&D sourcing arrangements.
Respondents were asked about the R&D sourcing modes
selected for their single most important NPD project
in the last 3 years (Howells, 1999a). A response of ‘‘1’’ on
this scale represented ‘‘R&D outsourcing’’, while a
response of ‘‘0’’ on this scale suggested that it was
‘‘in-house R&D’’.
Another variable (proposed by Shenhar, 2001), ‘‘pro-
ducts developed under marginal/adaptive product innova-
tion’’, was operationalized by asking R&D managers about
the degree of uncertainty of their single most important
NPD project in the past 3 years and its ability to generate
significant future profits. A response of ‘‘1’’ on this scale
indicated that the new product that had incorporated some
new improvements to the existing technologies was
developed under adaptive product innovation, while a
response of ‘‘0’’ on this scale suggested that the NPD
project was developed under marginal product innovation
as it was involved with well-known and established features
and functionality of the existing technologies. These two
types of product innovation were examined with two main
types of R&D sourcing—in-house R&D sourcing and
R&D outsourcing arrangements. In total, there are four
possible combinations or sourcing strategies: (1) in-house
R&D sourcing under marginal innovation; (2) R&D
outsourcing under marginal innovation; (3) in-house
R&D sourcing under adaptive innovation; and (4) R&D
outsourcing under adaptive innovation. These served as the
categorical variables and were used to examine the
association of the following constructs.
‘‘Technological complementarity’’ was a reflective mea-
sure composed of a four-item seven-point scale. The
construct was a modified version of the Complementary
Technological Resources scale used by Sarkar et al. (2001)
and Lambe et al. (2002). The construct measured the
degree to which the focal firms achieve their R&D goals by
pooling distinct technologies through external sources (via
outsourcing or other sourcing arrangements). This four-
item construct had an internal reliability of 0.83.
‘‘Technological codification’’ was a reflective measure
composed of a two-item seven-point scale that was
adapted from Simonin (2004). Respondents were asked
to assess the degree of ease with which technology know-
how can be codified and whether or not the technology
know-how for the firm’s NPD project is more explicit than
tacit. The scale displayed a high degree of internal
reliability (a ¼ 0.83).
‘‘Technological competency’’ (Day, 1994; Srinivasan
et al., 2002) measured the extent of the improvement of
R&D capability and acquisition of new technology. The
two-item seven-point scale showed high internal reliability
(a ¼ 0.81).
‘‘Development costs’’ was measured using a two-item
scale (adapted from Hultink and Robben, 1995). Respon-
dents were asked to assess overall development and
administrative costs for the project, and the two scales
also displayed a high degree of internal reliability
(a ¼ 0.86).
‘‘Financial profits’’ (adapted from Geringer and Hebert,
1991) was also operationalized with a three-item seven-
point construct. R&D managers had to make a subjective
evaluation of overall financial revenues and profit for the
project as well as possible generation of future profits. The
three items within the construct exhibited good internal
reliability (a ¼ 0.90). In the absence of objective data on
future benefits, the perceptions of R&D managers/execu-
tives were used. Although there has been some debate
regarding the legitimacy of perceptual measures as a proxy
for objective measures of firm performance, research has
succeeded in alleviating some of the concerns by showing
that perceptual measures of organizational performance
have a strong positive relationship with more traditional
objective measures (Ketokivi and Schroeder, 2004; Miller
et al., 1997; Venkatraman and Ramanujam, 1987). For
example, a study by Venkatraman and Ramanujam (1987)
showed that there is a high degree of correlation between
perceptual and objective performance measures in the
process of measuring performance and profits of several
competing organizations. Likewise, Miller et al. (1997)
indicated that perceptual measures are acceptable if the
measurements used to generate the reports are logical and
sound. Ketokivi and Schroeder (2004) commented that
while perceptions are a not a perfect proxy for objective
measures, perceptual measures are not fiction as some
researchers have claimed.
Finally, firm size and R&D outsourcing experience were
assigned as the control variables. ‘‘Firm size’’ was
measured as a logarithm value of full-time employees
while ‘‘previous R&D outsourcing experience’’ was mea-
sured using a logarithm value of the average number of
R&D outsourcing projects over the past 3 years.
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Y.-A. Huang et al. / Technovation 29 (2009) 155–169
4. Results
4.1. Case study
Case studies conducted at three IT firms provide support
for the central ideas of this research: there are obvious
linkages between technological determinants, R&D sour-
cing strategies, and organizational consequences. That is,
different technological determinants have different impacts
on the selection of R&D sourcing strategy by the firm and
this in turn will also affect its organizational performance.
For example, one interview participant said: ‘‘Our R&D
sourcing strategy is largely influenced by the amount
of revenue that is likely to be generated by a particular
NPD project. We classify our NPD projects into three
different categories, ranging from least important to
extremely important in terms of the financial revenuey
We tend to develop ourselves those NPD projects that are
likely to significantly contribute to our financial revenue.
So we are able to retain all the profits resulting from these
projects.’’ (Interview Transcript, CEO, PC Co., March 15,
2005.)
Firms tend to outsource those technologies that are
easily codifiable for contracting out. R&D manager from
another IT firm stated: ‘‘Our company has limited R&D
staff and resources. Therefore, we must effectively utilize all
our available resources on key projects and acquire external
resources, when necessary, to develop other products. For
example, SCSI chipset is our core technology and therefore,
we have made long term investments on this technology. We
have put in a lot of resources in designing and developing our
core chipset technology and at the same time, have
outsourced other less important subsystems to external
contractorsy. We have manufactured and marketed many
of these more profitable high-tech chipsets by ourselves in
order to maximize our revenuey. We have outsourced the
low-tech subsystems and other related products to external
contractors in order to lower our development costs.’’
(Interview Transcript, R&D manager, SCSI Co., February
17, 2005.)
Although it is important for firms to cultivate and build
adequate technological competency in the process of
developing some new products, it is simply not feasible
for them to possess sufficient R&D capability to develop all
of their new products. Firms need to be flexible in utilizing
their R&D sourcing strategies when facing resource
constraints and market pressures. Firms often decide to
develop internally those products for which they possess
sufficient technological competency or those that are likely
to generate substantial income for them. They tend to
outsource those technologies that they do not currently
possess. For example, one R&D manager said: ‘‘We did not
possess enough technologies to overcome the problems
associated with the MP3 and JPEG compression when we
were developing the digital photo frame not long ago. We
then elicited the expertise from our external outsourcing
partners to help our software engineers to overcome the
163
problems. This had helped us to meet the production deadline
and made a smooth entry into the digital photo frame
market.’’ (Interview Transcript, R&D manager, PC Co.,
March 11, 2005.) A senior project manager from another
IT firm supported this view: ‘‘At that time, the core
competence of our company was hardware design and we
were a bit weak in software design and engineeringy But we
found that MP3 player was an exciting new product and only
a handful of firms were capable of manufacturing it. It would
be a big profit generator for us. Therefore, we decided to
outsource the software components to external contractors
and as a result had significantly lowered the technical
complexity of the product for us. This had enabled us to
become one of the very few firms to sell the MP3 players
in the Taiwanese market. We had made a handsome
profit by using this R&D sourcing strategy.’’ (Interview
Transcript, senior project manager, Electronic Co., Jan-
uary 31, 2005.)
Most of the Taiwanese IT firms are SMEs and they
might not want to undertake the entire NPD processes in-
house. They may prefer to market those less risky products
with a lower profit margin. In this instance, firms are
willing to consider R&D outsourcing. For example, one
R&D manager said: ‘‘You know, our company would have
put ourselves in an extremely risky financial position if we
had carried out all of the NPD internally and failed to
outsource some of our R&D. We had consistently avoided
investing all our company resources on new products with
high degree of uncertainty. Instead, we had also developed
some new low-risk products with a low profit marginy. In
order to lower our costs, we had outsourced some of these
new low-risk products to external outsourcing contractors.’’
(Interview Transcript, R&D manager, Electronic Co.,
January 28, 2005.)
Interview comments suggest the importance of under-
standing in more detail the link among technological
determinants, R&D sourcing strategies, and their conse-
quences. In the following sections, the analysis of survey
data provides insights into the precise nature of these
relationships.
4.2. Survey findings
The hypotheses were tested by MANOVA analysis and
then one-way ANOVA. Five variables were analyzed using
MANOVA by combining R&D sourcing arrangements
and product innovation types as the categorical variables
(as listed in Table 1). Box’s M was 113.273, a non-
significant outcome (F ¼ 1.197, p ¼ 0.106), and this
indicated equality of the variance/covariance matrices of
the multiple variables across treatment groups. Significant
differences were found among four cells on all variables
(Wilks’ lambda F ¼ 3.783; p-value ¼ 0.000). An ANOVA
was then conducted on each variable and most of
them were statistically significant. Follow-up compari-
sons were made using Fisher’s least-significant-difference
(LSD) test.
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164 Y.-A. Huang et al. / Technovation 29 (2009) 155–169

Table 1
Influence of R&D sourcing arrangements and types of product innovation on organizational output using MANOVA

Constructsa Cell 1 in- Cell 2 R&D Cell 3 in- Cell 4 R&D One-way Fisher’s LSD Expected
house R&D, outsourcing, house R&D, outsourcing, ANOVA comparison: difference
marginal marginal adaptive adaptive results: significantly
innovation innovation innovation innovation, F(df ¼ 3, 117) p- different pairs
(n ¼ 28) (n ¼ 32) (n ¼ 38) (n ¼ 23) value (a ¼ 0.05)

Technological Mean 4.47 Mean 4.69 Mean 4.64 Mean 4.84 0.385 441, 2, 3
complementarity SD 1.09 SD 1.14 SD 1.25 SD 1.43 p ¼ 0.764
Technological 4.68 5.61 4.89 4.65 3.596 241, 3 and 4 241, 3, 4
codification 1.30 1.29 1.26 1.31 p ¼ 0.016
Technological 5.02 5.28 6.08 4.98 6.301 341, 2 and 4 341, 2, 4
competency 1.05 1.37 1.06 1.22 p ¼ 0.001
Development 4.00 3.05 4.19 3.82 6.051 2o1, 3 and 4 2o1
costs 1.20 1.19 1.28 1.28 p ¼ 0.001 443
Financial profits 4.33 5.18 5.29 4.45 4.327 241 and 4 241
1.28 1.20 1.45 1.16 p ¼ 0.006 341 and 4 344
a
Controlled by firm size and R&D outsourcing experience.

Surprisingly, the empirical results from Table 1 failed to
show that firms undertaking R&D outsourcing arrange-
ments of adaptive innovation had significantly higher
technological complementarity (M ¼ 4.84). The Fisher’s
LSD test indicated that complementarity of R&D out-
sourcing under adaptive product innovation was not
significantly higher than that of the other three sourcing
strategies. Therefore, H1 was not supported.
The mean for technological codification in cell 2
(M ¼ 5.61) was significantly higher than the means in cell
1 (M ¼ 4.68), cell 3 (M ¼ 4.89), and cell 4 (M ¼ 4.65).
Thus, H2 was supported. The findings suggested that firms
were more likely to undertake R&D outsourcing if the
technologies involved were codifiable and non-tacit. The
mean for technological competency in cell 3 (M ¼ 6.08)
was significantly higher than for the means in the other
three cells. The present finding indicated that firms that
focused on achieving improvement of technological com-
petency were likely to develop adaptive product innovation
through internal sources. Thus, H3 was also supported.
In addition, the results also demonstrated that R&D
outsourcing could reduce the development costs of the
NPD projects that were associated with marginal innova-
tion. ANOVA results showed that the mean for develop-
ment cost in cell 2 (M ¼ 3.05) was significantly lower than
for the means in the other three cells. However, the Fisher’s
LSD test revealed that the mean for development cost in
cell 3 (M ¼ 4.19) was not significantly higher than the
mean in cell 4 (M ¼ 3.82). Therefore, H4 was only partially
supported.
Moreover, a significant relationship between financial
profits and R&D sourcing strategies was established by the
ANOVA analysis (F=4.327, p=0.006). The mean for
financial profit in cell 3 (M=5.29) is significantly higher
than the mean in cell 4 (M=4.45). Furthermore, the
Fisher’s LSD test demonstrated that the mean in cell 2
(M=5.18) was also significantly higher than the mean in
cell 1 (M=4.33). Thus, H5 was supported. With respect to
adaptive innovation, the results showed that firms under-
taking in-house R&D sourcing were more likely to
generate higher profits than the firms taking on R&D
outsourcing. In contrast, with respect to marginal innova-
tion, firms were more likely to generate more financial
profits when they adopted R&D outsourcing than in-house
R&D sourcing. Finally, the results were also cross-
examined with the two control variables, firm size and
R&D outsourcing experience. R&D outsourcing experi-
ence varied significantly with all four quadrants of the
model (F=5.944, p=0.001) but no significant difference
was found with respect to the firm size.
5. Discussion and conclusion
This study has extended, as suggested by Santoro and
Chakrabarti (2002), the non-internal R&D activities
construct to a non-US-example Taiwanese IT industry.
Taiwan IT industry has been described by numerous
academics as fragmented, dynamic, innovative, highly
competitive, and quick learning (Hung, 2003; Kraemer et
al., 1996). The case study and survey results have been
examined from the perspectives of the core competence,
transaction cost, and cost advantage perspective. The
findings of this study demonstrate that different R&D
sourcing strategies adopted by firms can result in different
antecedent determinants and performance consequences.
The following sections discuss the determinants and
consequences associated with different R&D sourcing
strategies.
5.1. Technological determinants and organizational
consequences with R&D sourcing strategies
Our results indicate that the decision made by a firm to
adopt a particular R&D sourcing strategy is based on the

type of R&D sourcing arrangement and product innova-
tion selected. Table 1 has revealed that technological
determinants affect the selection of firms’ R&D sourcing
strategies, which, in turn, impact on the organizational
performance. The empirical evidence was consistent with
the theoretical perspectives noted earlier. Firms possessing
higher levels of technological codification tend to adopt
R&D outsourcing of marginal innovation and this can
significantly decrease their development costs (Narula,
2001; Chesbrough, 2007). However, this study has failed to
support the notion that technological complementarity has
greater influence on R&D outsourcing of adaptive
innovation than on the three other types of R&D sourcing
strategies. In other words, firms undertaking R&D out-
sourcing arrangements of adaptive innovation do not
necessarily have significantly higher technological comple-
mentarity. One possible explanation is that Taiwanese IT
firms do not think that technological uncertainty and
difficulties associated with the adaptive innovation are
strong enough drivers for them to strengthen their
technological complementarity (Shenhar, 2001). In addi-
tion, firms intending to improve their technological
competency and financial profits are likely to achieve them
through the adoption of in-house R&D sourcing under
adaptive innovation (Kessler et al., 2000; Narula, 2001).
Moreover, as noted in the Taiwanese IT industry, high
pressure to export forces Taiwanese IT firms, which are
predominantly SMEs with limited resources and capabil-
ities, to improve their global competitiveness, thus explain-
ing why Taiwanese IT firms aggressively capture and apply
both internal and external technological resources. Numer-
ous academics (e.g. Chang and Tsai, 2000; Hobday, 2003;
Hung, 2003; Poon, 2002) have observed that Taiwanese IT
firms usually take a proactive measure (with a high degree
of flexibility) to obtain critical resources internally and
externally in order to support their R&D activities,
allowing them to improve their organizational capabilities
I.
innovations
Marginal
Product Innovation Types
III. Determinants:
innovations
Adaptive
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Y.-A. Huang et al. / Technovation 29 (2009) 155–169 165
to compete with global giants. This may be the reason why
Taiwanese IT firms take different measures in dealing with
different R&D sourcing strategies in order to compete in
the global market. In other words, this study has found
that Taiwanese IT firms usually adopt a combination of
R&D sourcing strategies in accordance with their business
goals (e.g. to minimize development costs or to maximize
profits).
5.2. R&D sourcing strategy matrix model
From the results, a 2  2 R&D sourcing strategy matrix
model is developed (Fig. 2). The model positions R&D
sourcing arrangements and product innovation types as
two dimensions of R&D sourcing strategies, and illustrates
possible approaches and/or strategies for applying either
internal or external technological resources (as shown in
Fig. 2).
5.2.1. Determinants and consequences of R&D outsourcing
of marginal innovation
Quadrant II shows that firms can minimize their
development costs while retaining satisfactory financial
profit by adopting R&D outsourcing of marginal innova-
tion. This phenomenon may occur because marginal
innovation is well established and manufactured utilizing
firms’ existing technologies. Firms do not need to worry
about whether or not R&D outsourcing of this type of
innovation will result in damaging their core competencies.
R&D outsourcing of marginal innovation can also assist
firms in minimizing their transaction costs since the
technologies involved are easily codifiable and have non-
tacit inputs to the R&D process. This finding is consistent
with the relevant literature that firms tend to adopt R&D
outsourcing for those new products with low technological
competency and high technological codification and this, in
turn, will also assist them in lowering their development
R&D Sourcing Arrangements
In-house R&D Sourcing R&D Outsourcing
Determinants: II. Determinants:
Low Technological Codification High Technological Codification
Low Technological Competency Low Technological Competency
Consequences: Consequences:
High Development Costs Low Development Costs
Low Financial Profits Median Financial Profits
IV. Determinants:
Low Technological Codification Low Technological Codification
High Technological Competency Low Technological Competency
Consequences: Consequences:
High Development Costs High Development Costs
High Financial Profits Low Financial Profits
Fig. 2. R&D sourcing strategy matrix model.
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166 Y.-A. Huang et al. / Technovation 29 (2009) 155–169
costs and in improving their financial profits (Cote and
Latham, 2003; Narula, 2001; Quinn, 1992; Tidd and
Trewhella, 1997; Yasuda, 2005).
5.2.2. Determinants and consequences of in-house R&D
sourcing of adaptive innovation
However, since the examinations performed here are
based on comparing both the marginal and adaptive
innovations, the present findings do not imply that exerting
R&D efforts on the adaptive innovation are not worth-
while. Firms that are concerned about the strategic
importance of their technologies tend to spend more
R&D efforts on adaptive innovation through internal
sources in order to improve technological competency. For
example, in-house R&D for the adaptive innovation
(Quadrant III) has attracted the highest level of financial
profits for these firms. This is because these firms under-
taking in-house sourcing of adaptive innovation are often
able to cultivate unique and valuable competencies that can
be used to generate significant returns to the firms (Kessler
et al., 2000; Narula, 2001). This type of R&D sourcing
strategy can yield higher financial profits than the other
types of sourcing strategy.
5.2.3. Pitfalls in the selection of R&D sourcing strategies
The illustration shown in Fig. 2 suggests that R&D
sourcing strategies in Quadrants I and IV may not be good
choices for firms. The selection of a sourcing strategy in
these two quadrants is likely to result in higher develop-
ment costs and/or lower financial profits. For example,
expending effort on the marginal innovation with R&D
outsourcing (Quadrant II) improves development costs and
financial profits more than does expending effort on
the marginal innovation with in-house R&D sourcing
(Quadrant I). Similarly, expending effort on the adaptive
innovation with in-house R&D sourcing (Quadrant III)
improves financial profit more than does expending
effort on the adaptive innovation with R&D outsourcing
(Quadrant IV).
Indeed, the use of appropriate R&D sourcing strategies
and selection of suitable sourcing partners can assist
firms in lowering development costs as well as in lifting
financial performance. These findings are articulately
summarized by a senior project coordinator in response
to a question about the Taiwanese IT industry: ‘‘Taiwanese
IT industry is an ultra competitive industry. We have many
competitors who are capable of releasing attractive new
products all the time. In response to this, our company has to
market at least three new products per year in order to retain
our customers. Therefore, some of our new products are not
very innovative. We do our best to lower their R&D costsy
We do not aim to make a huge profit out of these products.
Really, our aim is not to lose money. However, we just do not
possess enough resource to develop every single new product
all by ourselvesy To do this, we have outsourced many of
these types of product to our external partners. In the
process, we have also managed to establish good working
relationships with these external partners.’’ (Interview
Transcript, senior project coordinator, SCSI Co., February
10, 2005.)
5.3. Concluding remarks
As mentioned earlier, the majority of Taiwanese IT firms
are SMEs, which undertake mostly OEM or ODM for
TNCs (Ernst, 2000; Hobday, 2003; Lin, 2004). In many
instances, they tend to undertake both marginal and
adaptive R&D. High pressure to export forces these
Taiwanese IT firms (which are predominantly SMEs with
limited resources and capabilities) to take a proactive
measure to obtain critical resources internally and
externally in order to support their R&D activities. In
other words, these Taiwanese IT SMEs tend to adopt a
combination of R&D sourcing strategies with a high degree
of flexibility in order to improve their organizational
capabilities to compete with global giants. The results
support most of our proposed hypotheses.
Adding to the existing literature on the determinants and
consequences of R&D sourcing strategies, this study
provides three conclusions regarding outsourcing versus
in-house NPD. First, consistent with findings from Howells
(1999a), technological resources may involve both internal
and external linkages, and R&D outsourcing with marginal
innovation should be treated as supplementing in-house
R&D in terms of developing adaptive innovation. Thus,
choosing the right product innovation type at the outset of
R&D sourcing is essential for obtaining the intended
outcomes.
Second, the selection of an appropriate R&D sourcing
strategy is essential for successful R&D sourcing. There-
fore, firms should carefully assess and measure the level of
their technological determinants (i.e. technological codifi-
cation and technological competence) before selecting an
appropriate R&D sourcing strategy. In addition, the
identification of these technological determinants of R&D
sourcing strategies should be based on a comprehensive
organization examination.
Managers must consider several key outputs when
deciding whether or not to contract out R&D activities—
development costs and financial profits. This study has
resulted in a model that reveals firms achieve various
performance outcomes when they engage in different
sourcing strategies (see Fig. 2). The findings suggest that
both R&D outsourcing of marginal innovation and in-
house R&D with developing adaptive innovation can result
in satisfactory consequences for firms undertaking R&D
activities.
The findings should also be generalizable to IT SMEs in
other economies. For example, electronic industries in
other Asian newly industrializing economies (NIEs; e.g.
Hong Kong) with similar industry characteristics should
benefit from this research. Likewise, IT SMEs in other
Asian economies such as China, Malaysia, and Thailand
have also undertaken OEM and ODM in order to
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Y.-A. Huang et al. / Technovation 29 (2009) 155–169 167

strengthen their R&D capabilities. Therefore, the findings
of the research may also be applied to the electronic
industries in these economies. IT SMEs within these
economies should consider adopting a combination of
R&D sourcing strategies with the objective of increasing
the efficiency and effectiveness of their OEM and ODM
operations.
Finally, some limitations in this research have to be
acknowledged in this study. The choice of variables
selected for the study is problematic. The reason for this
is that they may not be able to explain and capture the
complex nature of R&D sourcing process and its determi-
nants. There are some determinants of R&D sourcing that
have not been examined such as dependence on external
partners, risk of external partners lock-in, and the risk of
transferring valuable strategic knowledge outside. In
addition, this research has relied on the information
provided at a particular point in time. Further research
could take a longitudinal approach as the perception and
management of R&D sourcing strategies are likely to
change over time. Alternatively, the R&D sourcing strategy
matrix model can be further examined and validated in
other industry sectors or countries in order to increase the
generalization of the findings.

Appendix A. Measures used in the study

Constructs Measures Reliability alpha

(a)

Technological  Contribution of different technologies by external sources 0.83

complementarity  Strength of technological complementarity
 Value of the technology brought into the NPD project by external
sources
 dependency of the technology provided by the external sources

Technological  Technology know-how is easily codifiable (in writing, blueprints, 0.83

codification instructions, formulas, etc.)
 Technology know-how is more explicit than tacit

Technological  Improvement in firm’s R&D capability 0.81

competency  Introduction of new technology

Development costs  Project development costs 0.86

 Administrative costs

Financial profits  Satisfaction with gross revenue 0.90

 Satisfaction with net profits
 Possible generation of significant future profits

R&D sourcing  Selection of contractual modes in R&D activities NA

Marginal/adaptive  Technological uncertainty NA

product
innovation
Firm size  Number of employees NA

Firm age  Number of years the firm has been in business NA

R&D outsourcing  Average number of R&D outsourcing projects introduced over the past 3
experience years NA
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168 Y.-A. Huang et al. / Technovation 29 (2009) 155–169
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