Abstract/Summary

This study advances our understanding of the complementary and substitute relationships between investment in firm capabilities and two types of knowledge spillovers. We use three matched databases of 15,259 most innovative firms in the United Kingdom (UK) during 2002–2014 to demonstrate the joint effect of knowledge spillovers within and between industries and firm capabilities on firm innovation. This study furthers our understanding in three significant ways. First, it supports the dual nature of the R&D story. Secondly, it demonstrates that the relationship between knowledge spillovers and firm innovation is nuanced and depends on the extent to which a firm decides to invest in internal R&D, leading to either a substitution or complementarity effect between R&D and a type of knowledge spillover. Thirdly, the relationship may be different across industries. While all industries benefit from investment in internal R&D and spillovers, the creative industry does not experience the substitution effect, and knowledge-intensive business services exhibit both substitution and complementarity effects, which are accelerated by internal investment in R&D.