Knowledge Sourcing by Multidivisional Firms

Research Summary: Research on knowledge sourcing has generally treated firms as monolithic entities, even though firms most active in knowledge sourcing often comprise heterogeneous divisions, each possessing specialized knowledge and facing unique market prospects. This study examines how heterogeneity across divisions affects knowledge sourcing by multidivisional firms. We argue that firms source more early-stage knowledge, whose market prospects are highly uncertain, for low-performing divisions; by remaining active in the relevant markets, firms keep the flexibility to tap favorable market opportunities should they arise in the future. In contrast, firms source more late-stage knowledge, whose market prospects are largely revealed, for high-performing divisions so as to maximize current returns. The intra-firm heterogeneity, in turn, explains inter-firm differences in knowledge sourcing. Data from the pharmaceutical industry support these arguments. Managerial Summary: Firms that source external knowledge often span multiple technological areas and markets, and hence it is not immediately clear what to source and how much to source. This study examines how multidivisional firms tailor their knowledge-sourcing strategies to differences in performance across their divisions. We find that firms source more early-stage knowledge, whose market prospects are uncertain, for divisions with low innovation performance. This helps firms prop up those divisions and remain active in the related markets. In contrast, firms source more late-stage knowledge, whose market prospects are more certain, for divisions with high sales performance. This helps firms leverage the strengths of those divisions and realize immediate gains. Performance differences across divisions inside firms, therefore, can explain differences in knowledge-sourcing strategies across firms.