The role of cross-national knowledge on organizational ambidexterity: A case of the global pharmaceutical industry

Abstract

Using a sample of 70 global pharmaceutical firms, this study examined how cross-national knowledge affected the creation of exploitative (incremental) and explorative (breakthrough) types of technological innovations both of which are necessary for organizational ambidexterity. We found that there were significant differences for effectively using cross-national knowledge, which reinforces the need for organizational ambidexterity. The data used to study cross-national knowledge consisted of patent analyses of commercialized products, which is a step further than most studies that stop at just the patents themselves. Through the use of double-log regression analysis, the results suggested a notable conclusion: while the sourcing of intrafirm, cross-national knowledge enhanced explorative or breakthrough innovation, it did not enhance the development of exploitative or incremental innovation. The article concludes with managerial implications for managing ambidexterity.

Keywords

Cross-National Knowledge organizational ambidexterity innovation pharmaceuticals

Introduction

Knowledge sharing or knowledge transfer across projects has recently begun to be studied with regards to the codification of knowledge (Cacciatori et al., 2011; Newell et al., 2006). What is less understood is whether the type of knowledge being transferred has different influences on the innovating organization. Ambidextrous organizations are those that are able to pursue two dissimilar strategies at the same time, such as exploration and exploitation (March, 1991). Research indicates that these two types of learning take place in two separate time frames: long term and short term (March, 1991). Recent studies display evidence that exploitative and explorative learning can take place in both time frames (Swart and Kinnie, 2007). Thus, we view organizational ambidexterity as a proactive learning process in which firms can purposefully seek and exploit new and existing resources that can lead to the discovery and creation of both explorative (breakthrough) and exploitative (incremental) types of technological innovations, regardless of the time frame. Moreover, we argue that organizations should diversify their learning through various interorganizational collaborations to avoid being “locked in” to being overly explorative (breakthrough) or excessively exploitative (incremental) (Holmqvist, 2009). In our context of the global pharmaceutical industry, the announcement of explorative types of innovations, in particular, may not only push the firm out of its established knowledge platform, but also may create a profound impact on its ability to generate significant revenues and profits. For example, in 2007, Pfizer announced plans to close five facilities (research and manufacturing) totaling 10,000 jobs due to the firm’s insufficient number of breakthroughs in its pipeline and the loss of previous breakthroughs coming off patents that amounted to a 41 percent loss in sales revenue due to generic competition (Smith, 2007).

Many resource-based strategy, innovation, and international business scholars have called for more research on how the firm’s ability to absorb knowledge from cross-national resources influences innovations of this kind (e.g. Dunlap-Hinkler et al., 2010). For instance, according to Birkinshaw (1997), Dess et al. (2003), and Raisch and Birkinshaw’s (2008) surveys of the international management and ambidexterity literatures, since the earliest studies conducted by Ghoshal and Bartlett (1988) and March (1991), there has been limited research on how multinationals can leverage the innovative initiatives within their network of dispersed subsidiaries to increase innovation performance. Markman et al. (2008) purport that there is a greater need to study knowledge and how firms are able to source-in knowledge from not only internal resources, but also from other industry players and institutions. According to Cheung et al. (2010), few studies have examined interorganizational learning in a cross-border setting. Recent studies (Monteiro et al., 2008), however, have examined many of the causes behind why intrafirm knowledge-transfer activities can be problematic within multinational enterprises (MNEs) (e.g. isolated subsidiaries can be left out of the “in crowd,” and hence lose knowledge-sharing opportunities). Thus, social exchanges involving successful learning and knowledge transfer within these geographically dispersed networks can be enhanced when firms are mindful about organizational power/knowledge dynamics (Heizmann, 2011; Methusamy and White, 2005).

Phene and Almeida (2008) note that more research is needed to understand how and why some MNEs (and their subsidiaries) are better able to assimilate and effectively use such external knowledge to create new innovations. Our research investigates how the sourcing-in of not only cross-national knowledge (interfirm) per se, but also knowledge assimilated from an MNE’s subsidiary network (intrafirm) affects firm innovation capabilities in developing exploitative and explorative types of innovations.

The knowledge-based view of the firm suggests that firm differences are a result of a firm’s abilities or inabilities to develop, organize and leverage knowledge (Spencer, 1996). For instance, an International Monetary Fund (IMF) report (2006) noted that for G-7 economies, intangible knowledge assets (marketing and R&D knowledge) constitute nearly 30 percent of their stock of all long-term assets. According to learning and knowledge management theories, the higher the degree of interaction and feedback shared and coordinated through such intangible and social knowledge networks (Lester, 2001), the greater the likelihood that the firm will increase its access to critical competencies. In this case, innovation is fostered by diversity, whereas repeated spirals of knowledge within familiar environments lead to blindness (Cohen and Levinthal, 1990; Leonard-Barton, 1992; Levinthal and March, 1993).

Following the resource-based, learning- and knowledge-based theoretical perspectives, this study argues that firms increasingly operate in diverse cross-national environments that have both unfamiliar (suppliers, rivals) and familiar (shared intrafirm network) networks. Operating in these environments may not only trigger failures, but also may increase the firm’s incentive to search (Simon, 1955) for new solutions, which may ultimately enhance its technological capabilities and innovative processes (Glassman, 2001; Levitt and March, 1988; Miller, 1994; Miller and Chen, 1996). With the understanding that few firms are equipped to effectively manage these complexities especially at high levels (Kotabe et al., 2007), we suggest that firms with effective cross-national knowledge processes will thereby create scarce and valuable knowledge commodities to be used in the discovery and creation of new innovations. The primary theme of this study is that ambidexterity is preceded by the continual replenishment of diverse, cross-national knowledge resources.

In order to study the significance of cross-national knowledge, we incorporate two modifiers: the overall level of knowledge and the efficiency of intrafirm collaborative efforts, as they relate to organizational ambidexterity along two innovation extremes—exploration (breakthrough) and exploitation (incremental) (see Figure 1 for our conceptual framework). In the next section, we review the literature behind the conceptual model and generate hypotheses to test.

Figure 1.

Conceptual model of cross-national knowledge and organizational ambidexterity.

Research hypotheses and conceptual model

In changing environments, firms are constantly challenged to achieve the proper balance between the two concurrent and potentially competing tasks of alignment and adaptation (Gibson and Birkinshaw, 2004). The organizational learning literature and the recent literature on ambidexterity argue that in a dynamic environment, successful firms are required to enhance the value of their existing capabilities and technologies through exploitation, while at the same time develop valuable new capabilities through exploration (Levinthal and March, 1993; March, 1991; Raisch and Birkinshaw, 2008). That is, an ambidextrous firm is capable of both exploiting existing competencies as well as exploring new opportunities (Cao et al., 2009). The need for a firm to pursue these two very different processes simultaneously has been underpinned by a significant stream of research on exploration/exploitation, named organizational ambidexterity.

March’s (1991) seminal study conceptualized the tensions associated with exploiting existing opportunities and exploring or leading new knowledge creation. Exploration has been associated with search, experimentation, risk taking, innovation, and novelty, while exploitation has been associated with refinement, selection, production, and recombination of existing knowledge and capabilities (Dittrich and Duysters, 2007; March, 1991). In other words, exploration creates variety in experience through search and discovery, while exploitation improves the value derived from existing knowledge through routinization, refinement, production, implementation, and recombination (Holmqvist, 2004). Organizations innovate, in general, by combining existing and new knowledge to create novel offerings (Kogut and Zander, 1992). Therefore, innovation depends on the flow of new knowledge into the firm. Firms hoping to innovate must frequently turn to external sources to gain new ideas, insights, and expertise. The ability to acquire this knowledge from external entities is, however, limited by an organization’s own experience and expertise (Nelson and Winter, 1982). Familiarity and organizational routines are socially embedded, and while new routines may be unquestionably more efficient than traditional alternative, old routines may limit knowledge search activities particularly for foreign partners (Tsang, 2008).

Exploration and exploitation emerge from the firms’ contradictory knowledge-processing capabilities (Floyd and Lane, 2000). Firms engaging in exploration must compete for scarce resources within the firm. Moreover, it requires different sets of capabilities than those necessary for exploitation. The firms’ ability to identify and build these capabilities within its boundaries is a source of competitive advantage. Current research has shown that exploration and exploitation can be independent activities, and firms can indeed pursue high levels of the two concurrently (Lavie and Rosenkopf, 2006; Lubatkin et al., 2006). The goal of this study is to examine how cross-national knowledge influences the firms’ ambidexterity or their ability to balance exploration (breakthrough innovations that involve risk taking) alongside exploitation (refinement of existing innovations or incremental innovations) activities. We argue that firms can accomplish these goals by acquiring, assimilating, and using more complex knowledge domains from cross-national knowledge resources.

Cross-national knowledge

Embodied within every firm is a bundle of knowledge resources (Barney, 1991). As a social community, a firm’s production of knowledge constitutes a source of sustainable competitive advantage. Firms grow because of their ability to create and source new knowledge (Zander and Kogut, 1993). According to Argote’s (2011) recent review of the literature, there is much more research to be done on understanding how knowledge is created, rather than simply being retained and transferred. In this study, we look at the relationship between knowledge transfer and knowledge creation. The diversity of knowledge acquired through transfer activities should create a positive synergistic benefit that leads to new opportunities in creating novel innovations. Leonard-Barton (1995) argued that knowledge diversity can increase the pool of know-how from which the firm can gain access to, further stimulating the knowledge creation process for handling new ways to solve problems dealing with environmental uncertainties and complexities (e.g. Andriani, 2001). Swart (2011) noted that acquiring such knowledge is only advantageous or valuable when it is “enacted, i.e., know-how-in action (KHiA) which is defined as a routine in practice which consists of specific actions, by specific people, in specific places and times” (p. 320). Empirical evidence supports this notion and further has found that knowledge-transfer spillovers tend to occur in geographically localized clusters (e.g. Jaffe, 1993). For instance, Coombs et al. (2006) found that foreign firms, unlike domestic firms, entered into alliances to access local knowledge embedded in dominant regional clusters. Some of the reasons to strategically disperse and integrate research activities overseas are the desire to capture the full potential benefits of different national systems of innovation (NSI) (e.g. government tax credits, local technological capabilities) (Carlsson and Mudambi, 2003; Coombs et al., 2006), other interfirm or cross-national business-to-business relationships (Cheung et al., 2010), and customer–supplier relationships (Knoppen et al., 2011).

We argue that firms with greater cross-national knowledge ties have more opportunities to leverage their knowledge and resources to create more exploitative types of innovations (incremental) appealing to a larger, more diverse consumer population. While riskier types of explorative innovations (breakthrough) have been argued to initially create the foundation for future innovation advances, exploitative types of innovations have been suggested to extend the firm’s existing product/service life cycle through derivative product lines (Meyer and Lehnerd, 1997; Meyer and Mugge, 2001). Exploitative types of innovations in the global pharmaceutical industry can increase competition, while at the same time lower drug prices. Greater innovations of this kind also increase the firm’s revenue stream, thereby supporting the development of riskier, explorative types of innovations, specifically blockbuster innovations.

According to a study by Kotabe et al. (2007), innovative performance is a curvilinear function of the cross-national knowledge content used by a firm. They found that the initial benefits of transferring cross-nationally do not exceed the extra concomitant costs that result from obtaining such knowledge. In other words, transferring higher levels of cross-national knowledge did not amount to higher net innovative benefits because of the higher accompanying costs associated with managing such excessive diversity. We argue that the negative relationship between cross-national knowledge and innovativeness performance may pertain to the magnitude of the innovation change—exploitative (incremental) versus explorative (breakthrough).

While both types of innovations require the support of the firm’s functional areas (e.g. R&D, marketing), exploitative innovations, unlike explorative innovations, tend to follow technology trajectories that are known and require relatively minor experimental changes to bring a product or service to diverse markets in which competition already exists. Given this type of predictability, we argue that firms are in a better position to more effectively communicate, coordinate, and share knowledge with large numbers of diverse cross-national knowledge bases. We suggest that enhanced cross-national knowledge sharing of this kind will create opportunities to sustain growth through exploitation rather than exploration. Hence, we hypothesize,

Hypothesis 1a. Greater cross-national knowledge is positively related to the firm’s likelihood of developing “exploitative” or incremental innovations.

Hypothesis 1b. Greater cross-national knowledge is negatively related to the firm’s likelihood of developing “explorative” or breakthrough innovations.

Intrafirm cross-national knowledge

In terms of cross-national knowledge sources of innovation, most academics consider two innovation models: centralization versus decentralization. According to Ghoshal and Bartlett (1988), Gupta and Govindarajan (1991), and others (e.g. Asakawa, 2001; Dunlap-Hinkler et al., 2010), the trends in the decentralization of knowledge and the increasing emphasis placed on its need should encourage researchers and practitioners to examine innovation by taking into consideration the knowledge flow within the context of the headquarters–subsidiary relationship (Ambos and Birkinshaw, 2010; Bouquet and Birkinshaw, 2008; Phene and Almeida, 2008). This research supports the view that within MNEs, there is greater flow of intrafirm cross-national knowledge as “competence-creating” subsidiary mandates now play an important role as “centers of learning” (Cantwell and Mudambi, 2000, 2005; Frost, 2001; Frost et al., 2002). The concept of exploiting global knowledge from strategically advantageous “centers of excellence” is not new (Bartlett and Ghoshal, 1989, 1998; Doz and Prahalad, 1986). Nevertheless, the task of managing decentralized R&D operations is a complex activity. Disseminating local cross-national knowledge throughout the firm is problematic because it is accumulated through individual experiences that are difficult to articulate to others (Lord and Ranft, 2000; Polanyi, 1962). The complexity surrounding its transfer may increase its relative benefits (Lord and Ranft, 2000). Researchers have found that the innovative role of subsidiaries in MNEs has become significant with an increasing decentralization of the innovative function (e.g. Asakawa, 2001; Phene and Almeida, 2008).

Given that the decentralization of the subsidiary role is likely to result in valuable technology and innovation spillovers accumulated in geographic “centers of excellence,” (Phene and Almeida, 2008) we postulate that the net benefits from this strategy are greater for explorative types of innovations. We argue that increasing the firm’s heterogeneity of collaborative efforts outside of its home-base system of innovation is likely to reduce traditional, bureaucratic in-group processes. While creating an atmosphere ready for innovation may be different for different industries and/or companies, McMillan et al. (2000) found that an internal culture of scientific information openness was found to have higher R&D performance than a culture of secrecy. With the changing role of subsidiaries in MNEs and the benefits associated with greater intrafirm, parent firm–subsidiary linkages (Ambos and Birkinshaw, 2010; Bouquet and Birkinshaw, 2008), particularly through the use of virtual teams (Kauppila et al., 2011; Phene and Almeida, 2008), this study proposes that when firms are able to more freely access and share unique “internal” market and technical information through a common vision that values openness rather than secrecy (McMillan et al., 2000; McMillan et al., 1995), they are likely to stimulate their innovative capacity to develop greater explorative rather than exploitative innovations. Stated formally,

Hypothesis 2a. Greater cross-national knowledge from intrafirm resources is negatively related to the firm’s likelihood of developing “exploitative” or incremental innovations.

Hypothesis 2b. Greater cross-national knowledge from intrafirm resources is positively related to the firm’s likelihood of developing “explorative” or breakthrough innovations.

Methodology

Sample

The sample for this study was drawn from a population of US-based and foreign multinationals operating in the United States, who received approval from the US Food and Drug Administration’s (FDA) center for Drug Evaluation and Research (CDER) that their new products were safe and approved for marketing under US law. This research examines the transfer of US-approved patent type knowledge (see Jaffe et al., 1993) for US FDA products as a measure of cross-national knowledge. The transfer of such knowledge is a prevalent practice, across borders, for technology-intensive industries. Firms operating within the global pharmaceutical industry were selected because (1) this industry is both scientifically and technologically intensive, (2) US-based patent data in this industry are representative of global inventive activities (Patel and Pavitt, 1991), (3) this industry relies heavily on the protection of patents, and (4) this industry has a higher propensity to patent (Arundel and Kabla, 1998).

Raw data on a total of 3822 products approved for marketing, during the period of 1992–2002, were collected from CDER’s database. This approach differs from prior studies (e.g. Ahuja and Lampert, 2001; Phene et al., 2006) in that the data consist of the knowledge behind successful product introductions as opposed to just patents whether they were commercialized or not. Of the original 255 selected firms in this study, missing financial data on privately held firms reduced the sample size to 130 firms. Company data (e.g. R&D, licensing, mergers, and subsidiary activities) were collected from various business databases (e.g. Mergent, Edgar) and CHI Research, Inc. Extensive effort was required to track all the prior patents associated with a product because of the large number of mergers, acquisitions, and licensing agreements that are typical in this industry. The sample was further reduced to 70 firms due to the availability of data and our particular interest in studying knowledge transfer. We did not include firms that produced abbreviated new drug applications (ANDAs) because these drugs represent a generic equivalent. Generics do not have patent protection, and thus, we were unable to trace the knowledge-sharing activities associated with their development. US-based MNEs primarily dominated the sample. The foreign-owned MNEs, operating in the United States, were from Belgium, Bermuda, Canada, Denmark, France, Finland, Germany, Great Britain, Hungary, India, Ireland, Israel, Japan, Netherlands, and Switzerland.

Patent-based analysis

Studying the intangible commodity of knowledge has been a critical aspect in the analysis of the multinational firm (Buckley and Casson, 1976). Researchers maintain that while the value of knowledge cannot be directly measured, it is possible to measure outcomes (e.g. changes in profitability, efficiency, or rate of innovation) that follow from knowledge efforts. This research examined the transfer of patent type knowledge (see Jaffe et al., 1993) for US FDA products as a measure of knowledge flow. This study employed US patent data as a measure of technical innovations (Cantwell, 1989; Patel and Pavitt, 1991). Data on 1273 product patents for new drug approvals were obtained from CDER’s Electronic Orange Book. Detailed data on these patents and their 9988 backward citations were acquired from CHI Research, Inc.

A key feature of examining patent data is that patent citations are capable of identifying a link between the technical ideas embedded in the current patent and its prior inventions (Frost, 2001). According to Jaffe et al. (1993: 580), “in principle, a citation of Patent X by Patent Y means that X represents a piece of previously existing knowledge upon which Y builds.” This framework allows for the measurement of association between Patent X and Patent Y, with respect to technological, organizational, geographic, and temporal aspects (Frost, 2001; Jaffe et al., 1993). Based on this methodology, this study utilized a comprehensive archival patent-based measure of cross-national knowledge transfer, which improved previous measures of, for example, patent-count-based measures (Smith and Narin, 1993).

Information was collected on the source patent’s firm/parent name, application year, grant year, first inventor’s country, number of inventors, technology area, and number of times a particular patent was referenced or received forward citations. We coded references to earlier patents in a new patent application as prior arts or backward citations. This research investigated how patent knowledge transfer, derived from the geographic information contained in a patent citation (see Frost, 2001; Jaffe et al., 1993), affected new innovation. We acquired data from CHI Research, Inc., a research firm that has a patent tracking system that keeps track of important changes such as name changes and mergers (CHI Research, Inc., 2003).

Constructing measures

Measures for dependent variables

Our dependent variable, “organizational ambidexterity,” was defined as the generation, development, and implementation of innovation both explorative (breakthrough) and exploitative (incremental). The major theoretical difference between these two types of innovation is the degree of novelty or change embedded in the innovation. The product novelty of new FDA products was measured by categorizing “new to the market” products as Break_Innov and “product improvements” as Increm_Innov.

“New to the market” breakthroughs, in this study, refer to new drug approvals (NDAs) that are new chemical molecular entities or what the FDA defines as products that possess new active ingredients, which have never been marketed in the United States before. Incremental, “product improvements” were classified as NDA chemical types that have been marketed in the United States before in one form or another (e.g. a new chemical dosage form).

Measures for independent variables

Cross-national knowledge transfer

An essential aspect of our analysis was to characterize how a diverse set of knowledge flows, associated with the MNE’s ability to leverage its geographically dispersed network of knowledge resources, affects its innovative activities. This study categorized whether or not a knowledge flow pattern was (1) internal versus domestic and (2) international versus domestic.

After the patent data were collected, a modified patent-based tracking procedure was developed to more accurately represent the open innovation model of external knowledge sharing compared to an internal or closed R&D model. While the company may gain value from the launch of explorative, breakthrough products, they may not always own all of the intellectual property behind it. Many of the firm’s patents were either licensed from another company or were developed as part of a joint venture collaborative agreement. This open innovation model included a total of 406 patents or 32 percent of the total patent sample. For our cross-national knowledge variables, two levels of knowledge transfer were constructed: Level_1 (primary) and Level_2 (secondary). A score of 0 was assigned to firms that used domestic sources; a score of 1 was assigned to firms that transferred knowledge from cross-national sources.

This study then categorized the source–target nature or internal versus external cross-national knowledge flow by using the knowledge creation framework of Cantwell and Mudambi (2003). This study was concerned with five target–source cross-national knowledge flow patterns, which is typical of this type of research (Phene and Almeida, 2008). Knowledge flow pattern number 1 measured the knowledge that flows from parent to subsidiary. Knowledge flow pattern number 2 measured knowledge flows from subsidiary to parent. Knowledge flow pattern number 3 measured the knowledge that flows among a parent’s subsidiaries. Knowledge flow patterns 1, 2, and 3 were recorded as the firm’s intrafirm, cross-national knowledge (Intra_Firm).

To examine the external source–target knowledge-transfer decisions of the firm, cross-national knowledge flow decisions 4 and 5 analyzed the knowledge that was acquired from outside sources (e.g. licensing and joint ventures (JVs)). Knowledge flow pattern number 4 was concerned with the flow of knowledge to the parent firm from the external environment. Knowledge flow pattern number 5 measured the knowledge that flows to the parent firm’s subsidiary from the external environment. Due to the complexities associated with classifying knowledge flow activities, we relied on Tech-Line product of CHI Research, Inc., to assist with this categorizing effort; the company has developed a sophisticated way of properly identifying parent–subsidiary relationships.

A score of 1 was assigned to firms that transferred cross-national knowledge from internal sources (knowledge sources 1 through 3); a score of 0 was assigned to firms that transferred knowledge from external cross-national sources (knowledge sources 4 and 5). Computing final knowledge flows was completed through the aid of a sophisticated, independently developed computer program. Level_1 and Level_2 transfer patterns were added together; scores were not multiplied together since a score of 0 in either category (Level_1 or Level_2) would have resulted in a total net score of 0.

To analyze our hypotheses, we calculated the size of cross-national knowledge flows related to two primary ratios. For Hypotheses 1a and 1b (H1a and H1b), the size of cross-national knowledge (quantity) was measured by examining the ratio of cross-national prior art/backward citations (knowledge flows 1 through 5) to the total prior art/backward citations (international plus domestic) for the firm’s source patent(s).

For Hypotheses 2a and 2b (H2a and H2b), the level of intrafirm, cross-national knowledge (Intra_Know) was measured as the ratio of the number of prior art/backward citations that were cross-national in nature and “internal” to the firm (knowledge flows 1 through 3) divided by the total number of cross-national sources (knowledge flows 1 through 5). All source patents were traced back to their original “New Drug Approval (NDA)-to-Source Patent Correspondence.”

Measures for control variables

We included the following key firm-level control variables, which are common in this type of research (e.g. Phene and Almeida, 2008).

R&D

The firm’s investment in R&D resources (RD) was measured as the firm’s average R&D spending dollars over the period 1993–2002.

Resource Productivity Index

To measure the firm’s commitment to its nonfinancial resources, this study measured each firm’s resource productivity index (RPI). This study’s RPI is a metric that represents the firm’s patent development efficiency. The firm’s RPI, in this study, is measured as the total number of firm patents divided by the total number of resources (i.e. inventors) dedicated to the development of these patents. While in most industries it is desirable to improve staff productivity or have higher RPIs, this study argues that substantial gains in productivity are generally achieved through layoffs and cutbacks. In such cases, it may be too time-consuming for employees to develop more explorative types of innovations. According to Erhardt (2011), more exploitative types of knowledge creation require less interaction among team members, as they tend to have well-defined roles within the organization and are focused more on standard solutions requiring minor refinements.

Firm size (size)

The firm’s overall size was operationalized as the firm’s average sales for the 10-year period total, 1993–2002.

NSI

Saka-Helmhout (2010) found that national institutional characteristics affected the MNE’s ability to source-in and assimilate intrafirm knowledge. Raisch and Birkinshaw (2008) note that future researchers should consider the impact of how such cultural and institutional characteristics affect organizational ambidexterity. Thus, this study includes, as a control, the firm’s NSI or national location in which the firm was headquartered. Firms were coded into national territories based on internationally recognized two-digit codes. From this coding scheme, this study examined four specific NSI locations: US, Japan (JP), Europe (EU), and other (OT).

Data analysis and hypothesis testing

Based on the histogram and normal probability plot analysis, there was limited variation for one of the main constructs of interest: breakthrough innovations. The normal probability plot for breakthroughs was improved after the data were aggregated.

A double-log regression method was used to test the hypotheses. The advantage of using this model over more traditional linear models was that we could make predictions about the elasticity of the effect of independent variables on the dependent variable(s). Double-log models yield regression parameters that can be interpreted as elasticities or the percentage change in the dependent variable as a result of the percentage change in the independent variables (Wang and Jain, 2003). To utilize this method, this study had to control for the fact that some of the data were left lefted. For variables taking values of 0 or small negative values as a natural outcome, natural logarithms were taken after adding a score of 1 to these observations.

It was important that this study’s models fit the data well. To identify any multicollinearity concerns, variance inflation factor (VIF) analysis was conducted. Typically, VIF values greater than 10 are of concern. The VIF values for our variables were below 8.0. Thus, multicollinearity was not a cause of concern for this study.

Results

Determinants of organizational ambidexterity

Table 1 shows the means, standard deviations, and correlations for both the regression models Increm_Innov and Break_Innov. Table 2 shows the double-log regression results for testing H1a, H1b, H2a, and H2b. Overall model performance (i.e. adjusted R²) was significant for both regression models. The adjusted R² value for the model having Break_Innov as the dependent variable of interest was 0.569; the adjusted R² value for the Increm_Innov model was 0.608.

Table 1.

Correlation matrix and descriptive statistics.

Variables		N	Mean	SD	1	2	3	4	5	6	7	8	9	10	11
1	Break_Innov	76	2.90	4.50	1
2	Increm_Innov	76	29.00	46.10	.70**
3	RD	73	5132561	11626695	.57**	.47**	1
4	RPI	74	0.38	0.20	−.09	.00	−.09	1
5	Quantity	76	0.45	0.35	.19	.02	−.00	−.19	1
6	Intra_Firm	76	0.06	0.11	.45**	.23*	.40**	.01	.22	1
7	Size	76	4863440	7606992	.75**	.59**	.70**	−.07	.21	.42**	1
8	US	76	0.61	0.49	−.17	−.03	.00	.17	−.71**	−.09	−.20	1
9	JP	76	0.08	0.27	−.15	−.16	−.08	−.06	.03	−.16	−.11	−.36**	1
10	EU	76	0.28	0.45	.28*	.07	.09	−.21	.74**	.13	.28*	−.77**	−.07	1
11	OT	76	0.05	0.23	−.05	.09	−.10	.07	.20	.11	−.02	−.29*	−.07	−.15	1

Break_Innov: new to the market products; Increm_Innov: product improvements; RD: R&D resources; RPI: resource productivity index; Intra_Firm: intrafirm, cross-national knowledge; US: United States; JP: Japan; EU: Europe; OT: other.

Correlation is significant at the 0.01 level (two-tailed); *correlation is significant at the 0.05 level (two-tailed).

Table 2.

Determinants of organizational ambidexterity.

Variables	Model 1 N = 70
	Dependent variable Break_Innov		Dependent variable Increm_Innov
Independent variables	β	Significance	β	Significance
Intercept	−2.456	0.00***	−3.459	0.00***
RD (Log)	0.225	0.02**	−0.093	0.56
RPI (Log)	−0.281	0.05*	−0.106	0.66
Quantity (Log)	−0.514	0.31	−1.011	0.24
Intra_Firm (Log)	1.969	0.02**	0.001	0.99
Size (Log)	0.039	0.56	0.548	0.00***
NSI: JP	−0.556	0.04**	−1.651	0.00***
NSI: EU	0.298	0.26	−0.188	0.68
NSI: OT	0.347	0.32	0.487	0.42
Overall F-statistic	12.531		14.567
Significance	0.000***		0.000***
Adjusted R²	0.569		0.608

Break_Innov: new to the market products; Increm_Innov: product improvements; RD: R&D resources; RPI: resource productivity index; Intra_Firm: intrafirm, cross-national knowledge; NSI: national systems of innovation; JP: Japan; EU: Europe; OT: other.

Unstandardized regression coefficients are shown.

Private companies and companies without patents were excluded from analysis.

p < 0.10; **p < 0.05; ***p < 0.01.

For H1a, the results were nonsupportive and nonsignificant for the relationship between “quantity” of cross-national knowledge and Increm_Innov (β = −1.011; p = 0.24). For H1b, the results were in the negative direction as predicted but were not significant (β = −0.514; p = 0.31). For H2a, the results were nonsignificant (β = 0.001; p = 0.99). For H2b, the results were consistent and supported the hypothesis. The relationship between Intra_Firm and breakthroughs was in the positive direction of what this hypothesis predicted (β = 1.969; p = 0.02). Based on the double-log equation, we can expect that when intrafirm, cross-national knowledge increases by 1 percent, the quantity of breakthroughs increases by 1.97 percent. This value (greater than 1) illustrates that the relationship is elastic.

For the following control variables in our model, we found that the relationship between R&D spending and incremental innovations had a negative β-coefficient; the results were nonsignificant (β = −0.093; p = 0.56). The relationship between R&D spending and breakthrough innovations had a significant, positive β-coefficient for Break_Innov (β = 0.225; p = 0.02). The estimated coefficient for R&D spending yields useful information about the elasticity of breakthrough innovativeness with respect to R&D spending. This regression equation shows that a 1 percent increase in R&D spending is associated with a 0.22 percent increase in breakthroughs.

The results were nonsupportive and nonsignificant for the relationship between RPI and Increm_Innov (β = −0.106; p = 0.66). The coefficient for RPI was negative and significant for Break_Innov (β = −0.281; p = 0.05). The regression equation shows that a 1 percent decrease in the firm’s RPI level (i.e. having low RPI is desirable allowing for greater levels of team collaboration) is expected to result in a 0.28 percent increase in breakthrough innovations. Firm size was significant and positive for the Increm_Innov model only (Break_Innov: β = 0.039, p = 0.56; Increm_Innov: β = 0.548, p = 0.00). US, JP, EU and OT regions were considered. The variable “JP” was significant in both regression models, with a negative β-coefficient (Break_Innov: β = −0.556, p = 0.04; Increm_Innov: β = −1.651, p = 0.00), which suggests that innovation in terms of both breakthrough and incremental was significantly lower for Japanese firms than US firms.

Discussion

The purpose of our study has been to examine how cross-national knowledge affects organizational ambidexterity for firms in the global pharmaceutical industry. We argued that for exploitative types of innovations (incremental), unlike explorative types of innovations (breakthrough), we would expect to see extended product life cycles for innovations of this kind through higher “quantities” of enhanced access to cross-national knowledge. Contrary to our prediction, our variable for cross-national knowledge “quantity” was not statistically significant for incremental innovations. This finding highlights the potential limits of cross-national knowledge sharing. We found that firms are producing local, incremental innovations from their localized R&D centers. From a purely intuitive standpoint, there is a logical basis to this finding. Firms—both those inside and outside the pharmaceutical industry—produce local market innovations to sustain and grow existing product market share. Moreover, given the propensity of pharmaceutical firms to move from “drug discovery” to “drug development by design” over the last 30 years, this naturally lends itself to more targeted and incremental products (Hamdouch and He, 2009).

Another implication of this research is that it illustrates the impact of selective global R&D, where high-level, new-to-the-world technologies are kept close to an MNE’s native country headquarters. This is driven by a number of factors, an important one being preclinical discovery capabilities and intellectual property (Hamdouch and He, 2009). Many pharmaceutical firms leverage R&D centers in India and China for research that is fundamental to science (Pisano, 2006) but innately related to incremental product improvements, while keeping sensitive technology and core discovery capabilities “close to home.”

Firms need to seek to be firmly grounded at the market level, while leveraging cross-national resources for explorative types of innovations (breakthrough)—embracing ambidexterity at both the local and global levels. Over time, firms can progress from localized R&D organizations producing incremental products to a more globally or cross-nationally focused MNE producing breakthrough innovations. One needs to look no further than to Apple as a firm that has transformed into a global ambidextrous firm, leveraging internal R&D, vendors, and partners to produce a string of breakthrough innovations over the last decade, while maintaining and improving existing product lines (Marion et al., 2011). Large pharmaceutical firms have moved in a similar fashion, purchasing innovations and small new ventures to bolster R&D innovativeness and networking with global partners and vendors to increase the potential of drug pipelines. This has a large impact on the propensity to commercialize breakthrough innovations. In fact, the 12 percent of firms that leverage intrafirm cross-national knowledge are more likely to introduce breakthrough products.

Another question that guided this research was whether or not discernible patterns of cross-national knowledge accounted for innovation differences among firms. We found that the benefits of cross-national knowledge sharing are beneficial for both small and large firms. They are most effective when there is strategic reliance on the firm’s internal network. A firm’s network of subsidiaries represents an important part of the organization’s overall structure. Each subsidiary has its own “voice” (Bouquet and Birkinshaw, 2008), autonomy, interunit power (Ambos and Birkinshaw, 2010), and other types of unique work flow objectives, individual characteristics, and networking relationships. In some cases, knowledge-sharing activities in MNEs can be stunted if subsidiaries lose their “voice” and are not considered to be in the “in crowd” and/or are perceived as underperformers and thus are left out in the process (Bouquet and Birkinshaw, 2008; Monteiro et al., 2008).

Through the use of ever-advancing electronic technologies, however, traditional geographic proximity concerns have decreased over the years and may reduce these concerns with the number of virtual teams increasing (Kauppila et al., 2011). Thus, it has become easier for firms to establish and increase their frequency of knowledge sharing across borders, aiding in their transition to become a global, ambidextrous innovator. Developing strong ties between the parent firm and its network of subsidiaries can create greater opportunities to share knowledge (Ambos and Birkinshaw, 2010; Bouquet and Birkinshaw, 2008). In offshore regions, there is also the benefit of knowledge clusters (Hamdouch and He, 2009; Phene and Almeida, 2008).

There are two logics with respect to the benefits created by cross-national knowledge sharing: centralization versus decentralization. This study supports the more recent decentralized trend (e.g. Asakawa, 2001; Dunlap-Hinkler et al., 2010; Frost et al., 2002; Phene and Almeida, 2008). Given the realities of globalization, firms have turned to information technology (IT) and changes in corporate structure to enhance communication (Eppinger and Chitkara, 2006; Marion et al., 2007). This allows firms to have local R&D centers that iterate on incremental and basic research, while contributing to breakthrough science where needed—transferring this knowledge back to the corporate MNE. Key to the success of this process is to allow local R&D centers the autonomy to produce incremental innovation and basic science, while promoting a culture of intense knowledge sharing between divisions, centers, and employees, or what Pisano (2006) called a greater push for vertical integration within the pharmaceutical industry. This process enhances knowledge development, collection, dissemination, and learning among all members of the R&D value chain, and enhances the potential for repeated breakthrough discovery, commercialization, and long-term market success. Integral to the success of this structure is the ease that knowledge, both tacit and explicit, can flow throughout the organization. This can be fostered by embedding the use of IT tools into the R&D process. The impact of the use and benefits of embedding IT within the organization to promote R&D has been shown in multiple studies (Barczak et al., 2007; Thomke, 2006). Our results indicate, however, that quality and not quantity of that knowledge flow is critical to the global organization structure and the knowledge processes that drive innovation.

This research extends traditional findings that have looked at the arguments both for and against the decentralization of MNE subsidiaries. We found that more and more companies are relying on cross-national collaborative brainstorming using internal resources to identify emergent technologies, which lead to market leadership. It has been difficult to differentiate between internal and external cross-national knowledge sharing due to the extensive amount of mergers, acquisitions, and JVs that have been occurring in the global pharmaceutical industry over the past several years. Filling this gap, this study complements previous research in that it was able to study the origin of knowledge and how it affected innovation.

What has not yet been extensively studied in the literature is how MNE “centers of excellence” can create competitive advantage opportunities for the firm (Dunlap-Hinkler et al., 2010; Frost, 2001; Frost et al., 2002; Phene and Almeida, 2008). The results of this study shed new light on the on-going debate over whether or not MNE subsidiaries should be more decentralized or centralized. By establishing a positive link between intrafirm, cross-national knowledge and breakthrough innovations, our results have practical implications for the study of subsidiary partner selection. At the industry level, the importance of developing enhanced subsidiary capabilities has been slow to grow. One implication of our findings is that it provides further empirical support with regard to the payback from creating and maintaining these kinds of intrafirm relationships (e.g. Bouquet and Birkinshaw, 2008; Phene and Almeida, 2008). Above all, communication is key among these distributed resources. Going beyond centers of excellence, global MNEs can foster knowledge sharing by implementing the following: internal global conferences, an IT infrastructure that allows technical R&D members to have visibility of projects globally, and a vibrant “white paper” community that embraces Allen’s recommendations for increasing knowledge sharing within the functional organization (Allen, 1986).

This study has shown that cross-national knowledge sharing has its share of positive and negative consequences. Specifically, creating bigger and better innovations is not simply a function of increasing the firm’s “quantity” of cross-national knowledge activities. Rather, it may be the encouraging of the firm’s employees to share knowledge more freely within their own internal network of subsidiaries as one way that managers can create awareness about breakthrough innovative benefits. Organizations may benefit from the establishment of more formal programs that focus on helping employees to not only establish but also maintain “internal” relationships that span cross-national boundaries.

Researchers have traditionally viewed larger firms as having reduced innovative capabilities when compared to smaller firms. Simply because of inertia and complexity, size gives rise to a propensity to be less innovative. Meyer et al. (2011) note that such institutional inertia has the potential to hinder restructuring changes that may be needed to enable MNEs to take full advantage of their (global network) opportunities for value creation. Empirical research gives credence to differences in innovation between small and large firms, as the US Small Business Administration finds that small firms (those with fewer than 100 employees) were 13 times more innovative than large firms in generating new intellectual property.¹

However, in our study, we found R&D intensity to be positively related to breakthroughs, compared to incremental innovations, regardless of firm size. This is an important finding of the research. We posit that this is related to the challenges specifically related to the global pharmaceutical industry. Drug discovery and commercialization is a challenging and costly endeavor. The cost of R&D alone to pass FDA approval requires massive amounts of capital (more than US$1 billion), which is beyond the scope of most small firms. Historically, new, small firms would undertake an initial public offering (IPO) to raise capital to aid in validation and commercialization (Pisano, 2006). However, the paradigm has shifted over the last 10 years for new biotechnology firms to be acquired early in the drug validation stage by large MNEs (Sato and Gordon, 2008). These ambidextrous MNEs integrate globally, innovative small firms into their R&D umbrella and promote cumulative learning, which Pisano (2006) is noted as a critical characteristic in fostering sustainable, long-term success in the biotech industry.

Conclusions, limitations and implications

In this study, we examined how cross-national knowledge affects organizational ambidexterity. This research explored the phenomenon with specific attention to explorative types of innovations (breakthroughs). From a managerial and theoretical perspective, this research has shown that developing innovation is indeed a complex process for global firms. The results demonstrate that there are requirement differences for developing exploitative (incremental) versus explorative (breakthrough) innovations. For managers interested in fostering greater incremental innovativeness, our results indicate that transnational knowledge transfer was not helpful. While there tends to be a great deal of uncertainty surrounding the breakthrough innovation process, our results show that leading organizations, regardless of their size, were able to improve their breakthrough performance through greater intrafirm, cross-national knowledge sharing.

By integrating traditional innovation concepts developed in the literature with recent research on knowledge transfer, this study found that acquiring foreign knowledge from internal resources is a critical asset when it comes to developing breakthroughs. Knowledge-intensive firms like Hewlett–Packard (HP) have recognized the value of this type of learning. For instance, former HP Chief Executive Officer (CEO) Lew Platt has been quoted frequently in the news as saying “if HP knew what HP knows, we would be three times as profitable.” In other words, the knowledge residing in the firm was of tremendous benefit if it could be shared. We strengthen this observation with our results in that we find that the cross-national knowledge residing in the firm was of greater benefit than the knowledge outside the firm for breakthrough innovations.

There exists considerable research about the importance of industry-related pressures and how deviation from the norm may dramatically affect the firm’s performance. A concern of this study is that it focused primarily on single-industry data. The path to developing new products within the global pharmaceutical industry is a very long and expensive process due in part to strict governmental regulations. This industry values the development of more explorative types of innovations (breakthroughs). However, while the situation in the pharmaceutical industry is specific, it provides a good database on innovation study due to the patent and approval process. The relevance for other industries will be subject to further research. Finally, our current research provides the basis for rich, case-based, and qualitative research to study product development stories in depth.

Measures in our study were aggregated because of concerns regarding missing values in the data. Future longitudinal research may be better able to resolve these concerns. Moreover, we collected data from large-to-medium-sized organizations. While in most cases, this design choice would be seen as a limitation, we argue that this focus was necessary because research on large firm innovation is sparse and research on breakthrough innovation is mostly studied in small firms.

This study is based on secondary data analysis from legally constituted organizations. Similar to all research of this kind, we were unable to measure the firm’s attitudes, opinions, and perceptions about the effectiveness/ineffectiveness of its cross-national knowledge-sourcing strategies. Moreover, this study was restricted to a 10-year time horizon. During this period, it could be possible that since globalization pressures were strong, firms felt a greater need to integrate their cross-knowledge-sharing efforts. This limitation suggests that a firm’s cross-national sharing may vary depending on these pressures. Since globalization pressures are likely to become stronger rather than weaker, researchers should continue to gain a clearer picture of the firm’s cross-national sourcing options.

In conclusion, our findings suggest that exploratory research is relatively easy to transfer across divisions globally but exploitative innovation is more rooted in local conditions. Even in a homogeneous industry, such as pharmaceuticals, where there is a clear global need for common innovation, we found a strong exploitative research still persists and is not transferred to other areas. In more heterogeneous markets and industries, we would expect this occurrence to be more pronounced. For practical managerial purposes, our research suggests that MNEs foster global communication and knowledge transfer of exploratory research but allow local markets to develop their own knowledge for incremental, exploitative products.

Footnotes

Funding

This research received no specific grant from any funding agency in the public, commercial or not-for-profit sectors.

Notes

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