Strategic Management Journal

Strat. Mgmt. J., 34: 610621 (2013) Published online EarlyView in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2031 Received 21 August 2009 ; Final revision received 31 October 2012

RESEARCH NOTES AND COMMENTARIES BALANCING YOUR TECHNOLOGY-SOURCING PORTFOLIO: HOW SOURCING MODE DIVERSITY ENHANCES INNOVATIVE PERFORMANCE
VARESKA VAN DE VRANDE*
Rotterdam School of Management, Erasmus University, Rotterdam, the Netherlands

With external innovation becoming more and more important, many rms struggle with the question of how to balance their technology-sourcing portfolio. This study addresses this issue by looking at the effects of portfolio diversity on performance outcomes and the conditions under which diversity is most likely to materialize. Using a dataset of strategic investments by pharmaceutical rms, the results show that the variance in relative technological proximity between the focal rm and its partners exhibits an inverted U-shaped relationship with innovative performance and that this relationship is affected by the diversity of the external sourcing modes used in the portfolio. Copyright 2012 John Wiley & Sons, Ltd.

INTRODUCTION
Over the past few years, external sourcing of knowledge and technology has increasingly received attention in the literature. Prior studies have indicated the positive effects of several external sourcing strategies, such as corporate venture capital (CVC) investments (Dushnitsky and Lenox, 2005; Wadhwa and Kotha, 2006), strategic alliances (e.g., Baum, Calabrese, and Silverman, 2000; Lavie, 2007; Stuart, 2000) and mergers and acquisitions (M&As) (Ahuja and Katila, 2001). Nowadays, the sourcing of external knowledge has become a central part of a rms overall strategy. In order to access external knowledge, rms have multiple options in terms of whom to source from (e.g., suppliers, customers, competitors, and universities) and how to organize it (CVC investments, strategic alliances, joint ventures, M&As, etc.). Together, these relationships constitute the technology-sourcing portfolio.
Keywords: external technology sourcing; diversity; sourcing portfolios; technological proximity; innovation
*Correspondence to: Vareska van de Vrande, Rotterdam School of Management, Erasmus University, Rotterdam, the Netherlands. E-mail: vvrande@rsm.nl

Technology-sourcing portfolios thus consist of different types of partnerships with various kinds of partners. From an innovation perspective, an important aspect on which external partners vary is in terms of the underlying technologies and the extent to which these technologies overlap with the competences of the focal rm (Mowery, Oxley, and Silverman, 1998; Oxley and Sampson, 2004; Sampson, 2007). However, in order to access these external technologies, rms have a broad range of strategies that they can employ. To date, research on external knowledge sourcing portfolios has primarily focused on portfolios of strategic alliances (e.g. Hoffmann, 2007; Jiang, Tao, and Santoro, 2010; Lavie, 2007; Lavie and Miller, 2008). In particular, prior studies have indicated the benets of alliance experience (Hoang and Rothaermel, 2010), similarity and complementarity between the partners (Rothaermel and Boeker, 2008), the importance of international partners (Lavie and Miller, 2008), and the role of organizational and functional diversity of alliance partners (Jiang et al ., 2010). Another stream of research has pointed out the benets of being involved in different types of partnerships (Nicholls-Nixon and Woo, 2003; Powell, Koput, and Smith-Doerr,

Copyright 2012 John Wiley & Sons, Ltd.

Research Notes and Commentaries

1996) or with different kinds of partners (Baum et al ., 2000; Rothaermel and Deeds, 2006). However, although prior research has suggested that different governance modes are more likely to be used under particular circumstances or to target particular types of knowledge (e.g. Keil et al ., 2008; Van de Vrande, Vanhaverbeke, and Duysters, 2009), the literature on alliance portfolios has not yet included a broader set of interorganizational strategies that can be used to access external knowledge. As a consequence, the results of these studies may be incomplete, as most large companies currently do not limit themselves to strategic alliances. Rather, they employ a whole range of different governance modes to source external knowledge and technologies. Moreover, despite the importance of technological diversity in external sourcing portfolios, the interaction between technological diversity and sourcing mode diversity has not yet been taken into account. This paper addresses this research gap by focusing on the interaction between the variance of relative technological proximity (distance) in the portfolio and sourcing mode diversity and linking them together to innovative performance. In particular, I argue that in order to increase the effectiveness and efciency of external knowledge sourcing, rms need to employ a broader array of governance modes. With external technology sourcing becoming more important, the composition of the sourcing portfolio becomes a vital aspect of a rms competitive strategy and likely to determine its future competitive advantage. The contributions of this paper to the literature are twofold. First, by including a broad range of different governance modes and linking them together to innovative performance, this paper contributes to the growing stream of literature investigating the innovation performance effects of strategic alliances, M&As, and CVC investments (e.g., Dushnitsky and Lenox, 2005; Keil, Maula, and Schildt, 2008; Schildt, Maula, and Keil, 2005; Rothaermel and Hess, 2007). Second, by examining the particular role of portfolio diversity in terms of different types of partnerships, this paper contributes to the literature stream on alliance portfolios (e.g. Jiang et al ., 2010; Lavie, 2007; Lavie and Miller, 2008; Sampson, 2007). In particular, this paper demonstrates that rms can benet from portfolios with varying relative technological distances by using a diverse set of
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external sourcing mechanisms that more closely resemble the sourcing portfolios of rms today.

THEORY AND HYPOTHESES

Technological proximity Different external technology sourcing strategies all serve the same purpose, that is, getting access to technologies that are embedded in other rms. Nevertheless, they greatly differ in their characteristics and their applicability in the new business development process. For example, technologysourcing portfolios can be characterized in terms of the variety of the technologies that are being targeted (Oxley, 1997), the familiarity and newness of the underlying knowledge (e.g., Sampson, 2007), and the way in which the interorganizational agreements are organized (Keil et al ., 2008). From an innovation point of view, one way to dene technology-sourcing portfolios is in terms of the technological competences of the partners and the extent to which these competences are in line with those of the focal rm (e.g., Cantwell and Colombo, 2000; Rothaermel and Boeker, 2008). When a portfolio consists of partnerships with partners that all have competences very similar to the focal rm, the variance in relative technological proximity is much lower than when the technological competences of the partners vary in their degree of overlap with those of the focal rm. Prior research has argued that technological diversity increases the possibilities to recombine existing knowledge into new innovations (Fleming, 2001). Moreover, investing in a broader range of technologies avoids the danger of being locked into a particular technological trajectory. Hence, the variance in relative technological proximity will likely enhance the rms innovative performance. However, there are limits to these positive effects. First, greater variance of the knowledge being integrated increases the level of complexity, and thus the difculty and costs of monitoring these activities (Oxley, 1997), while decreasing the efciency with which the knowledge can be integrated (Grant, 1996). In addition, a high level of diversity makes it more difcult for inventors to consider the different components and their potential relationships simultaneously, resulting in a decrease of the marginal benets of investing in diversity (Fleming and Sorenson, 2001). As a consequence, I hypothesize that the variance
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involve the buying of shares of another company and, therefore, are usually targeted at rms that are publicly traded. Besides, prior studies have shown that minority holdings are often used in conjunction with strategic alliances as a way to facilitate coordination and control over the alliance (Zollo, Reuer, and Singh, 2002). Hence, both CVC investments and minority holdings can be used to scan the environment and gain some control over a partner rm. They are relatively exible forms of cooperation, primarily because of the small level of nancial commitment. Joint ventures, on the other hand, involve the creation of a new organizational entity and are usually made through an equally divided investment of equity among the partners (Sampson, 2004). Because joint ventures involve setting up a new entity, this type of investment is less reversible and involves a higher level of commitment (Leonard-Barton, 1995). Finally, M&As involve the highest level of commitment. They require substantial nancial resources to make the investment and are highly irreversible. Moreover, a high level of commitment is needed to successfully internalize the target rm (Steensma and Corley, 2001). Sourcing mode diversity As described above, CVC investments, strategic alliances, joint ventures, minority holdings, and M&As differ substantially in their application, exibility, and levels of commitment. This leads to the suggestion that in order to benet from a diverse technology-sourcing portfolio, it is important for rms to balance the sourcing modes used in their portfolio and not overcommit to a single type of investment. Prior studies (Keil et al ., 2008; Nicholls-Nixon and Woo, 2003; Schildt et al ., 2005; Van de Vrande et al ., 2009) have indicated that different types of knowledge require different types of investments. Most of the arguments focus on familiarity and relatedness with the partner rm with reasoning grounded in exibility or learning theories. On the one hand, when external knowledge sourcing entails a lot of uncertainty due to unfamiliar markets or technologies, rms may be more inclined to use a exible governance mechanism to gain access to these technologies. For example, depending on the level of market and technological familiarity, educational investments and venture capital are preferred over acquisitions and joint ventures (Roberts and Berry, 1985).
Strat. Mgmt. J., 34: 610621 (2013) DOI: 10.1002/smj

in relative technological proximity positively affects a rms innovative performance. However, beyond a certain point, this relationship will be subject to diminishing or even negative returns. I therefore propose: Hypothesis 1: The variance in relative technological proximity between the focal rm and its partners is curvilinearly (inverted U-shaped) related to innovation performance. Governance modes for external technology sourcing In order to effectively transfer and absorb the knowledge acquired externally, rms have a broad range of governance modes at their disposal. External technology sourcing modes that are commonly used from a new business development perspective include strategic alliances, M&As, joint ventures, minority holdings, and CVC investments (Keil et al ., 2008; Schildt et al ., 2005). These sourcing modes differ in a number of ways. First of all, a difference can be made between equity and nonequity investments. Second, a distinction can be made based on the level within the rm at which the agreement is made. A third distinction concerns the time horizon and exibility of the investment. Because these characteristics determine the sourcing mode diversity of the portfolio, the differences between the various sourcing modes will be discussed rst. Strategic (non-equity) alliances are a exible cooperation mechanism allowing rms to cooperate with other rms without making an equity investment (Vanhaverbeke et al ., 2002). Strategic alliances can be entered at different levels within the rm, either at a corporate or business unit level. They allow for short-term commitments that are project- or technology-specic. CVC investments, minority holdings, joint ventures, and M&As, on the other hand, all involve different levels of equity participation. CVC investments and minority holdings are both minority equity investments in other rms. CVC investments are particularly oriented toward young, start-up rms that are often privately held (Dushnitsky and Lenox, 2005). They are usually made through a dedicated business unit or corporate venturing department that is primarily involved in scanning interesting opportunities and investing in them. While minority holdings can also be used as a window on new technology, they
Copyright 2012 John Wiley & Sons, Ltd.

Research Notes and Commentaries

Moreover, for projects that are explorative or on a larger technological distance, CVC investments appear to be most attractive followed by nonequity alliances, joint ventures, and M&As respectively (Schildt et al ., 2005; Van de Vrande et al ., 2009). However, strategic technology alliances are known to be particularly benecial in early stage technological development (Vanhaverbeke et al ., 2002) or under conditions of environmental turbulence (Van de Vrande et al ., 2009). Due to their exible and cooperative nature, strategic alliances are an attractive way to share the costs and risks involved in the new business development process while maintaining a high level of exibility. Finally, although prior studies have pointed toward the use of educational acquisitions (e.g., Roberts and Berry, 1985) as a rst investment in new technology, M&As are preferred when the uncertainty surrounding the investment opportunity is low and a higher level of commitment can be justied (Folta and Miller, 2002). On the other hand, scholars have argued that more integrated governance modes enhance the effective transfer of distant knowledge. For instance, Mowery, Oxley, and Silverman (1996) found that alliances near the hierarchy end of the market-hierarchy continuum are more effective for transferring complex capabilities. Alternatively, Villalonga and McGahan (2005) indicate that the partner rms technological resources have a positive effect on the choice of acquisitions over alliances. It can thus be concluded that rms use different governance modes depending on the familiarity with (or proximity to) the technological capabilities of the partner rm. Hence, the more diverse the technological proximity between the investing rm and its partners, the higher the sourcing mode diversity that is needed to maximize the efciency and effectiveness of the knowledge transfer. Thus, a higher level of sourcing mode diversity in the portfolio is likely to enhance the positive relationship between the variance in relative technological proximity and innovation. Moreover, even when the diversity becomes too complex to manage and the positive innovation effects are decreasing; rms with higher sourcing mode diversity are expected to be better able to effectively transfer the knowledge. Therefore, I hypothesize: Hypothesis 2: The sourcing mode diversity of the sourcing portfolio moderates the inverted
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U-shaped relationship between the variance in relative technological proximity and innovation performance in such a way that rms with a higher level of sourcing mode diversity will benet more from intermediate levels of variance in relative technological proximity than rms with lower levels of sourcing mode diversity.

METHODS
Data and sample A sample of pharmaceutical rms (observation years: 19901997) is used to test the hypotheses. The sample was selected using Flemings Directory of Pharmaceutical Products Worldwide , which lists the largest pharmaceutical rms based on pharmaceutical revenues in 1989. The largest rms in the industry were selected to ensure the availability of the necessary data. Large rms are more likely to engage in external sourcing activities and to report them publicly (Keil et al ., 2008). Prior research on alliances and acquisitions has for that reason also focused on the largest companies in the industry (e.g., Keil et al ., 2008). Next, the sample was checked for parents and afliates using Dun & Bradstreets Who Owns Whom , which were then aggregated on parent company level. In addition, because some of these rms merged during the observation period, new rms were introduced after the merger event. After checking for duplicates, 78 independent companies were included in the sample. For these rms, all CVC investments, strategic technology alliances, minority holdings, joint ventures, and M&As were collected over the period 19851997, allowing the calculation of some of the independent variables using a veyear time lag. CVC data was derived from Thomson VentureXpert, data concerning alliances and joint ventures was obtained from the MERIT-CATI databank on Cooperative Agreements and Technology Indicators, and Thomson ONE Banker was used to collect information regarding the companies M&A activity. In addition, patent information was collected using data from the U.S. Patent and Trademark Ofce (USPTO). Because the USPTO grants patents on both subsidiary and parent company level, and the organizational level on which patents are applied for differs between companies, the
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following 1990): the formula
nt

patents were consolidated on parent company level for each observation year, using Who Owns Whom by Dun & Bradstreet. Finally, nancial data such as sales and research and development (R&D) expenditures was drawn from Worldscope. Because nancial information was not available for all rms, some observations were dropped during the empirical analysis. The focus of this study is on the different aspects of diversity of sourcing portfolios and their impact on innovation performance in the pharmaceutical and biotechnology industry. Therefore, attention is centered on the creation of new patents that belong to any of the following USPTO patent classes: 424, 435, 436, 514, 530, 536, 800, and 9301 (Rothaermel and Hess, 2007). In spite of this focus, I have also restricted the sample to agreements with partners that have at least one patent in the pharmaceutical or biotech industry. Variables Dependent variable The dependent variable of this study, innovative performance , measures the innovation output of the focal rms using weighted patent counts. Although other measures for innovative performance exist, such as Investigational New Drug Applications (IND), New Drug Applications (NDA), or company sales, it should be noted that in the pharmaceutical industry patenting is crucial to obtaining competitive advantage and patents are closely related to protability and market value (Henderson and Cockburn, 1994). In order to capture the value of innovation, weighted patent counts are used rather than raw patent applications (Trajtenberg, 1990). Weighted patent counts (WPC) is a count variable, where each patent i is weighed according to the subsequent citations Ci it receives, assuming that more important patents receive more citations and vice versa. Weighted patent counts for n patents applied for in year t can be calculated
1

below (1 + Ci )

(Trajtenberg,

WPCt =
i =1

Patent citations were collected until 2003 and in order to avoid right-censoring problems, 1997 was taken as the last observation year. Because the time horizon is limited and it is therefore not possible to observe all possible patent citations for each patent, the simulated cumulative distribution lags by Hall, Jaffe, and Trajtenberg (2005) are used to estimate the total number of citations each patent is likely to receive. Independent variables The rst hypothesis predicts a relationship between the variance in relative technological proximity of the focal rm and its partners and innovative performance. The variance in relative technological proximity is calculated as follows. First, for each dyad, I calculate the technological proximity of the partner rms, using the method developed by Jaffe (1986). Following this method, the technological proximity between two rms (i and j ) is computed as the uncentered correlation between their respective vectors of technological capital (measured as the number of patent applications in technology class k ), Pik and Pjk , respectively: Tij = k Pik Pjk k Pik 2 k Pjk 2

Description of the patent classes is as follows: 424: drug, bio-affecting and body treating compositions; 435: chemistry: molecular biology and microbiology; 436: chemistry: analytical and immunological testing; 514: drug, bio-affecting and body treating compositions; 530: chemistry: natural resins or derivatives; peptides or proteins; lignins or reaction products thereof; 536: organic compounds; 800: multicellular living organisms and unmodied parts thereof and related processes; 930: peptide or protein sequence.

The technological proximity (Tij ) measure takes a value between 0 and 1 according to their common technological interests. The variance in relative technological proximity is then calculated as the variance of technological proximity for each rm per year, so that higher values indicate a higher level of variance. Consistent with prior research (e.g., Stuart and Podolny, 1996; Henderson and Cockburn, 1996), a ve-year moving window is used to calculate this variable. The second hypothesis focuses on the moderating effect of sourcing mode diversity . To calculate the sourcing mode diversity of the portfolio, the Herndahl index is used. For each rm-year observation, sourcing mode diversity is calculated as 2 1-H, where H is calculated as follows: H = !N i =1 si ,
Strat. Mgmt. J., 34: 610621 (2013) DOI: 10.1002/smj

Copyright 2012 John Wiley & Sons, Ltd.

Research Notes and Commentaries

where S i = share of external sourcing partnership i in the sourcing portfolio. The external sourcing partnerships under study include CVC investments, strategic alliances, joint ventures, minority holdings, and M&As. Following Katila and Ahuja (2002) and Stuart (2000), a ve-year moving window is used for this variable. Next, the interaction terms variance in relative technological proximity * sourcing mode diversity and variance in relative technological proximity2 * sourcing mode diversity are calculated. To avoid multicolinearity issues, all the variables were mean-centered prior to calculating the interaction term. Control variables First, technological capital or patent stock was added as a measure of a rms technological strength (e.g., Dushnitsky and Lenox, 2005; Katila and Ahuja, 2002; Vanhaverbeke et al ., 2002). This variable is computed as the cumulative number of patents applied for by the focal rm in the ve years prior to the observation year t . Second, to control for the rms heterogeneity of internal resources, the variable internal technological diversity was added. Internal diversity is measured using the Herndahl index of the distribution of patents over the patent classes of interest. Third, because sourcing portfolios can differ greatly in size, a control variable measuring portfolio size is added, indicating the number of technology sourcing relationships in the portfolio (t-1 to t-5). Fourth, I control for the technological diversity of the partners by including partner technological diversity as a control variable. This variable is measured using the Herndahl index of the distribution of the partners patents over the different patent classes. Another important aspect that should be taken into account is the age of the technology of the partners in the portfolio. To account for this, average technological age and age diversity were also included as control variables. Average technological age is calculated as the average age of the partners patents, whereas age diversity is calculated as the variance in external search age (Katila, 2002). Sixth, average technological proximity is included to increase the interpretability of the effect of technological diversity. Additionally, because prior studies have also indicated a strong relationship between R&D inputs and innovation, the natural logarithm of R&D expenditures (t-1
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to t-5) is included as a control variable. Finally, I controlled for size (natural logarithm of sales) and introduced yearly dummy variables to capture eventual changes in patent application levels.

METHOD
The dependent variable of this study, weighted patent counts, is a count variable. Because the data shows signicant evidence of overdispersion (i.e., the variance largely exceeds the meansee Table 1), a negative binomial regression model is used, rather than a Poisson model (Cameron and Trivedi, 1998). The negative binomial model for panel data is estimated using the XTNBREG command in STATA. To determine the choice between a random- and a xed-effects model, I employed a Hausman (1978) specication test on the baseline model. The Hausman test was strongly signicant, indicating that a xed-effects model is the appropriate model for this analysis. Because in the XTNBREG procedure, random-effects and xed-effects apply to the distribution of the dispersion parameter, and not to the xB term in the model (Stata Press, 2011: 366). I have also estimated a xed-effects Poisson model as a robustness check, which conrmed the hypothesized effects presented here.

RESULTS
Table 1, below, shows the summary and correlation statistics. Table 2 shows the results of the xed-effects negative binomial empirical analysis. Model 1 shows the baseline model, with only the control variables included. In Model 2, the linear effect of the variance in relative technological proximity on innovative performance is added and Model 3 includes both the linear and the squared term. The coefcient of the linear term in Model 2 is not signicant, while Model 3 shows a positive signicant effect for the linear term, together with a negative, signicant coefcient for the squared term, indicating a curvilinear relationship between variance in relative technological proximity and innovation. Hence, the results in Model 3 conrm Hypothesis 1. The second hypothesis outlines a positive interaction effect between the variance of relative
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11

V. Van De Vrande
technological proximity and sourcing mode diversity. In Model 4, sourcing mode diversity is added as an independent variable. The coefcient is found to be nonsignicant, indicating that there is no direct effect for the extent of sourcing mode diversity and the innovative performance of rms. Next, in Models 5 and 6, the interaction terms are also included in the model. Both interaction terms are found to be signicant, thereby indicating that sourcing mode diversity and the variance in relative technological proximity do, indeed, interact. To understand the nature of this interaction, the results are graphed in Figure 1, following the guidelines provided by Aiken and West (1991). Figure 1 shows that the innovation performance of rms increases when a portfolio with a moderate level of variance in relative technological proximity is combined with a high level of sourcing mode diversity. Furthermore, Figure 1 indicates that at higher levels of variance, rms also benet from having a portfolio with a higher level of sourcing mode diversity. These results conrm Hypothesis 2; sourcing mode diversity positively moderates the relationship between the variance in relative technological proximity and innovative performance.
0.19*** 0.17*** 0.03 .16*** 0.33*** 0.23*** 0.01

0.63*** 0.16*** .08 .31*** 0.23*** .12** 0.05 0.07 .08 0.03 0.16*** .01 0.11* 0.12**

Weighted patent counts 743.69 979.39 Size (natural log) 8.71 1.03 0.30*** R&D expenditures 7.71 0.89 0.36*** 0.88*** Technological capital 0.28 0.34 0.85*** 0.42*** 0.48*** Internal technological diversity 0.46 0.15 0.19*** 0.06 0.06 0.21*** Portfolio size 11.22 9.03 0.13** 0.50*** 0.55*** 0.28*** Partner technological diversity 0.55 0.17 0.04 0.06 0.09 0.04 Avg. technological age 7.17 1.31 0.10* 0.24*** 0.20*** 0.04 Age diversity 24.19 7.70 0.17*** 0.13** 0.07 0.08 Average technological 0.58 0.16 0.09 0.07 0.18*** 0.12* proximity 11 Variance inrelative 0.12 0.07 0.09 0.03 0.03 0.06 technological proximity 12 Sourcing mode diversity 0.53 0.26 0.03 0.16*** 0.22*** 0.00

.30***

0.00

0.17*** 0.04

0.14** 0.30***

10

0.20***

DISCUSSION AND CONCLUSIONS

This study addresses the composition of the external sourcing portfolio and the effect of different aspects of diversity on innovative performance. Using a large-scale dataset of pharmaceutical rms, the results of the empirical analyses conrm the existence of an inverted U-shaped relationship between the variance in relative technological proximity and innovative performance and that this relationship is positively affected by the sourcing mode diversity of the portfolio. Despite the considerable amount of research on alliance portfolios in recent years (e.g., Jiang et al ., 2010; Lavie, 2007; Lavie and Miller, 2008), this study contributes to the literature in two important ways. First, the results of this study indicate the benets of having a higher level of sourcing mode diversity in the technology-sourcing portfolio. In particular, the results show that rms are more likely to benet from intermediate levels of variance in relative technological proximity when they invest in a diverse set of governance modes. As suggested by the ndings of this study, a higher level
Strat. Mgmt. J., 34: 610621 (2013) DOI: 10.1002/smj

Summary and correlation statistics Table 1.

Mean

s.d.

Copyright 2012 John Wiley & Sons, Ltd.

1 2 3 4 5 6 7 8 9 10

Research Notes and Commentaries

Table 2. Fixed-effects negative binomial regression analyses Model 1 WPC 1.362 (1.031) 0.304* (0.183) 0.165 (0.209) 0.830*** (0.215) 1.139*** (0.408) 0.001 (0.007) 0.757* (0.406) 0.054 (0.053) 0.010 (0.010) 0.125 (0.195) Model 2 WPC 1.026 (1.073) 0.358* (0.189) 0.202 (0.212) 0.865*** (0.218) 1.174*** (0.412) 0.003 (0.007) 0.700* (0.408) 0.056 (0.054) 0.009 (0.010) 0.174 (0.204) 0.778 (0.601) Model 3 WPC 0.937 (1.056) 0.364* (0.186) 0.200 (0.209) 0.891*** (0.217) 1.079*** (0.406) 0.006 (0.007) 0.899** (0.413) 0.067 (0.054) 0.007 (0.010) 0.223 (0.210) 4.197*** (1.520) 12.969** (5.610) Model 4 WPC 0.925 (1.064) 0.355* (0.187) 0.196 (0.209) 0.884*** (0.219) 1.012** (0.407) 0.006 (0.007) 0.885** (0.411) 0.074 (0.055) 0.006 (0.010) 0.164 (0.220) 3.975*** (1.538) 12.259** (5.666) 0.173 (0.159) Model 5 WPC 0.907 (1.076) 0.357* (0.187) 0.194 (0.209) 0.887*** (0.220) 1.018** (0.411) 0.006 (0.007) 0.882** (0.412) 0.075 (0.056) 0.006 (0.010) 0.164 (0.219) 3.990** (1.552) 12.315** (5.741) 0.172 (0.159) 0.233 (2.108)

617

Variables Constant Size R&D expenditures Technological capital Internal technological diversity Portfolio size Partner technological diversity Average technological age Age diversity Average technological proximity Variance in relative technological proximity Variance in relative technological proximity2 Sourcing mode diversity Variance in relative technological proximity* sourcing mode diversity Variance in relative technological proximity2 * sourcing mode diversity N Log likelihood Wald Chi2

Model 6 WPC 1.011 (1.064) 0.267 (0.189) 0.104 (0.211) 0.860*** (0.220) 0.983** (0.406) 0.006 (0.007) 1.058** (0.413) 0.082 (0.056) 0.005 (0.010) 0.225 (0.219) 5.588*** (1.622) 19.103*** (5.919) 0.178 (0.158) 10.502** (4.551) 38.248*** (14.83)

273 1480.08 110.59***

273 1479.26 110.61***

273 1475.71 124.14***

273 1475.11 125.09***

273 1475.10 125.13***

273 1471.93 134.49***

a. Standard errors in parentheses. b. * signicant at 10%; ** signicant at 5%; *** signicant at 1%. c. Year dummy variables were included in the analyses but are not shown in the table.

of sourcing mode diversity increases the effectiveness with which the external knowledge can be transferred. These results extend prior studies on alliance portfolios (e.g. Sampson, 2007) by showing the performance implications of having a diversied sourcing portfolio that consists not only of strategic alliances but also covers a broader spectrum of knowledge sourcing strategies. Second, this study supports the view that different governance modes are used to target different types of technologies, thereby stressing the importance to look at sourcing portfolios as a whole rather than at single (types of) investments.
Copyright 2012 John Wiley & Sons, Ltd.

As a consequence, this study extends prior studies on external knowledge sourcing and their effects on innovation performance (e.g., Dushnitsky and Lenox, 2005; Keil et al ., 2008; Stuart, 2000). Some interesting avenues for future research emerge from this study. First, the current study has taken innovative performance as a performance outcome. However, this variable does not fully capture the learning benets from external knowledge sourcing. As recently pointed out by Yang, Phelps, and Steensma (2010), innovative performance is also determined by a rms spillover knowledge pool. This spillover
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Figure 1.

Interaction between sourcing mode diversity and variance in relative technological proximity2,3

knowledge pool is only partially created through formal external technology sourcing agreements. Hence, future research examining the citation patterns of rms and the extent to which they build upon the knowledge of their partners could further reveal the learning benets of investing in a diverse portfolio. Moreover, as the pool of knowledge created through external technology sourcing is complex, this complexity may be another avenue for future research. At present, it is still unclear what type of knowledge (common vs. rare; explorative vs. exploitative) actually drives performance. Second, this study focuses on the composition of technology-sourcing portfolios including strategic alliances, M&As, and CVC investments. However, rms can also learn from (in-)licensing agreements. As a result, it would be logical to include licensing deals in the external sourcing portfolio. However, it is unclear to what extent licensing deals play a crucial role in developing new patents. Most licensing deals help in exploiting an existing technology (creating an external path to the market) rather than being a tool to create new technology (Tsai and Wang, 2009). Moreover, including licensing agreements would add to the
2 3

This gure is based on the results of Model 6 in Table 2. High and Low levels of diversity are calculated using the mean plus/minus one standard deviation.

technological diversity of the portfolio as well as to its sourcing mode diversity. The current results indicate that in order to benet from a technologically diverse portfolio, rms need to use a diverse set of sourcing modes as well. Including licensing would not alter these conclusions, as it stresses the idea that technological complexity requires a diverse set of sourcing modes to ensure efcient knowledge transfer. Third, future research can also include the different cost and risk proles of the various governance modes. Since M&As are on average more expensive than CVC investments and strategic alliances, it is also likely that they provide different rewards. Prior studies have already indicated the preference for particular governance modes under various circumstances (e.g., Van de Vrande et al ., 2009). A next step would be to link the characteristics of different governance modes with other aspects of portfolio diversity in order to further improve our understanding of external technology sourcing and its effects on rm performance. Moreover, some aspects of diversity may also be interdependent over time. For example, learning alters the technological proximity between partners. As a consequence, rms may decide to acquire a CVC partner (Benson and Ziedonis, 2009). The dynamics of the technologysourcing portfolio are a topic that has not yet been addressed in the literature. As rms try to optimize
Strat. Mgmt. J., 34: 610621 (2013) DOI: 10.1002/smj

Copyright 2012 John Wiley & Sons, Ltd.

Research Notes and Commentaries

their sourcing portfolios, these dynamics can help explain why some rms outperform others. Fourth, although the focus of this paper has been on the combination of the technological diversity and sourcing mode diversity, it should be noted that diversity comes in many forms and is not limited to the diversity in technological proximity between partners. Internal technological diversity, on the one hand, and partner technological diversity on the other hand, also appear to affect the innovation rates of rms and suggest an interesting avenue for future research. Technological diversity is an important determinant of innovation (Fleming, 2001), but the sources of diversity (internal, external, or a combination thereof), is a topic that has received much less attention in the literature. Finally, this study has investigated the effects of sourcing portfolios in the pharmaceutical industry, which is a high-tech industry with a substantial level of technological and market uncertainty. The increasing costs and time needed for the development of new drugs (DiMasi, Hansen, and Grabowski, 2003) make it a risky process with uncertain returns. Moreover, the pharmaceutical industry is characterized by a dual market structure, indicating the presence of a small group of large industry incumbents and another group of relatively small, entrepreneurial rms (Roijakkers, Hagedoorn, and van Kranenburg, 2005). Large pharmaceutical companies are characterized by their nancial resources and know-how necessary to deal with the extensive and costly clinical trials process that is necessary to approve new drugs. On the other hand, the increasing importance of biotechnology gave rise to a group of smaller, entrepreneurial biotech rms that can be regarded as an important source of new technologies. The competitive structure in the industry indicates an active market for ideas (Gans and Stern, 2003), stressing the importance of external technology sourcing. Although prior research has indicated the importance of CVC investments, alliances, and acquisitions as tools for new business development in the information and communications technology sector (e.g., Keil et al ., 2008), future research could improve our understanding of technology-sourcing portfolios by investigating the role of external sourcing mechanisms in other industries as well. For instance, the use of CVC differs between industries (e.g., Dushnitsky and Lenox, 2005). Similarly, when confronted with the
Copyright 2012 John Wiley & Sons, Ltd.

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choice between alliances and acquisitions, companies operating in low-tech sectors show an overall preference for M&As, while rms in high-tech sectors appear to choose strategic alliances over M&As (Hagedoorn and Duysters, 2002). As a consequence, the composition of technology-sourcing portfolios of rms in medium- and low-tech industries and thereby the effects of diversity may look somewhat different than the results presented here.

ACKNOWLEDGEMENTS
The author thanks the editor, two anonymous reviewers, Chris Tucci, Geert Duysters, Justin Jansen, Luca Berchicci, Michiel Tempelaar, Pursey Heugens, Tilo Peters, Wim Vanhaverbeke, and participants of the 2010 Corporate Entrepreneurship Conference at the Lally School of Management & Technology, Rensselaer Polytechnic Institute for their helpful comments and suggestions on earlier versions of this paper.

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Strat. Mgmt. J., 34: 610621 (2013) DOI: 10.1002/smj