Which intermediate import source is best for innovation in MNEs?

This paper explores the importance of the importing intensity for different intermediate inputs depending on their source (internal sourcing or intra-firm trade versus external sourcing or foreign suppliers) for different types of innovation (product and process innovation) and applied to MNEs (foreign versus domestic).

The sample contains 2,448 firm-year observations (2006–2016) of firms located in Spain that belong to an MNE group. The authors applied a conditional mixed process to a panel recursive bivariate probit model with robust standard errors.

The authors obtained three key results. First, intermediate imports do not always contribute to improving innovation, since their effects vary depending on their source. Second, intermediate imports from foreign suppliers (external source) are more advantageous for product innovation than those from intra-firm trade (internal source). Third, intermediate imports from intra-firm trade are more important for process innovation than those from foreign suppliers. Thus, the impact of importing intermediate inputs on innovation is contingent on the source of the imports, the ownership of the MNE and the type of innovation.

The paper contributes to this topic with new insights and results for MNEs. It identifies which import source is best for innovation depending on the type of innovative result expected. Moreover, it helps to uncover simultaneity and causal relationships between product and process innovation, issues which have not previously been considered in the literature.