Reaching beyond low-hanging fruit: Basic research and innovativeness

In this paper we examine the relationship between basic research and the innovativeness of innovations and how this relationship varies between internally- and externally-sourced innovations. In addition, building on Nelson's argument on the economics of basic research, we examine how the relation between basic research and innovativeness is conditioned by whether or not the firm is diversified and whether arguments about basic research and diversification built from Nelson (1959) hold for differently-sourced innovations. Using data from a large-scale survey of U.S. manufacturing firms, we provide some empirical evidence showing that basic research is associated with more innovative innovations. Furthermore, we show that for internally-generated innovations, this relation is moderated by whether or not the firm is diversified, consistent with Nelson's argument. However, for externally-sourced innovations, basic research has a direct association with more innovative innovations, consistent with the absorptive capacity argument regarding superior technical evaluation, with the moderation of diversification not observed. The results contribute to a better understanding of the different mechanisms through which basic research is related to the type of innovations commercialized by for-profit firms. •We analyze sample of 5000+ US manufacturing firms, measuring innovativeness of innovations•Show relation between innovativeness and basic research, diversification and innovation source (external or internal)•For external innovation, basic research associated with innovativeness of innovations•For internal innovation, basic research associated with innovativeness only in presence of firm diversification