Knowledge Development Approaches and Breakthrough Innovations in Technology-Based New Firms

Compared to large established firms, technology-based new firms (TBNF) seem well placed to produce breakthrough innovations although questions remain as to their adeptness at subsequent exploitation. Building on the innovation and strategy literatures, the study identifies two different knowledge development approaches or modes (business models) in TBNFs – internal versus external – and examines their relation to breakthrough innovation and subsequent progression of the product to market. The internal mode assembles knowledge inside the firm to generate its innovations, whereas the external mode relies heavily on alliances to develop and assemble knowledge among firms embedded in a creative network. The study uses a unique panel dataset of 69 UK new biotechnology firms over an 11-year period to explore this issue empirically. The findings show that the external knowledge development mode is associated with more breakthrough innovations and a faster movement of innovations to market. The externally focused mode is not impeded by its relative lack of internal knowledge; it uses partners to access, assemble and develop a wide scope of knowledge in a flexible manner. In addition, partners provide deep domain expertise to undertake the requisite deep-dives. In contrast, the internal mode has the huge challenge of assembling knowledge resources internally and suffers from a quicker onset of path dependence that impedes the generation of breakthroughs. This study provides a choice of business models (internal or external) that is associated with different breakthrough and speed to market performance outcomes. Going forward, policy makers and managers seeking breakthrough innovations and speedy progression of the innovations to market should consider the potential resource efficiency of the external mode and the vital role played by collaborations – small firm versus large firm and private versus public entities