The effects of innovation sources and capabilities on product competitiveness in Hong Kong and the Pearl River Delta

It is widely recognized in the theoretical literature that firms need to use both internal and external sources of innovation to gain a competitive advantage. However, although it is assumed that internal and external sources of innovation have distinct relationships with firm capabilities, it is not clear how various innovation sources affect such capabilities, or how or to what extent such relationships affect product competitiveness. This paper examines the effect of diverse sources of innovation on a firm's technological innovation capabilities and the extent to which such capabilities mediate the improvement of product competitiveness. Based on a survey of 200 manufacturing firms in Hong Kong and the Pearl River Delta region, we identify internal departments as a major source of innovation for improving a range of firm capabilities. Acquiring disembodied technology improves learning, resource allocation and organizing capabilities, whereas acquiring embodied technology enhances learning and manufacturing capabilities. We use a hierarchical regression analysis to demonstrate that some sources of innovation, such as internal departments, can lead directly to superior product competitiveness, whereas innovations acquired through conferences and competitors contribute to competitiveness through the mediation effects of resource allocation, marketing and organizing capabilities.