Innovation and Productivity in the Iranian Industry: the substitution versus complementary role of the internal and external R&D

Souzanchi Kashani, Ebrahim; Fathollahi, Raheleh

doi:10.22034/jstp.2026.12118.1960

Innovation and Productivity in the Iranian Industry: the substitution versus complementary role of the internal and external R&D

Document Type : Original Article

Authors

¹ Faculty Member, Graduate School of Management and Economics, Shairf University of Technology, Tehran, Iran

² Sharif University of Technology, Graduate School of Management and Economics

10.22034/jstp.2026.12118.1960

Abstract

This research examines the relationship between internal and external research and development (R&D) activities and their combined effects on innovation and productivity across various industrial sectors in Iran. Drawing on data from Iranian manufacturing firms operating in four distinct sectors—science-based, scale-intensive, specialized suppliers, and supplier-dominated industries—the study provides a nuanced understanding of how the configuration of R&D strategies shapes innovation outcomes. The empirical findings indicate that internal R&D exerts a positive and statistically significant influence on external R&D engagement, suggesting that stronger in-house research capabilities enhance firms’ absorptive capacity and ability to collaborate with external knowledge sources. This complementary relationship is particularly pronounced in science-based sectors, where technological complexity and knowledge intensity are high. The joint impact of internal and external R&D on innovation varies across sectors. In science-based and specialized supplier industries, the two forms of R&D complement each other, producing synergistic effects that enhance innovative performance. Conversely, in scale-intensive sectors, a substitutive relationship emerges, implying that external R&D may partly replace internal efforts. Moreover, product innovation is found to have a significant and positive impact on firm productivity, acting as a key mediating channel through which R&D investments translate into improved economic performance. The results emphasize the importance of targeted investment in internal R&D and the formulation of sector-specific innovation strategies. Although the study faces limitations related to cross-sectional data and incomplete control of macroeconomic variables, it offers valuable insights for industrial managers and policymakers in transition economies seeking to enhance innovation-driven productivity growth.

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