**1. Introduction**

This article presents a geographically diverse *and statistically representative* view of how firms from countries around the world are sourcing innovation in the Digital Age. To our knowledge, this is the first such survey since AI and predictive analytics have become important to firm performance, and it is certainly the one with the most complete coverage of the sources being used for digital innovation. Our results thus provide a unique view on how firms are sourcing innovation and how this relates to the digital capabilities and competitive advantage they seek.

Our data comes from a new, representatively sampled cross-country survey on corporate innovation. This 2018 survey of 300 firms was sampled to be representative of large firms in seven industries across eight countries. In each case, a validated innovation leader within the company was asked more than 100 questions about how the firm innovates. These included firm-level questions about what types of innovation the firm invests in: which innovation sources, either internal or external, the firm uses, how important these sources are, and the characteristics of their business environment. As recommended by the Oslo Manual [1], the survey also asked about specific recently completed innovation projects, gathering information on 600 projects in total. Data was gathered on which innovation source was used for each project, how that project was implemented, the match between the firm's internal capabilities and those needed for the project, and whether the project ended up providing an advantage against competitors.

We find significant changes to how firms are innovating in the Digital Age compared with what they were doing just a few years earlier, as well as to what previous surveys have found. Nearly all the firms in our sample use a mix of internal and external innovation sources, innovating internally when they have industry-leading capabilities in that area, and outsourcing innovation when they do not. Four external innovation sources (universities, third-party experts/consultants, startups, and crowd) are increasingly used by companies, as are innovation labs (internal R&D labs co-located with innovation hotspots like Silicon Valley). At the same time, there is little to no growth in the number of companies using traditional external innovation sources (suppliers, customers, and competitors) or of traditional internal innovation sources (business unit staff, central R&D).

Despite the rapid growth in the use of external sources, for 91% of firms it is internal sources that remain the most important source of innovation. Within that internal innovation, however, there is a shift away from innovating within business units to doing so centrally (at Central R&D or Innovation Labs). In addition to be more important overall, internal sources also provide 77% of the firms' most successful innovation projects. By contrast, universities and suppliers account for 17% of the most successful projects. Consistent with the importance that firms place on internal innovation sources, we find that projects that originate from inside the firm are more likely to provide competitive advantage than those coming from external sources.

We also find that digital technologies are central to firm innovation, with 97% saying that their most successful innovation of the last few years was a digital initiative. Commensurately, we see nearly all firms increasing their investment in digital innovation. There is also a strong correlation between increases in investment in digital and firms getting a greater share of their revenue from new products or services. We also find that the innovations coming from fast-growing external innovation sources (universities, third-party experts, startups and crowd) are mostly digital technologies, and are ones where firms' internal capabilities are particularly weak.

This chapter's main contributions to the field are as follows. First, our research provides more geographic and industry diversity than previous work. Second, our research is recent and thus can document over a decade of open innovation practices. Third, we have focused on firm-level analysis to emphasize the managerial relevance of our findings. Lastly, much of the literature on innovation sourcing has not considered the substantial role that the digital economy has played on innovation practices, whereas the importance of this phenomena is clear in our analysis.

First, we leverage these advantages in data and survey design to understand how large firms are sourcing innovation, a major topic in the literature over the years.

In the next section, we connect these trends to characteristics of digital innovation, and how we have seen innovation practices materially evolving e.g., the challenge that businesses have in building advanced digital capabilities. Finally, in later sections, we discuss how and why our findings diverge from previous research and provide strategy and policy conclusions about how open innovation is evolving and the key role of digital innovation in changing the sourcing landscape.
