**4.2 Which innovation sources are the Most important?**

Thus far, our analysis has been limited to which sources are used but has not considered the relative importance of sources. **Table 3** shows two ways of evaluating which sources are most important: the share of companies said that their most successful innovation project came from that source (per the Oslo manual and similar to ACW), and the share of companies said that a source was the most important innovation source for the company overall. Both results indicate that internal sources remain overwhelmingly the most important innovation sources for firms; 91% of firms said that an internal source (Central R&D, Innovation Labs, BU Dedicated, and BU Operational) was their most important, and only 9% said an external source was. Similarly, 77% of firms said that their most successful project came from an internal source, but only 23% said it came from an external source.

The contrast between which innovation sources are producing the most successful innovation projects and those that are most important to the firm overall, reveal interesting differences. Innovation labs, while only the most important source for 13% of companies, nevertheless produced the most-successful project for 25% of them. This contrasts with Central R&D, which seems to have more overall importance, ranking as 'most important' for 58% of companies, but only produces 35% of the most-successful innovation projects. Despite almost no external innovation sources being 'most important' for companies overall, universities and suppliers nonetheless provided companies some of their most successful projects (9% and 8%).

The three right-most columns of **Table 3** also show the overall importance of innovation sources changing over time. For example, only 1% of firms considered innovation labs as one of their three most-important innovation sources five years ago, but 33% do today, and 73% anticipate that it will become one in five years. This rise in importance is echoed by startups and universities (although universities are expected to plateau near current levels). Crowd has grown slowly over the last five years but is expected to grow dramatically in the next five years (although few companies have experience with crowd, so this may just reflect hype).

Other innovation sources are falling in importance, for example BU Dedicated: 86% of firms thought it was one of their top three sources five years ago, whereas 50% do today, and only 9% project that it will be in five years. Other sources falling in importance include BU Operational, Suppliers, and Customers.

Although there has been a dramatic broadening of the external innovation sources being used, our analysis reveals that internal sources remain the most important ones for firms. Consistent with this, internal innovation sources also produce innovation projects that are more likely to provide competitive advantage. When firms are asked "How enduring was the advantage that your company gained from this innovation?", 89% of the projects undertaken internally were rated as providing "an advantage which persisted." But this share falls to 61% for projects done using external sources, a drop of 28 percentage points (statistically significant at p-values <0.01).

A natural explanation for the positive correlation between doing innovation internally and getting more competitive advantage is that innovations sourced externally may be easier for competitors to access – and thus they will provide less competitive differentiation. It may also be harder to protect IP when innovating externally, making it easier for competitors to mimic an innovation [40]. Thus, it is not surprising that internal innovation sources are viewed as more important than external sources for firms because they are more likely to provide competitive advantage.

#### **4.3 How internal or external is each innovation source?**

Up to this point, we have asserted that the internal innovation sources are Central R&D, Innovation Labs, BU Dedicated, and BU Operational, and that other sources are external. But this is not a foregone conclusion. Innovation Labs are often located within innovation hubs, and thus could be more external than internal. Similarly, the literature of absorptive capacity [41, 42] argues that internal expertise and resources makes the usage of external innovation sources more successful. Hence, some external innovation sources might have a substantial internal component. We investigate this question by having respondents report the mix of internal and external resources that they use when innovating with each innovation source. These answers are reported on a 7-point Likert scale, which for ease of interpretability we recode to: 1 (relies solely on internal resources) to 1 (relies solely on external resources), with 0 indicating an equal mix.

**Figure 2** shows that Central R&D, Innovation Labs, and BU Dedicated and BU Operational use primarily internal resources, whereas the others are primarily external. Interestingly, four of the five fastest-growing innovation sources (Innovation Labs, Universities, Crowd, and Third Party) use a more equal mix of internal and external resources than do traditional sources.
