In order to catch up with the current technological frontier, firms, especially in developing countries, try to acquire technological advancement through internal R&D efforts, as well as through external technology-sourcing activities. This study tests whether these two sources of technology acquisition are complements or substitutes for each other in small- and medium-sized Chinese manufacturing firms. The evidence that we present shows some signs of complementarity between the two sources of knowledge in reaching a higher unconditional intensity of product innovation for firms with 100-300 employees and, in general, a significant degree of substitutability between them in achieving higher levels of labour productivity.
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