Relationship between product market strategy and inbound open innovation: evidence from Japanese firms

Inbound open innovation—the deliberate sourcing of external knowledge to advance a firm’s innovation activities—has been widely adopted, yet the factors that determine its effectiveness remain incompletely understood. This study examines how product market strategy moderates the effectiveness of inbound open innovation. Drawing on the generic strategy framework, we argue that cost leadership and differentiation impose fundamentally different knowledge requirements, which in turn shape the returns of different modes of inbound open innovation. Cost leadership rests on process-oriented knowledge that is largely codified and widely distributed across suppliers, competitors, and firms in other industries, and that is therefore accessible through external search. Differentiation rests on tacit, context-specific knowledge that is more difficult to acquire externally and that competes for the same managerial attention as in-house research and development. We test the resulting hypotheses using archival financial data combined with survey responses from 242 chief technology officers and research and development directors in Japanese publicly listed industrial firms, operationalizing inbound open innovation as external search breadth and depth and estimating hierarchical ordinary least squares regressions. The results show that both breadth and intensive depth improve innovation performance for firms that adopt a cost leadership strategy, whereas neither mode benefits firms pursuing differentiation, even though differentiation itself is consistently and positively associated with innovation performance. These findings establish product market strategy as a theoretically grounded moderator of the effectiveness of inbound open innovation, extend the generic strategy framework to encompass external knowledge sourcing, and provide a theoretical bridge between the product market strategy and open innovation literatures.