Technological, radical, and incremental innovation of foreign subsidiaries versus domestic firms located in Portugal: The moderating role of external collaborations

Abstract

Innovation is a key driver of firm competitiveness, and external collaborations are often seen as critical enablers of innovation performance. However, limited research has explored how innovation behavior differs between foreign subsidiaries and domestic firms, particularly in terms of both the likelihood and intensity of innovation across different types. This study addresses this gap by analyzing data from 13802 firms in Portugal that responded to the 2022 Community Innovation Survey, covering innovation activities between 2020 and 2022. Using logistic regression and hurdle models, we assess how external collaborations, categorized by partner type, affect the innovation performance of foreign subsidiaries and domestic firms across three innovation types: incremental, radical, and overall technological innovation. We find that foreign subsidiaries are significantly more likely to innovate than domestic firms, especially in incremental innovation. However, when it comes to the intensity of innovation (measured by the share of turnover from new products), this advantage largely disappears, except for overall technological innovation. Our results also reveal that the benefits of external collaboration differ markedly by firm type. Domestic firms gain more from collaborating with customers and suppliers. In contrast, foreign subsidiaries benefit primarily from partnerships with universities and research institutes, suggesting a reliance on formal knowledge sources aligned with their higher absorptive capacity. These findings offer nuanced insights into how firm origin and collaborative strategies jointly shape innovation outcomes. They also have clear policy implications: to close the innovation gap, domestic firms may require support in building effective vertical collaborations and absorptive capabilities, while foreign subsidiaries could be incentivized to engage more deeply with national innovation ecosystems.