Internal and External Exploration Orientation: Substitutes or Complements?

Using data from the biopharmaceutical industry, the current study investigates the combined effect of internal and external exploration (exploitation) on firm performance. Building on the conflicting results of prior research, we argue that whether internal and external exploration (exploitation) complement or substitute one another differs for different performance measures and furthermore depends on the characteristics of the firm { in particular a firm's vertical scope. Our findings contribute to existing research by highlighting the moderating role of the vertical scope of a firm when it comes to explaining the performance effects of the interaction between internal and external exploration (exploitation). Furthermore, the results of our study underscore that these effects differ between exploration and exploitation performance. Our findings suggest that for firms with a narrow vertical scope internal and external exploration (exploitation) complement one another in regard to exploration performance but at the expense of exploitation performance. With an increase in vertical scope both the positive (exploration) as well as the negative (exploitation) effects on firm performance decrease.