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Firms don’t innovate in isolation but through relationships with partners, using external knowledge, and collaborating across regions and borders.
Using data collected at the firm level in the UK between 2004 and 2020, Audretsch and Belitski (2026) have demonstrated how collaborative knowledge—in local, national, and international levels—interacts with investments in R&D and human capital. This is to determine whether or not a company will introduce a new product.
The results of the study demonstrate what is referred to as an “innovation paradox.” In other words, combining R&D expenditures with external collaboration may actually hinder the innovation of firms within the UK. This is particularly the case in situations where companies do not have the ability to absorb and utilize knowledge gained through external means.
Accordingly, “people” make the difference among firms that have success utilizing external collaborative methods to create innovative solutions from those that do not.
The study found that investing in employee skills helps companies turn collaborations into innovation. This is especially true for start-ups, where talent bridges the gap between outside ideas and real-world results.
In contrast, incumbent companies achieve significant gains in innovation through local and/or regional collaborative efforts. However, they are unable to successfully utilize the benefits of collaborating with companies located outside of their local area unless they also significantly invest in developing their human capital.
Overall, the article’s takeaway is that in high-cost economies, innovation runs through people, not just by R&D budgets. Talent is the key mechanism that allows firms to convert collaboration into competitive advantage. By highlighting the central role of people and relationships, the study offers clear insights for policymakers, entrepreneurs, and corporate leaders trying to design innovation strategies that actually work in high-cost environments.
Innovation in High-cost Developed Economies: People and Relationships
How geographical knowledge collaboration and investment in human capital differentially affect innovation in startups versus incumbents, with evidence from the UK (2004–2020).
Audretsch & Belitski (2026) investigate how geographical collaboration and investments in R&D vs. human capital affect product innovation propensity in startups versus incumbent firms. Using UK firm-level data from 2004–2020, they uncover an “innovation paradox” and demonstrate that talent—not just R&D spending—is the key conduit for successful non-local collaboration.
Summary
The study examines how startups and incumbent firms in high-cost developed economies (like the UK) use regional, national, and international knowledge collaborations to drive product innovation, and how investments in R&D versus human capital moderate these relationships.
Core Findings:
- Startups benefit more from regional collaboration, while incumbents gain more from national partnerships.
- An “innovation paradox” exists: Combining R&D investment with external collaboration actually reduces innovation propensity due to cognitive overload and coordination conflicts.
- Human capital is the key enabler: Investing in skilled employees (university graduates+) makes national and international collaborations effective, especially for startups.
- Knowledge spillovers benefit both groups equally, challenging prior literature that emphasized localized spillovers mainly helping younger firms.
Key Data Points:
- Sample: 7,115 startup observations + 39,188 incumbent observations (UK, 2004–2020)
- Regional collaboration increases startup innovation probability by 2–5 percentage points.
- R&D + external collaboration reduces innovation probability by 1–2 percentage points.
- Human capital + European collaboration increases innovation probability by 11 percentage points for startups.
Collaboration Geography: Startups vs. Incumbents
The geographical locus of knowledge collaboration has distinct impacts depending on firm type and maturity.
| Geography | Startup Effect | Incumbent Effect | Key Drivers |
|---|---|---|---|
| Regional (≤80 miles) |
Positive (+) | Non-significant | Trust, informal communication, lower transaction costs, local market alignment |
| National (UK-wide) |
Non-significant | Strong Positive (+++) | Diverse knowledge, institutional protection, IP enforcement, market relevance |
| European (EU partners) |
Conditional on human capital | Positive (+) | Regulatory alignment, lower collaboration costs, technological diversity |
| International (outside EU) |
Conditional on human capital | Positive (+) | Cutting-edge expertise, novel business models, global networks |
Why Startups Prefer Regional Ties:
- Resource constraints: Limited funds make local partnerships more feasible.
- Tacit knowledge transfer: Proximity enables face-to-face interaction essential for complex knowledge exchange.
- Market testing: Regional markets serve as low-risk testing grounds before scaling.
- Ecosystem embeddedness: Access to universities, incubators, and government support within the region.
Why Incumbents Leverage National/International Networks:
- Absorptive capacity: Established routines and resources enable integration of diverse knowledge.
- Risk diversification: Multiple geographical partnerships reduce dependency on single markets.
- Scale advantages: Existing national/international operations facilitate cross-regional collaboration.
- Institutional experience: Familiarity with different regulatory and market environments.
The Innovation Paradox
Contrary to conventional wisdom, combining internal R&D investment with external knowledge collaboration reduces innovation propensity—a phenomenon the authors term the “innovation paradox.”
Mechanisms Behind the Paradox:
- Cognitive overload: Simultaneously managing internal R&D and integrating diverse external knowledge overwhelms organizational capacity.
- Coordination costs: Aligning internal and external innovation activities creates conflicts and redundancy.
- Strategic misalignment: Internal R&D priorities may conflict with collaboration partners’ objectives.
- Knowledge protection concerns: Fear of involuntary knowledge spillovers reduces openness in collaboration.
Empirical Evidence:
- Startups: R&D + regional collaboration reduces innovation probability by 2 percentage points.
- Startups: R&D + national/international collaboration reduces innovation probability by 1 percentage point.
- Incumbents: Similar negative effects, particularly strong for European/international collaborations (-2 percentage points).
- The paradox holds across all geographical collaboration types when combined with R&D spending.
Managerial Interpretation:
The findings suggest that firms face a strategic choice:
- Option A: Focus on internal R&D development with limited external collaboration.
- Option B: Engage in extensive external collaboration while minimizing parallel R&D investments.
- Option C (preferred): Invest in human capital to enable effective integration of external knowledge without the paradox effect.
The paradox is particularly relevant in high-cost economies where both R&D and collaboration entail significant financial commitments.
The Human Capital Advantage
Investment in skilled employees—measured as the share of university graduates—emerges as the critical factor enabling successful non-local collaboration, especially for startups.
How Human Capital Works:
- Enhances absorptive capacity: Skilled employees better recognize, assimilate, and apply external knowledge.
- Reduces integration barriers: Employees with diverse backgrounds bridge cultural, institutional, and technical differences.
- Facilitates relational quality: Talented personnel build higher-quality collaboration relationships.
- Enables knowledge co-creation: Human capital transforms collaboration from simple knowledge transfer to joint innovation.
Quantitative Impacts:
- European collaboration + 1% increase in graduates → 11 percentage point increase in innovation probability for startups.
- National/international collaboration + human capital → consistent positive effects for both startups and incumbents.
- Regional collaboration + human capital → no significant effect (knowledge redundancy limits benefits).
- Human capital effects are stronger for startups than incumbents in international contexts.
Strategic Implications:
| Strategy | Effect on Startups | Effect on Incumbents | Recommendation |
|---|---|---|---|
| Hire graduates + pursue European partnerships | High impact (+++) | Moderate impact (+) | Prioritize for startups seeking international expansion |
| Hire graduates + pursue national partnerships | Positive (+) | Positive (+) | Effective for both groups; incumbents gain more |
| Increase R&D + collaborate externally | Negative (−) | Negative (−) | Avoid simultaneous maximization |
| Regional collaboration alone | Positive (+) | Non-significant | Startup-specific strategy |
Policy and Managerial Implications
For Startup Managers & Entrepreneurs:
- Prioritize regional ecosystems: Build deep relationships with local universities, suppliers, and customers.
- Invest in talent before R&D: Hiring skilled employees enables effective national/international collaboration.
- Use human capital to “open doors”: Leverage talented staff to bridge institutional and cultural gaps in European/global partnerships.
- Avoid over-collaboration: Focus on collaboration quality rather than quantity to prevent cognitive overload.
For Incumbent Firm Leaders:
- Leverage national networks: Act as knowledge integrators across regional ecosystems.
- Overcome “not-invented-here” syndrome: Develop organizational routines that value external knowledge.
- Partner with startups: Gain innovation agility while providing scale and resources.
- Balance R&D and collaboration: Separate internal R&D projects from external collaboration initiatives to avoid the innovation paradox.
For Policymakers & Regional Development Agencies:
- Design people-centric incentives: Subsidize talent recruitment in startups (e.g., expand UK Knowledge Transfer Partnerships).
- Strengthen regional innovation platforms: Connect startups with local universities and incumbents (e.g., Tech Nation UK, La French Tech).
- Support shared infrastructure: Fund living labs, co-location spaces, and shared R&D facilities to lower coordination costs.
- Encourage incumbent-startup partnerships: Use tax incentives or procurement preferences to reward knowledge transfer.
Future Research Directions:
- Beyond product innovation: Study commercialization rates and sales from new products.
- Cross-country comparisons: Test findings in other high-cost economies (Germany, Scandinavia, US).
- Collaboration quality: Examine relationship depth, trust, and knowledge co-creation processes.
- Sectoral differences: Compare high-tech vs. low-tech, manufacturing vs. services.
- Digital collaboration: How remote work and digital platforms change geographical constraints.
References
Audretsch, D. B., & Belitski, M. (2026). Innovation in high-cost developed economies: People and relationships. British Journal of Management.
Key References from the Study:
- Audretsch, D. B., & Belitski, M. (2022). The knowledge spillover of innovation. Industrial and Corporate Change, 31, 1329–1357.
- Audretsch, D. B., Belitski, M., & Caiazza, R. (2021). Start-ups, innovation and knowledge spillovers. Journal of Technology Transfer, 46, 1995–2016.
- Barboza, G. (2024). Missing links of knowledge spillover effects on firm intensity and regional development. Small Business Economics, 63, 1721–1745.
- Cohen, W. M., & Levinthal, D. A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35, 128–152.
- Zahra, S. A., & George, G. (2002). Absorptive capacity: A review, reconceptualization, and extension. Academy of Management Review, 27, 185–203.
Data Source: UK Innovation Survey & Business Structure Database (2004–2020), Office for National Statistics.
