Firm Search for External Knowledge: How Institutions Matter for Innovation Performance

The innovation performance of modern firms is increasingly determined by their ability to search and absorb external knowledge. However, after a certain threshold firms "oversearch" their environment and innovation performance declines. In this paper, we argue that prior literature has largely ignored the institutional context that provides or denies access to external knowledge at the country level. Combining institutional and knowledge search theory, we suggest that the market orientation of the institutional environment and the
magnitude of institutional change influence when firms begin to experience the negative performance effects of oversearch. Based on a comprehensive sample of almost 8,000 firms from ten European countries, we find that institutions matter considerably for firms' search activity. Higher market orientation of institutions increases the effectiveness of firms' search for external knowledge while higher magnitudes of institutional change decrease it. Our results provide important insights for management on how to adapt search strategies to the institutional context.