Innovation efficiency and complexity of innovation strategy: A trade-off relationship

How firms’ innovation strategies shape their ability to efficiently transform innovation inputs into marketable outputs remains an open question. Typically, innovation strategies are treated as exogenous, second-stage determinants of innovation efficiency, implicitly assuming that firms’ strategic choices do not directly shape their innovation production frontier. Drawing from the Profiting from Innovation framework, we challenge this assumption by arguing that innovation efficiency is inherently conditioned on firms’ decisions regarding appropriability and complementarity strategies, particularly in fragmented innovation ecosystems. We develop an integrated methodological approach that endogenously incorporates firms’ innovation strategies into the efficiency estimation process. Using Community Innovation Survey data for 4298 innovative firms across five European moderate-innovator countries, we develop an augmented Data Envelopment Analysis and a novel heuristic algorithm to identify latent, hierarchically structured firm groups with heterogeneous innovation frontiers. Empirical findings reveal a systematic trade-off between innovation efficiency and the complexity of innovation strategy. Firms pursuing narrow IPR portfolios achieve higher innovation efficiency and follow a competitive rent-seeking logic, whereas firms adopting broad IPR portfolios experience efficiency losses associated with monopoly rent-seeking behaviour. Among IPR-intensive firms, those that also pursue product–process ambidexterity suffer additional efficiency penalties, leading to a hierarchical structure of innovation efficiency groups. Through the integration of innovation efficiency and innovation strategy within a unified theoretical and empirical framework, we demonstrate that strategic complexity of innovation commercialisation strategies fundamentally reshapes the innovation production frontier, particularly in moderate innovator economies characterised by fragmented innovation systems, weak complementary assets, and higher coordination and administrative costs.