Breakthrough innovations like the Internet, penicillin and even sliced bread changed the world forever. For businesses in every industry, innovation remains a top priority as they strive to make their own indelible marks on history.

But how do companies innovate?

“Most companies state that in order to enhance their innovativeness, they need to leverage the knowledge acquired from external partners. But my research says the opposite,” said assistant professor Denise Dunlap-Hinkler. “The competitive advantage is actually gained by internal knowledge transfer—the sharing of knowledge within the global boundaries of the firm.”

Dunlap-Hinkler is a tenure-track professor in the International Business department of Northeastern’s College of Business Administration. Her initial research focused on how pharmaceutical firms develop new products and where they gain the knowledge that results in breakthrough innovation.

She chose the pharmaceutical industry because in order to bring a new product to market in the United States, all pharmaceutical companies must gain approval from the Food and Drug Administration (FDA). “It can be difficult to pin down what’s considered breakthrough and innovative,” said Dunlap-Hinkler. “The FDA uses a consistent set of definitions in the evaluation of new products, which allows me to examine this phenomenon across companies.”

In addition, the industry’s use of patent protection for intellectual property provided a way to measure the knowledge shared to develop each innovation by company.

Dunlap-Hinkler examined the companies’ business development strategies and identified two main methods used for growth. Companies either accumulated new knowledge through outside partnerships and acquisitions or built on existing knowledge through internal sharing, or both.

She compared the effectiveness of these strategies by analyzing patent information for each company and discovered that the companies using more internal knowledge transfer were also developing more breakthrough products.

“When a company shares knowledge across borders and at least half of it comes from internal sources, it’s even more likely to be a breakthrough,” said Dunlap-Hinkler. “I found the same results for both foreign and U.S. -based firms.”

She also observed that the majority of companies still treat their international operations as “outposts” with knowledge flowing one-way—from out in the field back to headquarters.

“Given the global marketplace and the competency of people overseas, there’s a need for knowledge to flow both ways,” she said. “These findings should make managers pause and ask, ‘Are we truly taking advantage of our rich global knowledge network?’ and help them to maximize the use of their overseas capabilities.”

She is currently developing an approach to examine the unique ways that knowledge transfer occurs in emerging economies around the world, particularly in countries where business networking is heavily influenced, and potentially limited, by cultural factors.

By Rachel Sockut