Innovation spend often feels like a balancing act.
How much do you invest internally vs how much do you rely on external pilots, partnerships, or bets on emerging technologies?
Over the past decade, top innovators have moved away from a one-size-fits-all R&D model and have instead adopted a strategic mix of internal R&D, external collaboration, and targeted bets.
That doesn’t mean allocating innovation budget is simple. It requires balance, optimisation, and structure.
Why a balanced innovation portfolio matters
The pressure to both protect the core business and explore new opportunities is real.
On one hand there is sustaining engineering, process improvement and incremental innovation to remain competitive and efficient. On the other hand there is the need to explore adjacent markets, disruptive technologies, or bold new business models.
Recent data confirms that R&D investment is not slowing down. The top 2,500 corporate R&D spenders crossed €1.3 trillion in 2022 – a 13 percent increase on the previous year. Software, ICT and data-driven innovation in particular are now leading the charge.
At the same time, many companies recognise the limitations of pure in-house development.
As technology becomes more complex and fast-moving, relying only on internal capability risks both duplication and missed opportunities. That is prompting a shift toward more open, collaborative R&D models.
The result: high-performing innovation organisations are increasingly adopting a portfolio approach, mixing internal R&D, external pilots/partnerships, incremental improvements and speculative bets on emerging tech.
Internal R&D vs external pilots and partnerships
On average, R&D-intensive organisations allocate about 36% of their total R&D spend to research activities, and 64 percent to development.
What does this mean in practice?
For many teams, “research” includes exploratory, early-stage work, proof-of-concepts, and internal R&D initiatives.
While “development” tends to involve scaling, sustaining engineering, incremental upgrades, or embedding technology into products or services.
52% of the budget goes to “innovation projects” (rather than sustaining engineering), with that innovation spend itself subdivided into: incremental (≈ 44%), next-generation (≈ 36%), and transformational projects (≈ 21%).
But internal R&D is only part of the story for leading firms.
Recent analyses of large enterprises reveal that for many, a significant share of R&D budgets is allocated to external innovation. Collaboration with partners, licensing, joint development, or startup alliances. Among large firms with mature innovation functions, 43% of what would traditionally be “R&D” is now going to such external innovation.
So why the shift?
For many organisations, external partnerships, whether with startups, academia, or other firms, can bring fresh talent, different perspectives, and access to capabilities the organisation might lack, especially in cutting-edge domains.
Combining internal R&D with external collaboration often produces better innovation outcomes than relying solely on internal work.
For instance, organisations that invest in internal R&D but also actively engage with external partners or knowledge spillovers are more likely to deliver both incremental and radical innovations.
When and why external pilots and partnerships work best
External pilots and partnerships are most effective when they complement, not replace, internal capability. There are a few key conditions under which this works particularly well:
- When the company has enough “absorptive capacity,” meaning an internal R&D team that can evaluate, integrate, and build on external knowledge and technology.
- When the projects involve complexity or emerging technologies that lie outside the firm’s core competence. External partners like startups, research institutions, or other firms often bring unique expertise, speed, or agility.
- When the goal is diversification: exploring adjacencies, new market segments, or disruptive business models. Rather than putting all eggs in one R&D basket, firms spread risk across a portfolio.
- In regulated or high-risk industries (e.g. biopharma), where external sourcing can significantly boost productivity. For example, in pharma firms, a large share of successful products now come from externally sourced assets.
In practice, many of the most effective external pilots are structured not as one-off experiments, but as ongoing collaborations with mutual learning, knowledge exchange, and shared risk.
Short pilots can turn into long-term relationships, and even “failed” experiments can produce valuable data, feedback, or insight.
How emerging tech bets and core optimisation co-exist in a smart R&D portfolio
The challenge for many organisations is how to divide innovation spend between “core” initiatives (optimisation, sustaining the existing business) and “exploratory” or “disruptive” tech bets.
High performers tend to treat this as a deliberate tension to manage instead of a problem to avoid.
A useful way to think about it is portfolio diversification, similar to investment funds: some portion of spend goes to safe, incremental returns, another portion goes to next-generation improvements, and a third portion goes to transformational bets with high risk and high reward.
Surveys reflect exactly that structure with 44% incremental, 36% next-gen, and 21% transformational among innovation projects.
Emerging tech investments tend to come from two sources: internal R&D (when companies have the appetite and capability to explore deep innovation) and external collaborations (when the technology is nascent or external expertise is required).
Research that maps leading R&D firms to emerging technology domains shows a clear correlation between high R&D spend and greater proximity to emerging tech innovation, hinting that firms investing heavily in R&D are also more likely to lead in emerging-tech adoption.
Meanwhile, companies that continue to fund core optimisation such as maintaining and improving their existing products, systems or services, ensure that the foundation remains stable, efficient, and profitable, even as they explore the future.
The synergy of both approaches creates resilience.
Core optimisation delivers short-to-medium-term efficiency and competitiveness
Emerging-tech bets offer long-term optionality and potential disruption.
What high-performing innovation teams actually do differently – 5 steps
1. Treat innovation budget like a portfolio, not a silo
Instead of allocating all innovation spend into a single bucket (e.g. internal R&D), they consciously subdivide resources by risk, expected return, and time-horizon (incremental, next-gen, transformational, external pilots, internal research).
2. Build in absorptive capacity
Before investing heavily in external collaborations, they ensure internal R&D capacity, governance and cross-functional processes exist so that external inputs can be effectively evaluated, integrated and scaled.
3. Embrace external collaborations while maintaining internal ownership
Rather than outsourcing all innovation, they often position external pilots as complementary: start-ups or academic partners provide novel ideas and agility; internal teams provide strategic direction, integration capability, and IP management.
4. Use data and analytics to guide decision-making.
Instead of relying on ad-hoc initiative funding, high-performing firms review their R&D and innovation portfolio periodically (some as often as quarterly) to re-balance investment between sustaining tasks and bold bets.
5. Recognise that not all innovation is equal.
Incremental innovation, next-generation improvements, and transformational bets each have different risk/reward profiles. By clearly segmenting them they avoid treating all innovation as though it has the same payoff horizon.
Pitfalls to avoid when allocating innovation spend
That said, the mixed model is not a silver bullet. There are several common pitfalls even high-performing organisations must watch out for:
Overcommitting to external collaborations without internal capacity
If a company does not have internal R&D competency or absorptive capacity, relying heavily on external sources can lead to wasted budgets and poor integration of ideas. Research shows collaboration only leads to significant innovation output when the firm already invests in R&D.
Treating all external pilots like core projects
Sometimes external pilots require more flexibility, iteration, and even “failure.” Treating them with the same governance or expectations as core projects can stifle innovation.
Neglecting to rebalance portfolio over time
What made sense in one year like heavy next-gen bets, fewer sustaining investments, may not make sense later as the business and market evolve. Without periodic review, spend can get stuck in lowest-common-denominator projects or “pet ideas.”
Under-investing in sustaining engineering or incremental innovation
Overemphasis on “shiny new tech” can lead to neglect of the core business, which often still drives majority of revenue and customer value.
How to get started: a pragmatic approach to shaping your own innovation allocation strategy
If you are responsible for shaping innovation budgets in your organisation, here is a pragmatic approach to adopting a balanced allocation strategy:
First, map your current spend across categories: internal research, product development/sustaining engineering, external pilots/partnerships, and speculative tech bets. Try to get a sense of what proportion of your overall innovation budget is going to each.
Then, engage stakeholders across R&D, product, business development, and strategy to define your portfolio goals: What percentage of innovation spend should go toward sustaining core business vs next-gen vs transformational? What level of external engagement do you want? What risk tolerance do you have?
Third, ensure you have internal capabilities such as people, governance, processes, so that external inputs can be effectively evaluated and integrated. Without this, external pilots often fail to deliver value.
Fourth, set up periodic review mechanisms (quarterly or bi-annual) to assess performance across your portfolio: what’s delivering? What’s lagging? What needs scaling up or winding down? Use data and metrics (resource usage, time to market, revenue potential, strategic alignment) rather than assumptions.
Finally, treat external collaboration not as a “nice to have,” but as a strategic pillar alongside internal R&D and core optimisation. With the right approach, external partnerships and emerging-tech bets can dramatically enhance your innovation output without compromising the stability of your core business.
Conclusion
Innovation in large organisations is no longer about “in-house labs only.”
The pace of technological change, complexity of emerging tech, and the need to stay competitive in both present and future markets demands a diversified, deliberate, and balanced approach to allocating innovation spend.
High-performing teams treat their innovation budget like a portfolio.
They blend sustaining optimisation, incremental improvement, next-generation evolution, and transformational bets using a mix of internal R&D and external collaboration depending on strategic goals and risk appetite.
They build the internal capacity to absorb external ideas, periodically review and rebalance their portfolio, and treat collaboration, external pilots, and emerging-tech bets as core components of innovation, not optional extras.
If you are looking to future-proof your innovation investments, use FounderNest. As a market intelligence platform that combines competitor targeting and tracking, market trend monitoring, company tracking and innovation scouting in one place, it gives innovation leaders the clarity they need to allocate spend wisely and spot opportunities earlier.
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