The purpose of this study is to investigate the impact of internal and external R&D on SMEs
innovation performance. Micro level data was obtained from Enterprise Survey. For analysis,
bivariate models have been used. The results show that internal and external R&D positively
affects the product and process innovations. However, this effect is stronger for Indian SMEs.
In comparison, only external R&D showed positive association to product and process
innovation for Pakistani SMEs. Similarly, Pakistani SMEs are externally constrained (lack of
access to credit) than Indian SMEs. Moreover, Indian SMEs are dominant in terms of
undertaking internal R&D, generating product and process innovations than Pakistani SMEs.
Lastly, the complementary relationship has been examined between internal and external
R&D for both countries. Regarding contribution, this research study for the first time has
examined the Indian and Pakistani SMEs innovation activities. The implication of this study
suggests that business managers can utilize the balance combination of internal and external
R&D to accelerate the SMEs innovation performance.