The Financial Dilemma of Open Innovation: Equity or Debt?

This study investigates how different sources of innovation financing - self-funding, debt, and equity - moderate the non-linear relationship between open innovation (OI) and innovation performance (IP). Drawing on microdata from the 2016-2018 Community Innovation Survey, we estimate a logistic regression model with interaction terms to assess how financing modes affect the probability of innovation success across varying degrees of openness. Consistent with prior literature, we confirm an inverted U-shaped relationship between OI and IP, indicating diminishing returns beyond moderate openness levels. Our findings reveal that external financing ensures the best innovation performance at low openness levels, with equity exerting the strongest effect. However, equity and debt financing both negatively moderate the marginal returns of openness, particularly at high levels of collaboration, where cognitive overload and governance complexity become more pronounced. Self-financing, although capital-constrained, becomes relatively more effective under high openness due to greater managerial autonomy and reduced oversight burdens. These results highlight the importance of aligning financial strategies with firms' openness profiles to optimize innovation outcomes. The study bridges gaps between OI and capital structure research and provide actionable insights for firms and policymakers seeking to balance innovation governance with effective financial design.