The paper examines the two-way relationship between external R&D activities and internal R&D expenditures on a cross-section of Flemish R&D active companies. The analysis extends the classical explanatory variables like size, diversification, ownership structure and technological opportunities to include the impact of various external sourcing strategies. R&D cooperation and to a lesser extent R&D contracted out are found to have a significant positive effect on internal R&D but only if the companies have absorptive capacity in the form of a full-time staffed R&D department. At the same time, firms are found to be more frequently engaged in R&D cooperation, the more they spend on internal R&D. (C) 1997 Elsevier Science B.V.