We examine the impact of internal and external r&d on labour productivity in a 6-year panel of dutch manufacturing firms. We apply a dynamic panel data model that allows for decreasing or increasing returns to scale in internal and external r&d and for economies of scope. We find complementarity between internal and external r&d, with a positive impact of external r&d only evident in case of sufficient internal r&d. These findings confirm the role of internal r&d in enhancing absorptive capacity. The scope economies are accompanied by decreasing returns to scale at high levels of internal and external r&d. The analysis indicates that productivity grows by increasing the share of external r&d in total r&d.