The recent surge of interfirm cooperative agreements can be seen to express a way for firms to respond to and organize market failure, especially in technology markets. The incentives for firms to internalize activities are to avoid the disadvantages, or capitalize on the advantages, of imperfections or disequilibria in external mechanisms of resource allocation. The purpose of this paper is to investigate empirically, on the basis of data from German firms, the impact of vertical R&D cooperation on innovation in firms. The analysis is based on a survey conducted by the " Center for European Economic Research " (Zentrum für Europäische Wirtschaftsforschung, ZEW) in Mannheim among 370 companies, mainly in the manufacturing sector. The results of the econometric analysis suggest a statistically significant impact of vertical R&D cooperation on the intensity of R&D activity in German firms. Informal modes of R&D cooperation (informal exchange of technological knowledge) seem to be more important for their innovative behavior than formal ones (joint ventures, joint development teams etc.). Since the relationship between vertical R&D cooperation and the intensity of R&D activity in innovating firms has been tested in a broader theoretical and empirical framework, the empirical results also confirm the significance of other key determinants of innovative activity, such as " technological opportunities " , " appropriability conditions " and " market demand " .