Understanding the Antecedents,Contingencies, and Performance Implications of Process Innovation: A Dynamic Capabilities Perspective

This paper examines one of the most important sources of competitiveness in dynamic industries—the capability of firms to introduce process innovations. While the management of product innovation has received considerable theoretical and empirical attention in the literature, our knowledge about how firms become process innovators—and why many firms fail to do so—remains underdeveloped. In order to provide novel insights into the configuration of firms' process innovation activities and their performance implications, this paper draws on the dynamic capabilities approach. More specifically, this study aims to shed light on the antecedents, contingencies, and performance consequences of interfirm differences in process innovation success, that is, firms' propensity and effectiveness of implementing new production, supply chain, or administrative processes. Particular emphasis is placed upon the analysis of potential complementarities or substitution effects between innovation activities such as internal and external research and development, prototyping, external knowledge acquisition, and employee training. Cross‐sectional data from a large‐scale survey of German manufacturing and service firms serves as the basis for testing the hypotheses advanced in this paper. Findings suggest that by engaging in a broad range of different innovation activities, firms can indeed increase the likelihood of achieving process innovation success, which is in turn positively related to firm financial performance. Yet decreasing marginal returns to innovation activities have to be considered as process innovation propensity was found to increase with the number of activities pursued simultaneously only up to a point, after which negative marginal returns set in (inverted U‐shaped relationship). Furthermore, while environmental turbulence was found to have surprisingly little influence when it comes to translating process innovation success into firms' subsequent financial performance, industry membership as well as the nature of the innovation process (i.e., internal generation, external adoption, or cocreation of an innovation) emerged as key contingency factors. These findings have important theoretical as well as practical implications for managing new process introductions.