The perilous leap between exploration and exploitation

Research summary : R&D‐based exploration and exploitation are necessary in order for firms to have sustainable competitive advantage. Yet, transitioning between these orthogonal types of R&D is considered profound organizational change. Building on recent research showing that compact, significant changes in R&D expenditure is an antecedent to the transition between explorative and exploitative R&D, I show that this leap between exploration and exploitation is quite hazardous. The magnitude of changes in R&D expenditure, whether increases or decreases, is positively associated with organizational failure. Firms maintaining higher levels of absorptive capacity are more capable of surviving the leap from R&D‐based exploitation to exploration, and firms that do not use reductions in R&D expenditure to manipulate short‐term earnings performance are more likely to survive the leap from exploration to exploitation. Managerial summary : In order to survive and thrive, innovative companies must be able to exploit their existing competencies, and to explore for new ones once those current competencies decline in value. However, transiting from one form of innovation to the other is difficult because the skills required to explore are fundamentally opposed to those required to exploit. In this article, I describe how difficult this leap between exploration and exploitation can be. I show that the move between R&D‐based exploration and exploitation is related to organizational failure. In addition, firms that are superior learners are more likely to survive the leap from exploitation to exploration, and firms that are not cutting R&D expenditure to manipulate earnings are more likely to survive the leap from exploration to exploitation. Copyright © 2015 John Wiley & Sons, Ltd.     

Risk abatement as a strategy for R&D investments in family firms

The behavioral agency model suggests family firms invest less in R&D than nonfamily firms to protect their socioemotional wealth. Studies support this contention but do not explain how family firms make R&D investments. We hypothesize that when performance exceeds aspirations, family firms manage socioemotional and economic objectives by making exploitative R&D investments that lead to more reliable and less risky sales levels. However, performance below aspirations leads to exploratory R&D investments that result in potentially higher but less reliable sales levels. Using a risk abatement model, our analyses of 847 firms over 10 years supports our hypotheses. Copyright © 2013 John Wiley & Sons, Ltd.     

Conceptualizing and measuring capabilities: methodology and empirical application

This paper attempts to operationalize and measure firm‐specific capabilities using an extant conceptualization in the resource‐based view (RBV) literature. Capabilities are conceived as the efficiency with which a firm employs a given set of resources (inputs) at its disposal to achieve certain objectives (outputs). We expand on extant theoretical literature on relative capabilities, by delineating the conditions that have to be met for relative capabilities to be measured non‐tautologically. We then proceed to suggest an estimation methodology, stochastic frontier estimation (SFE), that allows us to infer firm capabilities. We illustrate this technique with a sample of firms in the semiconductor industry. Our findings underscore the heterogeneity in R& D capability across firms in this industry, as well as the persistence in these capabilities over time. We also find that the market rewards high R& D capability firms, in that they show the highest average values of Tobin's q. Copyright © 2004 John Wiley & Sons, Ltd.     

Is R&D risky?

Research summary : Many studies use research and development (R&D) intensity or R&D spending as a proxy for risk taking, but we have little evidence that either associates positively with firm risk. We analyze the relations between R&D intensity (R&D spending to sales) and R&D spending on the one hand and 11 different indicators of firm risk on the other, using data from 1,907 to 3,908 firms in various industries over 13 years. The analysis finds a general lack of consistent positive association between R&D and firm risk, making the use of R&D as an indicator of risk taking questionable. Furthermore, R&D intensity and spending do not correlate positively, suggesting they measure different constructs. We discuss potential reasons for these nonsignificant results. Our study demonstrates that researchers should avoid casual use of R&D as a proxy for risk taking without explicitly providing a clear definition and measurement model for risk. Managerial summary : Risk is a key construct in strategic management research. Many studies in this area measure risk taking by research and development (R&D) intensity (the ratio of R&D spending to sales) or R&D spending. However, since R&D intensity and spending have also been used to measure various other things such as information processing demands, this raises the question of whether R&D intensity and spending are valid indicators of firm risk. We examine this issue by considering the associations of R&D intensity and R&D spending with conventional measures of firm risk. We find a general lack of consistent positive association between R&D and firm risk, making the use of R&D as an indicator of risk taking questionable. Furthermore, R&D intensity and spending do not correlate positively, suggesting they measure different things. Copyright © 2016 John Wiley & Sons, Ltd.     

Make,buy, organize: The interplay between research,external knowledge,and firm structure

We bridge current streams of innovation research to explore the interplay between R&D, external knowledge, and organizational structure—three elements of a firm's innovation strategy, which we argue should logically be studied together. Using within‐firm patent assignment patterns, we develop a novel measure of structure for a large sample of American firms. We find that centralized firms invest more in research, and patent more per R&D dollar, than decentralized firms. Both types access technology via mergers and acquisitions, but their acquisitions differ in terms of frequency, size, and integration. Consistent with our framework, their sources of value creation differ: while centralized firms derive more value from internal R&D, decentralized firms rely more on external knowledge. We discuss how these findings should stimulate more integrative work on theories of innovation. Copyright © 2013 John Wiley & Sons, Ltd.     

Outside CEOs and innovation

Research Summary: Innovation is the principle driver of firm and economic growth. Thus, one disturbing trend that may explain stagnant growth is a 65% decline in firms’ R&D productivity. We propose that the rise of outside Chief Executive Officers (CEOs) may be partially responsible for the decline because those CEOs are more likely to lack technological domain expertise necessary to manage R&D effectively. While this proposition was motivated by interviews with Chief Technology Officers (CTOs), we test it at large scale. We find that firm R&D productivity decays during the tenure of outside CEOs relative to that of inside CEOs. We further find this effect is more pronounced for firms with high R&D intensity and for firms employing outside CEOs with more remote experience, lending circumstantial support for the underlying assumption regarding lack of expertise. Note that this is not a call for boards to avoid outside CEOs, rather it is recommendation to consider the implications for innovation. Managerial Summary: While outside CEOs offer advantages over internal candidates, we argue one unintended consequence is weaker innovation. This argument was prompted by two coincident trends: a 65% decline in companies’ R&D productivity and a doubling of outside Chief Executive Officers (CEOs). The argument was reinforced by interviews with Chief Technology Officers (CTOs), who recounted shifts in orientation from R&D as an investment to R&D as an expense that occurred shortly in response to a new CEO. We felt this shift was more likely with outside CEOs because they may lack technological domain expertise necessary to effectively manage R&D. Our results are consistent with the argument—company R&D productivity decreases under outside CEOs. Note, however, that we don’t advocate avoiding outside CEOs, rather we recommend R&D firms consider technological domain expertise during CEO hiring.     

R&D team diversity and performance in hypercompetitive environments

Research summary : This article examines the effects of an R&D team's composition on its performance outcomes in hypercompetition. The fundamental feature of firms in hypercompetitive settings is that they are constantly challenged to improve their competitiveness in a relentless race to outperform one another. Analyzing a unique data set from the Formula 1 motorsport racing industry, we find an inverse U‐shaped relationship between team diversity in task‐related experience and performance an important result that diverges from well‐established theories developed in more stable environments. Fundamentally, we show that the role of R&D team experience diversity varies depending on the size of the organizations in which R&D teams operate. While we find a moderating effect for firm age, this effect is not as robust as that of firm size. Managerial summary : This article examines the relationship between R&D team composition and performance in fast‐moving environments. Firms in these environments are constantly challenged to improve their competitiveness by outperforming one another. Analyzing a unique data set from the Formula 1 motorsport racing industry, we find that a team's diversity in job‐related experience increases its performance up to a certain extent. Once R&D teams become too diverse, performance decreases because communication and coordination become more difficult. We also show that the role of R&D team diversity varies depending on the size of the organizations in which R&D teams operate. Overall, our findings provide several novel implications for the strategy, innovation, and team literatures. Copyright © 2016 John Wiley & Sons, Ltd.     

Does international research and development increase patent output? An analysis of Japanese pharmaceutical firms

Internationalizing research and development is often advocated as a strategy for fostering the development of technological capabilities. Although firms conduct international R&D to tap into knowledge bases that reside in foreign countries, we argue that in order to benefit from international R&D investments firms must already possess research capabilities in underlying or complementary technologies. We examine the international R&D expansion activities, research capabilities, and patent output of 65 Japanese pharmaceutical firms from 1980 to 1991. We find that firms benefit from international R&D only when they possess existing research capabilities in the underlying technologies. In addition to refining our understanding of when international R&D enhances firm innovation, our results integrate asset‐seeking and asset‐based theories of foreign direct investment. Internationalizing R&D to tap into foreign knowledge bases is consistent with asset‐seeking theories of foreign direct investment, while the contingent nature by which firms benefit from international R&D is consistent with asset‐based theories of foreign direct investment and the notion of absorptive capacity. Copyright © 2004 John Wiley & Sons, Ltd.     

Strategic investments in Japanese corporations: do foreign portfolio owners foster underinvestment or appropriate investment?

This paper investigates the effect of foreign ownership on strategic investments in Japanese corporations. Foreign owners are typically portfolio investors who frequently buy and sell shares and hold diversified portfolios of small stakes in many firms. Prior research has presented two conflicting perspectives on the role of such investors: (a) their frequent trading leads to pressure for short‐term returns that fosters underinvestment; (b) their active trading fosters appropriate investments. We investigated the relationship between foreign ownership and strategic investments using dynamic panel data analysis of a sample of 146 Japanese manufacturing firms from 1991 to 1997. We found that foreign ownership enhances strategic investments (in R&D and capital intensity) to a greater extent when firms have growth opportunities than when they lack such opportunities. We conclude that foreign ownership fosters appropriate investment. Copyright © 2006 John Wiley & Sons, Ltd.     

Are all ‘sharks’ dangerous? new biotechnology ventures and partner selection in R&D alliances

We examine how new biotechnology firms (NBFs) select pharmaceutical firms as R&D allies as a function of value creation and value appropriation considerations. We develop a theoretical framework to understand partnering decisions accounting for both, a potential partner's ability as well as incentives to appropriate and create value within an R&D alliance. Our empirical findings show that NBFs are more likely to ally with pharmaceutical firms with the ability to create value, as long as these firms have the incentives to use their skills to create rather than appropriate value. Our study highlights the double‐edged sword nature of value creation skills and provides a deeper understanding into the contextual factors that determine when potential R&D partners will perceive such skills as increasing appropriation risks. Copyright © 2012 John Wiley & Sons, Ltd.     

Declared essential patents and average total R&D expenditures per patent family

The sharp increase in SEP declarations and declaring firms emphasizes the necessity for understanding firms’ innovation investment behavior in standardization. This paper empirically investigates whether declared standard-essential patents (SEPs) and the declaring firm’s business model (operationalized as a firm’s location in the value chain) are associated with a firm’s innovation investment behavior. To this end, we measure firms’ innovation investment behavior through average total research and development (R&D) expenditures per filed patent family for publicly listed firms from 1999 to 2018. Our sample mainly includes major SEP family declarants. We rely on a binary business model taxonomy differentiating upstream and downstream firms. Within that setting, total R&D expenditures rise with increasing fragmentation of declared SEP families, suggesting that firms adjust their R&D investments to declaration developments in standard-setting organizations (SSOs). We also show that upstream firms have significantly lower total R&D expenditures than downstream firms, which could indicate structural differences in their intellectual property (IP) and R&D management processes. Our results can help SSOs and regulators better understand firms’ innovation investment behavior.     

R&D spending,domestic competition,and export performance of Japanese manufacturing firms

This paper examines three factors influencing the export performances of Japanese manufacturing firms: R&D spending, domestic competitive position, and firm size. Export sales are positively associated with (1) R&D expenditures, (2) size of a firm, and (3) average R&D intensity of an industry. A firm's export ratio is related to the size of the firm, but not to the firm's and the industry's R&D intensities. Follower firms are characterized by higher export ratios than market leaders. The results indicate a relationship between the patterns of domestic competition and the international competitiveness of Japanese firms.     

Formation of R&D consortia: industry and company effects

This study investigates economic and strategic inducements of R&D cooperation. We focus on industry and company factors that affect a firm's rate of participation in R&D consortia. These factors are analyzed in a dynamic context using a sample of 312 Japanese firms in 74 industries between 1969 and 1992. We find a firm in an industry with weak competition and appropriability conditions has a higher rate of consortia participation. A firm's R&D capabilities, network formation through past consortia, encounter with other firms in product markets, age, and past participation in large‐scale consortia also positively affect its tendency of consortia formation. Copyright © 2002 John Wiley & Sons, Ltd.     

International R&D partnerships and intrafirm R&D–marketing–production integration of manufacturing firms in emerging economies

Although cross-functional integration is important for research and development (R&D), research about implications of cross-functional integration has been rather sparse. In new product development (NPD), no study to date has examined intrafirm as well as interfirm integration of key functions such as intrafirm R&D–marketing–production together with interfirm integration of host R&D–partner R&D. Such marketing and operations interface contributes to a better understanding of how operational and marketing activities impact on competitiveness and firm performance. This study collected data from 202 electronics manufacturing firms operating in an emerging economy, mainland China and Hong Kong with international R&D partnerships. The findings indicate that a high level of R&D integration between firms improved NPD performance when cross-functional integration is based on existing rather than new product configurations and key technologies. Interestingly, in high distance situations, cross-functional integration in the production validation stage generated NPD success. The findings show that high environmental uncertainties lead to a high level of host and partner firms R&D integration. However, product newness has no significant effects on R&D integration in any of the NPD stages.     

Does R&D offshoring lead to SME growth? Different governance modes and the mediating role of innovation

Research summary : In this article, we address the role of R&D offshoring strategies in the sales growth of small‐ and medium‐sized enterprises (SMEs). We propose that different governance modes of R&D offshoring—insourcing versus outsourcing—may lead to growth, but that they differ in their effects. In turn, we argue that innovation mediates the relation between international R&D sourcing strategies and sales growth. Based on a large database of SME manufacturing enterprises in Spain, we find that offshore outsourcing positively affects sales growth both directly and indirectly, while offshore insourcing only affects sales growth indirectly via innovation results. The analysis reveals different contributions of each governance mode to sales growth and the mediating role of innovation in the relation between R&D offshoring and firm growth. Managerial summary : We analyze how different governance modes of international R&D sourcing—offshore insourcing and outsourcing—may contribute to growth in SMEs. Modes of offshore R&D outsourcing positively affect the growth of sales in two ways. One effect is direct, produced by improved efficiency, flexibility, enhanced resources, and access to new markets. And the other effect is indirect as offshore R&D outsourcing favors the achievement of innovations, and this in turn, positively affects firm growth. For their part, captive modes only exert an indirect effect. Offshore R&D insourcing contributes to the achievement of innovations, and thus, ultimately to firm growth in so far as these innovations enable SMEs to increase sales. Therefore, innovation results perform a mediating role in the relation between R&D offshoring and sales growth. Copyright © 2015 John Wiley & Sons, Ltd.     

The Paradox of Openness: How Product and Patenting Experience Affect R&D Sourcing in China?

External R&D sourcing may help firms compete in an environment characterized by rapid technological changes. Yet, prior studies have produced conflicting findings on how a firm's technological experience affects the extent to which the firm engages in external R&D sourcing. Although many highlight that firms with extensive technological experience are equipped with more technological knowledge, collaborative skills, and absorptive capacity, encouraging greater levels of external R&D, others suggest the opposite due to potential exchange hazards and partnership conflicts. Adopting an external partner's perspective, the current study reconsiders this “paradox of openness” by analyzing how a focal firm's product experience and patenting experience affect an external partner's tendency to provide external R&D services to the focal firm. Specifically, this study explore how a focal firm's knowledge protectiveness and tacitness embedded in its product and patenting experience influences the external partners' motivation for knowledge transfer. This study predicts that a firm's product experience increases the focal firm's external R&D sourcing because it provides high levels of knowledge tacitness and external openness and can encourage external partners to share and exchange knowledge with the focal firm. In contrast, a firm's patenting experience decreases the focal firm's external R&D sourcing because it denotes knowledge explicitness and protectiveness and may discourage external partners to share and exchange knowledge with the focal firm. This study further predicts that patenting experience has a negative moderating effect on the relationship between product experience and external R&D sourcing. Using a data set of 575 high‐tech firms in China, this study finds support for our predictions. Our findings contribute to the growing literature on the knowledge‐based view and technology entrepreneurship in emerging markets.     

Creating incentives for innovation? The relationship between pay dispersion in R&D groups and firm innovation performance

Innovation is a critical organizational outcome for its potential to generate competitive advantage. While the contribution of knowledge workers to the generation of innovation is widely recognized, little is known about how organizational incentive mechanisms stimulate or inhibit these workers' behaviors that promote innovation. This study examines the relationship between pay dispersion in R&D groups and firm innovation using employee‐level compensation data in US high‐technology firms. The results show that (1) pay dispersion in R&D groups is negatively related to firm innovation and (2) this negative relationship is alleviated in firms with greater financial slack. This study contributes to the innovation literature by illuminating the implications of organizational incentive systems for successful innovation. Copyright © 2013 John Wiley & Sons, Ltd.     

Direct and interaction effects of top management team and board compositions on R&D investment strategy

This paper examines why firms differ in levels of R&D investment intensity by developing and testing a theory of direct and interaction effects of top management team and board outsider composition on R&D intensity. The theory is tested in a longitudinal sample of technology‐intensive firms that completed an initial public offering. The results indicate that both top management team composition and board composition have direct and additive effects on R&D investment intensity. Also, monitoring by outsider directors does not constitute a universally effective governance mechanism with regard to a firm's R&D investment strategy. Firms opt for lower levels of R&D investment intensity when their outsider‐rich board interacts with a team of managers who have high levels of (1) firm tenure, (2) shared team‐specific experience, or (3) functional heterogeneity. When a firm's competitiveness relies on sustained R&D investments, it is important to note these interaction effects and make adjustments to promote a healthy dialogue between managers and the board. Adjustments could be made to the management team composition (e.g., initiating management turnover to reduce firm tenure) or to the bundle of governance mechanisms (e.g., partially substituting board monitoring with other mechanisms). Copyright © 2006 John Wiley & Sons, Ltd.     

Allocation of inventive effort in complex product systems

This paper examines the allocation of inventive effort in complex product systems. I argue that complex product systems, e.g., personal computers (PCs), are distinguished by functional interaction among several components, each guided by a relatively autonomous bundle of technical and economic characteristics. I try to explore whether the dynamics of such interactions between components of complex product systems can help us understand changes in the relative allocation of inventive effort. I advance and empirically test three hypotheses: (1) emergence of component constraints (bottlenecks) in product systems will trigger research and development (R&D) investment to resolve the constraints; (2) slack component firms have a strong incentive to invest in resolving component constraints; and (3) the incentive of slack component firms to invest in resolving component constraints is increasing in their prior sunk R&D investments in slack components. In sum, I argue that interactions between components in a product system conditions the R&D incentives of firms and also that the incentives are increasing in their prior investments or capabilities. Using product reviews from technical journals, I trace the constraint components in the PC from 1981 to 1998 and attempt to predict shifts in the allocation of inventive effort in the subsequent period. The empirical results strongly support all three hypotheses. This study highlights the paradoxical effect of modularity in complex product systems. Modular design architectures, while contributing to accelerating the pace of technical change, also tend to limit the economic benefits of firms' component R&D efforts, especially when different components technologies are progressing at different rates. This often creates an impetus to enlarge the scope of firm R&D activities beyond the component product markets that firms operate in. Other implications for R&D decision making are discussed. Copyright © 2007 John Wiley & Sons, Ltd.     

Entry mode,organizational learning,and R&D in foreign affiliates: evidence from Japanese firms

This paper develops hypotheses concerning the role of entry mode and experience‐based organizational learning as determinants of the R&D intensity of foreign affiliates and tests these hypotheses on a sample of 420 Japanese manufacturing affiliates abroad. Entry mode has a major impact on R&D activities: the R&D intensities of acquired affiliates substantially exceed those in wholly owned greenfield affiliates, while the R&D intensities of minority owned ventures are higher if Japanese parent firms lack strong R&D capabilities at home. For greenfield operations, support is found for an incremental growth pattern of foreign R&D as a function of organizational learning and affiliate capability building. The results are consistent with the view that part of the explanation for Japanese firms' relative lack of involvement in overseas R&D must be sought in their status as ‘latecomers’ in the establishment of overseas manufacturing networks. At the same time, a number of Japanese firms have actively used foreign acquisitions and joint ventures to gain access to overseas technology and to establish overseas R&D capabilities at a faster pace. Copyright © 2002 John Wiley & Sons, Ltd.