Behavioral and economic determinants of innovation strategy

Abstract

This thesis attempts to shed light on the impacts of Behavioral and economic determinants of innovation strategy of the firm. The thesis consists of two empirical research projects.

The second one explores the question of what inside mechanisms affect the efficiency of technological resource allocation within a diversified firm. By drawing on insights from the managerial opportunism and influence cost theory, we propose that influence costs caused by opportunistic segment managers may distort the optimal allocation of technological resources and their applicability. To test our idea, we construct patent applicability data (both firm-level and segment-level) of diversified firms and matched single-business firms in manufacturing industries of the U.S. during 1986-2002. Using coarsened exact matching (CEM) estimation for firm-level comparison, we find that diversified firms generate technological resources that are, on average, less applicable to their businesses than single business firms. Then, for segment-level analyses, employing multilevel model and controlling for investment opportunities of segments, we find that (1) the core segment (the segment with the largest sales) gets more technological resources applicable to its business than non-core segments (2) non-core segments operating businesses related to the core segment obtain more technological resource than non-core segments that are not related to the core segment, and (3) the benefit of those favored non-core segments is negatively moderated by their size. Overall, our paper contributes to the literature on cost of diversification in the context of innovation by investigating internal dynamics within a diversified firm.

The first one explores how technological and financial performance simultaneously influence decisions in exploration behavior of the firm. The behavioral theory of the firm proposes that performance–aspiration gaps significantly affect search behavior. While the theory proposes that various performance dimensions matter in organizations, in the context of innovation the research has predominantly focused on financial performance metrics. In this study, we take a multi-dimensional perspective to examine how technological performance and financial performance simultaneously determine a firm’s exploration behavior through shaping organizational states. We first introduce four types of organizational state by combining technological and financial performance. Then, we propose that financial performance feedback delimits the scope of technological boundary of exploration while technological performance feedback influences the organizational emphasis toward utilizing its own knowledge in further exploration. Using patent and financial data from 150 firms in high-tech industries of the U.S. during 1995-2002, we find support for our arguments. We find that different organizational state leads organizations to focus more on a certain types of exploration. Therefore, a firm’s exploration behavior can vary in accordance to organizational states conjointly formed by feedbacks from financial performance and technological performance. Our study offers the potential for bridging two theoretical perspectives, the behavioral theory of the firm and explorative search, with a richer range of organizational states and actual technological trajectory of exploration.