An inquiry into the process of adaptation in firms

Abstract

The third essay investigates what drives firms to make increases in innovation investments, which are risky, and long-term investments. Applications of behavioral theory of the firm show that shortfalls in expected performance drive innovation investments, indicating a problem driven motive to invest in innovation. This essay combines the behavioral theory insight of problem driven search, internal decision making processes, and the nature of innovation investments to show that increases in R&D intensity are a signal of low future performance indicating that managers make changes in R&D investments when they expect diminished future performance. Additionally, for firms performing well relative to their peers, changes in R&D are a stronger signal of low future performance. These findings are contrasted with the opposite arguments and findings suggested by existing literature utilizing the Resource-Based View of the firm.