Underperformance Duration and Innovative Search: Evidence From the High-tech Manufacturing Industry

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Author Information : Wei Yu '18 (National University of Singapore)

Maria Minniti (Syracuse University, Whitman School of Management)

Robert Nason (Concordia University, John Molson School of Business)

Year of Publication : Strategic Management Journal (forthcoming)

Summary of Findings : Our research shows that the length of time that a firm has been underperforming contributes to shaping firms’ innovative search patterns in a nonlinear manner.

Research Questions : Are underperforming firms' innovation decisions influenced by the duration of underperformance?

How does underperformance duration influence those firms' innovative search?

What we know : Previous behavioral theory literature argues and finds that the gap between firm performance and aspiration levels (underperformance intensity) is an important trigger for the innovative search behavior of firms. This exclusive focus on underperformance intensity, however, has overshadowed the importance of underperformance duration, or the length of time that a firm has been performing below its aspiration level. This omission is unfortunate, as previous psychological literature has long recognized the importance of performance permanence on decision making.

Novel Findings : We draw on behavioral theory, shareholder pressure and organizational learning to link underperformance duration to patterns of innovative search. We specifically examines three aspects of innovative search: innovative search magnitude (R&D expenditures), search scope (the use of new knowledge) and search depth (the use of familiar knowledge).

We argue that shareholder pressure and myopic learning would dominate change pressure and pressure to search new knowledge in the early years of underperformance, inducing reductions in innovative search. However, as underperformance persists, pressure for new knowledge and change would break free and lead to increases in innovative search.

We find that innovative search magnitude and scope each first decreases and then increases with underperformance duration. In addition, we find marginal evidence that innovative search depth first increases and then decreases with underperformance duration.

Implications for Practice : Innovation is vital for a firm’s survival and competitive advantage and requires a search for knowledge. Previous research suggests that the gap between current performance and desired performance is an important trigger for firms' innovative action. We suggest that how long the firm has been underperforming also plays an important role in firm innovation. Using financial and patent data on public high technology manufacturing firms, we show that there are non-linear relationships between the duration of a firm’s underperformance and its innovative activities. We find that underperforming firms first decrease and then increase R&D spending and the use of new knowledge as underperformance prolongs. Our results imply that underperforming firms face competing short and long term pressures that influence the nature of its innovative activities.

Full Citations : Yu, W., Minniti, M. and Nason, R. (in press) Underperformance duration and innovative search: Evidence from the High‐Tech manufacturing industry. Strategic Management Journal.

Abstract : Behavioral theory examines how the intensity of underperformance influences firms’ strategic decisions; yet, it largely fails to consider the effect of underperformance duration. Drawing on behavioral theory and organizational learning, we argue that the length of time that a firm has been underperforming contributes to shaping firms’ innovative search patterns. We test our theory merging COMPUSTAT and NBER patent data for 1,610 high-tech manufacturing companies between 1986 and 2006. Our results largely support our predicted curvilinear relationships. We find that innovative search magnitude and scope each first decreases and then increases with underperformance duration. In addition, we find marginal evidence that innovative search depth first increases and then decreases with underperformance duration. The statistical and practical significance of the results is also discussed.

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This research shows that the length of time that a firm has been underperforming contributes to shaping firms’ innovative search patterns in a nonlinear manner.

Wei Yu

Wei Yu

Wei Yu is a Ph.D. student in entrepreneurship at the Martin J. Whitman School of Management.
Wei Yu
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