Invest in Innovation or Not? How Managerial Cognition and Attention Allocation Shape Corporate Responses to Performance Shortfalls

Abstract

This study investigates the influence of managerial cognition and attention allocation on firms’ responses to negative performance feedback. We explore how managerial cognition, as shaped by managers’ experiences, connections, positions, and industry environments, affects underperforming firms’ attention allocation and, consequently, their decisions to invest in innovation. Utilizing a longitudinal sample of Chinese high-tech firms from 2009 to 2017, we find that firms increase investment in research and development (R&D) when performance falls below aspiration levels. We also document that underperforming firms are associated with an even larger R&D investment increase when their CEOs have an R&D or engineering background, serve simultaneously as the board chair, or are not politically connected. In addition, we highlight the moderating effects of industry competition and industry norms on the relationship between firm underperformance and R&D intensity. We conclude that managerial cognition affects firms’ allocation of attention to innovation as a solution for closing performance gaps and shapes corporate responses to negative performance feedback.

The double‐edged sword: A work regulatory focus perspective on the relationship between organizational identification and innovative behaviour

“…It also indicates that factors in relation to growth and strong ideals should be underlined for fostering OI of employees to induce a work promotion focus that facilitates innovative behaviour. This can be achieved, for example, by positively framing feedback to employees, guiding employees to look ahead to the future (He et al, 2020; He et al, 2021; You et al, 2021) and implementing proper promotion policies, incentive‐based pay and other human resources practices.…”

Remembering James March

“…They provide a contingency perspective arguing that the impact of this subjective interpretation depends on certain individual and structural factors that affect their attention allocation process. Finally, the article by He, Huang, and Yang (2021) enriches the understanding of 'situated attention' in the attention-based view of firms by highlighting social context in which managers are embedded in. It emphasizes the role of interactions between managers and their environment in their cognitive and attention allocation processes and the subsequent impact on firm innovation.…”

“…Attention is a key concept in Cyert and March's (1963) behavioral theory of the firm, and the attention-based view has become an important perspective in strategic management and organizational studies. Closely linked to the article by Jia, Tsui, and Yu (2021), the study by He, Huang, and Yang (2021) emphasizes the important role of managerial cognition and attention allocation in firms' decision-making and learning processes. Contributing to the performance feedback theory of organizational learning, this article argues that organizational learning and search are not only influenced by aspirations based on past experiences but also affected by a cognitive process based on a forward-looking process.…”

“…Entitled 'Invest in Innovation or Not? How Managerial Cognition and Attention Allocation Shape Corporate Responses to Performance Shortfalls', the article by He, Huang, and Yang (2021) develops a theoretical framework by considering the role of managerial cognition in firms' responses to performance gaps from the perspective of the attention-based view of organizations. The authors advance the argument that managerial cognition affects managers' attention allocation, which influences their interpretations of performance gaps, perceptions of innovation in solving firms' performance problems, and subsequent strategic choices.…”

“…Second, the study by He, Huang, and Yang (2021) contributes to the performance feedback learning model by emphasizing the subjective interpretations of managers about the suitability of firm innovation as a viable solution to address a firm's performance problems. They provide a contingency perspective arguing that the impact of this subjective interpretation depends on certain individual and structural factors that affect their attention allocation process.…”