Underperformance duration and innovative search: Evidence from the high‐tech manufacturing industry

Abstract

Research Summary: 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. Managerial Summary: 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 nonlinear 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. K E Y W O R D S behavioral theory, innovative search, nonlinearity, time, underperformance duration

Performance Feedback Persistence: Comparative Effects of Historical Versus Peer Performance Feedback on Innovative Search

“…We restrict our sample to firms in the manufacturing industry (Standard Industrial Classification [SIC] codes 2000-3999) as a large proportion of hightech and innovative activities come from manufacturing industries (Hecker, 1999). This practice is also consistent with previous behavioral research examining innovative search (e.g., Bromiley & Washburn, 2011;Chen & Miller, 2007;Yu et al, 2019), which makes our study comparable to previous studies. To construct our sample, we undergo several datacleaning procedures.…”

“…Innovative search t : This is computed as R&D expenditure divided by total sales. Compared with other innovative search measures, such as log transformation of R&D expenditures, this measure reflects the average benefits innovation can bring (e.g., Cohen & Klepper, 1992) as well as the relative importance of innovation compared with other firm activities (Bromiley et al, 2017; Yu et al, 2019). This is a commonly used measure for a firm’s innovative search intensity (e.g., Chen & Miller, 2007; Greve, 2003a).…”

“…Since historical aspiration reflects a firm’s own capabilities, when firms fail to achieve what they can usually achieve, managers are likely to have a better understanding of what is wrong and how they could improve in a relatively short period of time. In such circumstances, managers are better positioned to execute local search directly in the neighborhood of the problem (e.g., Chen & Miller, 2007), rather than engaging in distant search, such as innovative investments with long-term returns (Yu et al, 2019). Further, such an approach is consistent with myopic demands from shareholders, particularly institutional investors, of publicly traded companies that focus on short-term incremental returns to firm performance rather than goals with long-term time horizons (Bushee, 1998; Bromiley & Washburn, 2011).…”

“…Firms use aspiration levels to guide strategic decision making generally (Cyert & March, 1963) and innovative search in particular (Bromiley & Washburn, 2011;Chen & Miller, 2007;Greve, 2003aGreve, , 2007Yu, Minniti, & Nason, 2019). Firms garner performance feedback by assessing the discrepancy between aspiration levels and current performance (Argote & Greve, 2007).…”

The role of entrepreneurial orientation and family control of the firm in the economic recovery of underperforming firms

“…This group of firms is particularly suitable to study the influence of EO and family control on the economic recovery of underperforming firms, first because entrepreneurial and innovation behaviour is likely to be more salient for high and medium technology firms. These businesses usually face technological changes and thus need to develop strategies geared towards change and innovation (Cloodt et al, 2006;Yu et al, 2018). Also, the influence of controlling owners (e.g., a family) on forms' strategic decision-making process is likely to be more noticeable in small firms.…”