Academic journal article Journal of Business Economics and Management

Organizational Slack Effects on Innovation: The Moderating Roles of CEO Tenure and Compensation

Academic journal article Journal of Business Economics and Management

Organizational Slack Effects on Innovation: The Moderating Roles of CEO Tenure and Compensation

Article excerpt

Reference to this paper should be made as follows: Mousa, F.-T.; Chowdhury, J. 2014. Organizational slack effects on innovation: the moderating roles of CEO tenure and compensation, Journal of Business Economics and Management 15(2): 369-383.

JEL Classification: J33, O31, O32.

Introduction

This study enhances our understanding of the impact of organizational resources on firm innovation. The importance of resources in firm innovation cannot be emphasized enough. Many scholars, building on Penrose's (1959) work, have argued that resources, and the capability to effectively mobilize them, are essential to organizational innovation (Levinthal, March 1981). A better understanding of the nature of the resources needed to support innovation is therefore essential. This is particularly true given that innovation is the driving force behind economic development (Schumpeter 1934) and essential to any firm dreaming of a place in the competitive world of the future (Van de Ven 1986). This study, therefore, aims to inform the literature on exactly how slack resources influence the organizational commitment to innovation.

The impact of organizational slack on firm outcomes has been perceived as both a positive and a negative. On one hand, slack has been perceived as essential to various organizational outcomes. Cyert and March (1963) provided the seminal answer to this puzzle when they argued that for organizations to survive, and for their political coalitions and subgroups to meet competing goals, slack must exist. Later researchers built on this work, suggesting that slack prevents unhealthy conflict (Bourgeois, Singh 1983) and creates buffers that reduce information-processing and coordination costs across subunits (Galbraith 1973). More recently, scholars have argued that slack supports innovation (Singh 1986), firm expansion (Bamford et al. 2000), young firm IPO valuation (Mousa, Reed 2013), and growth (Bradley et al. 2011). Some researchers, however, have countered that slack is an indication of waste. For instance, excess resources may decrease efficiency, resulting in performance below the full potential of the available resources (Williamson 1963). These scholars argue that slack may interrupt the entrepreneurial process (Mosakowski 2002) and negatively impact entrepreneurial management (Bradley et al. 2011).

In this study, we specifically focus on two types of organizational slack: financial and human slack. Building on the literature in the two broad categories of financial and human slack (e.g., Cooper et al. 1994; Mishina et al. 2004), we argue that slack is crucial to facilitating and sustaining innovation in organizations and suggest that such resources not only impact growth (Mishina et al. 2004), but also directly impact firm innovation. We further argue that CEO tenure and compensation, combined with slack resources, impact R&D spending. The research and development (R&D) process generally requires ample time and resources, and entails some risk. Both financial and human resources are particularly necessary throughout the R&D process. For instance, not only do financial resources aid the R&D process from an operational point of view, they are essential to the acquisition of equipment, technology, new research labs, and the hiring of scientists.

1. Theoretical foundations and hypothesis development

1.1. Financial slack, human slack, and R&D investments

Financial slack refers to the level of assets available to an organization (e.g., cash on hand) (Kraatz, Zajac 2001) that can be easily deployed to various uses (Mishina et al. 2004). Financial slack is the least absorbed form of slack, especially given that it is completely divisible for the allocation of multiple activities (Greve 2003).

From a resource based view (RBV), financial assets are valuable, but not rare, because they are generic (Latham, Braun 2008). …

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