Academic journal article Journal of Business and Entrepreneurship

Exploring the Impact of an External Crisis on R&d Expenditures of Innovative New Ventures

Academic journal article Journal of Business and Entrepreneurship

Exploring the Impact of an External Crisis on R&d Expenditures of Innovative New Ventures

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

In today's fast-moving and unpredictable business environment, a firm's ability to innovate becomes one of its most important capabilities, having the potential to create competitive advantage leading to the firm's survival and above-average profitability. Innovation as a management concept can be broadly defined as "the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations" (OECD and Eurostat, 2005, p.46). Being developed either internally or in other organizations, the adopted new product, process or method can lead to competitive advantage stemming from Shumpeterian rent - appropriating the benefits of successfully implemented innovations, until these innovations get imitated by competitors (Mudambi & Swift, 2014; Kor & Mahoney, 2005; Rosenberg, 1990).

Research and development activity (R&D) has long been considered an important internal organizational driver of innovation in organizations (Mudambi & Swift, 2014; Fagerberg, 2006; Thornhill, 2006), allowing firms to secure an oligopolistic position, create the first-mover advantage (Kor & Mahoney, 2005; Rosenberg, 1990), improve productivity (Wakelin, 2001; Mairesse & Sassenou, 1991) or enhance the internal ability to apply the existing knowledge to commercial ends (Cohen & Levinthal, 1990). Overwhelming body of evidence suggests that R&D investments are beneficial for firms (see, e.g., Mudambi & Swift, 2014).

Y et, as any other activity, R&D imposes demands on scarce organizational resources (most important, capital and managerial time), which might have better use in other spheres of business. The problem of having to choose the proper level of expenditure in R&D activities is most salient in new ventures, which are usually substantively resource-constrained (Katila & Shane, 2005).

In this paper, we address the broad research question of the impact of an externally-caused crisis on R&D expenditures of new ventures. Answering this question will provide essential insight on whether these organizations' behavior is close to the rational one. Prior studies demonstrate that only stable investments in R&D allow the firms to develop and sustain capabilities underpinning their competitive advantage (Kor & Mahoney, 2005; Dierickx & Cool, 1989). Therefore, any disruption in the flow of funds to R&D can have a detrimental effect on the knowledge accumulated through this activity. Some recent studies complement the original, 'need for stable R&D funding' thinking by stating that "high performing firms maintain relatively long periods of stable R&D activity, interrupted by compact, significant changes in their innovative efforts" (Mudambi & Swift, 2014, p.126). In other words, the current evidence suggests that high-performing firms are engaged in long periods of exploitative R&D (relatively low-cost and stable) with infrequent switches to exploratory R&D (relatively high-cost and short) [see the discussion in Mudambi & Swift, 2014]. In line with this reasoning, during an external crisis a firm's R&D expenditures should either remain on the same level (exploitative R&D), or substantively increase (exploratory R&D), to develop new capabilities needed for surviving during the adversity. Ergo, the rational response of new ventures to a crisis implies sustaining or increasing the R&D expenditures. That said, in this paper we investigate if the actually observable behavior matches the rational model.

Surprisingly, the existing literature does not devote enough attention to the behavioral question of the impact of a crisis on R&D expenditures of firms, at either firm or industry levels (Filippetti & Archibugi, 2011). Available related studies propose two opposite views. …

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