Performance and innovation behaviour of firms
visit and seminar by Prof. Poh Kam Wong, head of NUS Enterprise (web), on the EPFL/Unil campus, presenting his paper entitled “Performance Feedback, Financial Slack and the Innovation Behavior of Firms” (with Lydia Lu)
We examine the effect of a firm’s performance feedback on its innovation behavior. Building on Cyert and March’s (1963) behavioral theory of the firm, we develop specific hypotheses about how firms adjust their exploratory and exploitative innovation activities in response to performance feedback, and how this adjustment is moderated by the firms’ financial slack. Empirical evidence from a panel data covering 323 Taiwanese electronics firms listed on the Taiwan Stock Exchange (TSE) over 1998- 2011 is consistent with our theoretical predictions. In particular, we found that firms reduce both exploratory and exploitative innovation activities, but more so the former, in response to further improvement in performance when their performance is above their aspiration level. In contrast, firms increase exploratory innovation activities but decrease exploitative innovation ones in response to deteriorating performance when their performance is below their aspiration level. In addition, our results show that financial slack has a different moderating effect on the link between performance feedback and innovation when firm performance is above or below its aspiration levels.
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