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CIRCLE, Center for Innovation, Research and Competences in the Learning Economy, Lund University Papers in Innovation Studies, CIRCLE, Center for Innovation, Research and Competences in the Learning Economy, Lund University

No 2012/8:
Towards a Richer Specification of the Exploration/Exploitation Trade-off: Hidden Knowledge-based Aspects and Empirical Results for a Set of Large R&D-Performing Firms

Torben Schubert () and Peter Neuhaeusler ()

Abstract: In this paper we describe a richer framework characterizing the trade-off between exploration and exploitation with respect firm performance. We devise a model that complements the notion of organizational learning as a process of inferential learning from the past with an explicit incorporation of a knowledge/information-related theory. Based on this and an international panel data set of large R&D performing firms, we can show empirically that a firm’s innovation activities affect its growth perspectives and its asset base differently, depending on the degree of exploitation/exploration. We also show that competitors’ R&D has important diverging effects on other firms which again depend on the degree of exploitation/exploration. Finally, we demonstrate the mediating role of environmental risk. We therefore argue that the trade-off between exploration and exploitation has (at least) three constituent dimensions: an internal dimension relating to performance in terms of increasing sales growth and preservation of the asset base, an external competitive dimension, and a contingency dimension relating to environmental factors such as risk. We conclude that the trade-off between exploration and exploitation can only be fully understood, if all three components are taken into account simultaneously.

Keywords: Firm performance; exploration; exploitation; innovation; growth; (follow links to similar papers)

JEL-Codes: M00; (follow links to similar papers)

32 pages, April 10, 2012

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