Papers in Innovation Studies,
Lund University, CIRCLE - Centre for Innovation Research

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

JEL-codes: M00

32 pages, April 10, 2012

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