IVS seminar

Abstract

Organizational theorists have long argued that despite its costs, organizational slack helps ensure the long run survival of the firm. Notwithstanding the construct’s proposed importance for dynamic adaptation and proactive management of environment its link with innovation has been rather inconclusive and fragmented. Empirical evidence is sparse and illuminated mostly from cross sectional studies where innovation is not only defined very broadly to include both technological and administrative innovations but also is viewed homogenous and one-dimensional. Further, little effort has been expended to extend the empirical testing to include two opposing lines of thinking: the agency theory and the satisficing principle and to develop richer linkages with the theory of search.

In this paper, by integrating organizational literature on slack with the literature on the theory of search and agency view, I investigated the slack-innovation relationship with patent data (N=13651 filed between 1966 and 2001) on 10 US farm equipment manufacturers. Preliminary findings showed that absorbed and potential slack had an inverted U-shaped relationship with novel innovations (non-local and organizational boundary-spanning) as hypothesized and that this relationship was most prominent when performance exceeded aspiration levels and/or the ratio of institutional ownership declined. Environmental dynamism was found to have positive relation with novel innovations whereas munificence had no impact. Against the subset of novel innovations, the research also found that at high levels of slack, firms narrowed their search scope and increased the depth of their search. In other words, too much increase in slack led to exploitation over time. I also hypothesized and tested for a curvilinear relationship between slack and emerging innovations (innovations that are new to the firm and the industry and that the firm may or may not have crossed organizational boundaries) to discern the impact of boundary behavior. The results did prove some support for the hypothesis for potential slack but none for others, implying that diminishing returns to slack were not significantly observable when non-local search took place within and outside the organizational boundaries. Imposing agency control (institutional ownership) however led to a confirmation of the hypothesis for potential slack.