Optionality and Selectiveness in Innovation

We use data from the European Community Innovation Survey to quantitatively explore how firms that discontinue innovation projects differ from firms that do not. Complementing prior literature centered on the option value of innovation projects, our main focus is on the firm characteristics associated with the propensity to abandon projects. In our empirical context of product innovation, firms that select out projects during development (selectors) prove to run more projects and engage in more varied activities than their counterparts (nonselectors). This likely facilitates the reallocation of resources from discontinued projects and makes opportunity costs more salient. Selectors also organize differently. They tend to sequence resource-allocation decisions, have dedicated portfolio managers, and incentivize efficient abandonment. These organization-design features likely counteract the tendency to prolong project commitments. Our discoveries lay groundwork for future inquiry into explanations of firms’ heterogeneous ability to organize innovation in uncertain market environments.

Klingebiel, Ronald and Christian Rammer (2021), Optionality and Selectiveness in Innovation, Academy of Management Discoveries 7(3) , 328-342