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Article Excerpt
Innovation is generally viewed as critical to the competitive health of organizations, industries, and nations. As such, how, why, when, and which organizations innovate has been a subject of interest in such diverse literatures as economics, business strategy, R&D management, organizational psychology, and finance. One important aspect of innovation writings concerns the nature of organizational resources needed to support it. We can think of resources in terms of people, equipment, technology, information, special relationships, and even unique items such as patents or reputations. However, financial resources are probably the most necessary, if not sufficient, element in ensuring the translation of creative ideas into new processes, products or services. This is because innovation requires investments that go beyond those needed to address immediate operational needs, and because financial resources are a primary means for acquiring and supporting the people, equipment, technology and infrastructure involved in innovation. For example, Griliches (1990), in his survey, noted that the relationship between R&D spending and innovation has been repeatedly demonstrated.
Organizational slack is one possible source of funding for innovation. It consists of resources available to the firm above-and-beyond those necessary to meet immediate business requirements, fund ongoing programs, or meet explicit objectives (Cyert and March, 1963; March and Simon, 1958). Although, as will be discussed later, there are various definitions of slack (Bourgeois, 1981), all of them reflect the notion of excess resources that both cushion the organization from environmental changes and represent an opportunity for discretionary allocations, such as to innovation activities. According to Rosner (1968), slack allows firms to purchase innovation, absorb failure, bear the cost of developing and implementing innovations, and explore ideas in advance of" an actual need. As an illustration, Lee and Grewal (2004) showed that slack was related to retailers' adoption of the Internet as a communication channel.
However, this "cushion," which can enhance the competitive position of the firm and be a source of funding for innovation activities, may also be viewed as an impediment to organizational performance in general and to innovation activities in particular. At the organizational level, some have argued that slack reflects inefficiencies in organizations (e.g., Thompson, 1967; Yasai-Ardekani, 1986)--witness the emphasis on consolidation, streamlining, downsizing, and other efficiency-driven initiatives of the last 20 years--and that poor internal control systems in public corporations contribute to inefficiencies in deploying such resources (Jensen, 1993). At the innovation level, it has been proposed that slack gives rise to reduced discipline in the management of projects, thereby impairing innovation outcomes (Nohria and Gulati, 1996).
Thus, slack has been viewed as both creating funding opportunities for innovation, and as encouraging wasteful, undisciplined spending that hurts innovation outcomes. Trying to reconcile these positions, Bourgeois (1981) postulated a curvilinear relationship between slack and organizational "success" in general, while Nohria and Gulati (1996) and Geiger and Cashen (2002) extended the argument to the slack-innovation relationship in particular and offered empirical evidence to support such a relationship. These researchers suggest that too little slack may inhibit experimentation leading to innovation, while too much slack may lead to diminishing returns, or accelerating diminishing returns, as a consequence of undisciplined spending and improper oversight of innovation projects.
The purpose of this study is to further explore and extend previous research on the nature of the relationship between organizational slack and innovation in several important ways. First, this study addresses some of the methodological limitations of the oft-cited Nohria and Gulati (1996) study, thereby testing the robustness and generalizability of their findings. Second, given the prominent role played by patents as evidence of inventiveness in innovation research, this study investigates the nature of the relationship between organizational slack and patent-based outcomes--in particular, the importance or impact of firms' patents on subsequent work in the area. Third, to the degree that innovation-related processes and, in particular, patenting activity are at least partially a function of industry dynamics, this study investigates the moderating effects of industries' propensity to patent on the slack-inventions relationship.
Below we review the relevant research from which we generate our hypotheses concerning the role of organizational slack and patent-based innovation. We then proceed to describe our methodology, present our results, and discuss the research and practice implications of our findings.
THEORY AND HYPOTHESES
Different Types of Slack
Slack resources are usually assessed in terms of financial indicators. In the most common typology, researchers distinguish between available, recoverable, and potential slack resources (Bourgeois, 1981; Bourgeois and Singh, 1983; Sharfman et al., 1988; Singh, 1986). Available slack (also referred to as unabsorbed) represents resources available and not yet committed for particular allocations (e.g., resources available to fund innovation or an increase in dividend payments to owners). Recoverable slack (also referred to as absorbed) represents resources that have been absorbed by the organization (e.g., excess overhead), but which could be recovered through increased efficiencies. Potential slack represents future ability to generate resources (e.g., raising additional equity capital).
The research activity resulting in patents is heavily dependent on internal funding requiring internal resources to support it. Hao and Jaffe (1993) noted that the long and uncertain payback, the secrecy required, the inability to explain future concepts to investors, and the intangible nature of the assets produced make it difficult to finance R&D activities with external sources of funding, making firms more reliant on internal funding. Thus, the effects of the availability of such funding, above-and-beyond that required for ongoing operations should be an especially important determinant of patent-based innovation.
Of the three types of slack, potential slack, because it is not a current resource, is the least likely to play a major part in the internal funding thought to be important for funding R&D activities. Furthermore, debt financing has many other implications for a firm, including the expenses of servicing the debt, and its impact on the firm's credit worthiness and stock price, and thus is not going to be tapped lightly. While "absorbed" slack is, in theory, recoverable, the recovery may be difficult and is likely to evoke strong emotions and negative consequences. In other words, to the degree that slack has been absorbed into the organization, there are forces, such as power and politics (Pfeffer, 1992), that work against its recovery. It is usually during times of economic crisis that such recovery is attempted, and then any recovered resources are more likely to be used to cut costs and increase efficiency than to be redeployed to innovation activities.
Thus, available or unabsorbed slack is the most appropriate measure for investigating the slack-patent-based-innovation relationship, since it represents untapped, internal resources that could be used for innovation purposes. In studying the slack-innovation relationship, it seems far more likely that available or "unabsorbed" slack will make salient the allocation choices open to the firm, one such choice being innovation programs.
The Slack-organizational Performance Relationship
The relationship between slack and innovation can be viewed as a special case of the relationship between slack and organizational performance. Most discussions of slack and its impact on organizations go back to the work of Cyert, March, and Simon on the behavioral theory of the firm (Cyert and March, 1963; March and Simon, 1958). Taking a positive view, March and Simon noted that slack supports a differentiation of goals within the organization. Explicitly addressing the slack-innovation linkage, they note that "when an organization has slack money or manpower not committed to going programs, various specializations of function may arise with respect to commitment to new programs and program elaboration" (1958: 187). Thus, their view supports the notion that increased slack will foster innovation, though little is said about when such slack will, in fact, be devoted to innovation activities as opposed to other potential uses. Using similar arguments, others (e.g., Singh, 1986) have argued that slack...
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