My coauthor Petra Andries (Ghent University) and I just published a new paper in Research Policy: “Firm-level effects of staged investments in innovation: The moderating role of resource availability” (preprint available on this website)
Here’s a brief Twitter thread summarizing of our main findings:
Very glad to see our paper "Firm-level effects of staged investments in innovation: The moderating role of resource availability" published in Research Policy. Let me share a brief summary of our findings with you in case you're interested. ▶️ https://t.co/u1ZCrK9O2X
— Paul Hünermund (@PHuenermund) June 6, 2020
Times like these are characterized by a high degree of investment uncertainty for firms. One of the main tools to deal with this kind of uncertainty that have been proposed in the literature, in particular when it comes to investments in R&D, is the stage-gate model.
— Paul Hünermund (@PHuenermund) June 6, 2020
Staging entails to divide an innovation project up into several discrete parts and projects only proceed to the next stage if a couple of pre-determined citeria ("gates"), related to technical feasibility and profitability, are met in a certain, again pre-determined, time-frame. pic.twitter.com/ORpldWPCdY
— Paul Hünermund (@PHuenermund) June 6, 2020
Theoretically, the idea opf staging is based on the real options model. Instead of incurring all costs upfront, firms are able to benefit from the option value of timely abandoning unfruitful ideas and reinvesting the saved costs in new innovation projects ("value of learning"). pic.twitter.com/sUgifR29y8
— Paul Hünermund (@PHuenermund) June 6, 2020
So from a theoretical point of view, we would expect firms that stage their innovation projects to abandon more projects and to reinvest some of the saved money into new projects. That's not what we observe empirically though – at least not for all firms alike.
— Paul Hünermund (@PHuenermund) June 6, 2020
In particular, an important contigency factor seems to be a firm's overall (financial) resource availability. Firms with relatively low resource endowments behave like we expect: they abandon and start more projects compared to non-staging firms. Resource-abundant firms don't! pic.twitter.com/M0Uc81MAPs
— Paul Hünermund (@PHuenermund) June 6, 2020
We've talked with managers in R&D units at big German companies about this and one of them told us: "We never really abandon projects. If they're performing poorly, we just keep them going until they're eventually phased out. No one really has the guts to make a clear cut."
— Paul Hünermund (@PHuenermund) June 6, 2020
In the paper we link the phenomenon to several behavioral factors: managers in resource-abundant firms are prone to fall into reinforcement traps and there's a lack of strict monitoring to constrain such behavior. We also present additional empirical evidence for these mechanims.
— Paul Hünermund (@PHuenermund) June 6, 2020
So while resource-constrained firms seem to benefit from the staging of innovation projects already, resource-abundant firms should should either strive for a more disciplined assessment of pre-defined project milestones or rethink their staged investment approach altogether.
— Paul Hünermund (@PHuenermund) June 6, 2020
Finally: real options thinking has been heralded as a new core pillar of strategic management research. Our study shows though that these behavioral contigencies need to be taken into account if the model is supposed to have maximum predictive power and live up to its promise.
— Paul Hünermund (@PHuenermund) June 6, 2020
Times like these are characterized by a high degree of investment uncertainty for firms. One of the main tools to deal with this kind of uncertainty that have been proposed in the literature, in particular when it comes to investments in R&D, is the stage-gate model.
— Paul Hünermund (@PHuenermund) June 6, 2020
Paul Hünermund, Ph.D. 