Resource Allocation Flexibility for Innovation Performance: The Effects of Breadth, Uncertainty, and Selectiveness

No matter how well resourced, innovation efforts are prone to failure. This paper investigates how the allocation of resources to product innovation projects allows firms to cope with this challenge. We assume that firms choose both the amount of financial resources devoted to innovation projects, and the number of projects. Based on data for almost 1,500 innovative firms from Germany, we test whether a policy of allocating resources to a broader range of innovation projects increases sales of new products. We analyze whether firms that allocate resources selectively by stopping projects with unfavorable prospects are more successful than nonselective firms. In addition, we also consider the degree of uncertainty in the product market as a further mediating variable of resource allocation efficiency. We find that breadth in resource allocation increases innovation performance, more so than the amount of resources devoted to each project. The effect increases with novelty of the innovation output. We also show that the performance effect of breadth varies in different contexts. Firms can expect greater new product sales through breadth if they operate in uncertain market environments or if they allocate resources selectively. The paper shows that firms’ choice of resource allocation strategy impacts performance. We theorize how breadth can increase the chances of success, which is particularly important in uncertain markets, and how selectiveness can contain some of the disadvantages that come with breadth. A firm that follows a dual policy of resource allocation breadth and selectiveness is more flexible, dealing with innovation uncertainty more efficiently than its peers.

Klingebiel, Ronald and Christian Rammer (2011), Resource Allocation Flexibility for Innovation Performance: The Effects of Breadth, Uncertainty, and Selectiveness, ZEW Discussion Paper No. 11-073, Mannheim.