The effect of perforamnce feedback, financial slack on the exploration and exploitation innovation

In this study, we focus on firms¡ performance feedback with regard to explorative and exploitative innovation. Building on Cyert and March¡s (1963) behavioral theory of the firm, performance feedback is a mechanism that can help companies to adjust their strategies, and deal with problematic or slack searches. We extended this argument in the context of Taiwan to investigate how firms adjust their behavior in terms of explorative and exploitative innovation when facing different kinds of performance feedback. Ten years¡ panel data with 374 firms was collected from Taiwanese firms in the electronic industry which were publicly listed on the Taiwan Stock Exchange (TSE) from 2000 to 2009. Our finding showed that firms do adjust their explorative and exploitative innovation activities in response to different kinds of performance feedback. In particular, when firms¡ performance is above their aspiration level, they prefer to maintain their exploitative innovation and reduce their explorative innovation. We also found the majority of Taiwanese firms are risk averse, and that when their performance falls below their aspiration level, they are likely to increase their exploitative innovation activities when the performance shortfall is small. In addition, we also found that financial slack not only has a direct effect on both explorative and exploitative activities, but also has a positive moderating effect on performance feedback when the level of performance exceeds the aspiration level. The evidence from Taiwanese electronic companies corroborates and extends the behavioral theory of the firm and not only allows us to test this theory in a new empirical setting, but also enables us to incorporate important factors not considered in previous research.