What is the Optimum Amount of Original Slack? A Study of the Relationship between Slack and Innovation in Multinational Firms

Abstract

The effect of slack on innovation has been mired in controversy. On one side are those who argue that slack encourages innovation by providing a pool of resources that can be used to support risky innovative projects. On the other side are those who argue that slack breeds complacency and a lack of discipline that leads to the pursuit of pet projects that rarely translate to useful innovations. In this paper we try to resolve this controversy by suggesting that slack is not always good nor always bad for innovation. Indeed, too much or too little slack may both be detrimental for innovation. We hypothesize that there is a inverse-U shaped relationship between slack. We provide empirical evidence to support this hypothesis by examining the relationship between slack and innovation across several departments (equivalent to functional sub-units) in two multinational corporations.

JEL Classification: G00