The Effects of Experience on Selecting Innovation Projects - Better the Devil You Know

36 Pages Posted: 12 Nov 2008

See all articles by Tobias Schmidt

Tobias Schmidt

Deutsche Bundesbank - Research Center

Franz Schwiebacher

affiliation not provided to SSRN

Wolfgang Sofka

Tilburg University; CentER; CIR

Date Written: 2008

Abstract

Innovation success depends heavily on firm's ability to set priorities and select the most promising options from its project portfolio before the odds of success or failure become visible and reliable. We ask: What does previous innovation experience tell firms about what not to do in the future? With this in mind, we focus on projects that did not materialize or were abandoned - an important building block for choosing and implementing the "right" projects. We suggest two major learning mechanisms. On the one hand, real options theory suggests a process based on financial data. On the other hand, research on absorptive capacities finds that previous innovation experience translates into superior ability to value, extract and exploit external knowledge. We test both hypotheses on an empirical basis for more than 600 German firms, covering innovation activities in the period 1997 to 2005. Our results indicate congruence between firms' innovation experience and their project selection patterns. Extensive R&D experience materializes as a stock of knowledge that enables firms to judge projects based on knowledge criteria. Non-R&D innovation experience, stemming from producing and introducing products to markets, resonates as decision-making based on economic factors in the future. Both types of innovation experience appear to generate distinct decision-making capabilities inside the firm which are subsequently exploited in selecting projects for the future.

Keywords: Project selection, real options, absorptive capacity

JEL Classification: F23, O31, O32, D83

Suggested Citation

Schmidt, Tobias and Schwiebacher, Franz and Sofka, Wolfgang, The Effects of Experience on Selecting Innovation Projects - Better the Devil You Know (2008). ZEW - Centre for European Economic Research Discussion Paper No. 08-084. Available at SSRN: https://ssrn.com/abstract=1298957 or http://dx.doi.org/10.2139/ssrn.1298957

Tobias Schmidt (Contact Author)

Deutsche Bundesbank - Research Center ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Franz Schwiebacher

affiliation not provided to SSRN ( email )

Wolfgang Sofka

Tilburg University ( email )

Netherlands

CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

CIR ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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