Exploring the Impact of an External Crisis on R&D Expenditures of Innovative New Ventures
Journal of Business and Entrepreneurship, 26(3), 1-36.
43 Pages Posted: 2 May 2015 Last revised: 19 May 2015
Date Written: 2015
What is the impact of an exogenous crisis on research and development expenditures of innovative new ventures? Existing literature does not provide a clear answer. One view suggests that shrinking revenues and constrained funding reduce firms’ R&D intensity. The opposite view argues for amplified risk-seeking and innovative behavior of organizations in crisis, leading to higher commitment to R&D with resulting additional investments. We unite these opposing views in a generalized behavioral framework based on the premise that the impact of a crisis on a venture’s R&D expenditures is contingent on its pre-crisis R&D intensity. When facing a crisis, R&D-intensive companies reduce their R&D commitment, while non-R&D-intensive companies do not alter their R&D expenditure budgets, or even increase R&D spending to innovate themselves out of the adversity. We empirically test our behavioral framework using the longitudinal data from the Kauffman firm survey. The results strongly support our theoretical reasoning: during the 2008 financial crisis R&D-intensive ventures tended to substantively decrease their R&D investments (on average more than 10 percentage points decrease in R&D to sales), while their non-R&D-intensive counterparts demonstrated positive (although statistically insignificant) change in R&D investments. In other words, a crisis strikes most deeply the R&D activity of the most innovative ventures, despite the rational need to sustain R&D funding in industries with rapid technological change and short product life cycles. We conclude by positing underlying reasons for the observed behavioral patterns, and then suggest avenues for further research.
Keywords: R&D, new ventures, innovation, behavioral strategy, threat-rigidity, Kauffman Firm Survey
JEL Classification: L26
Suggested Citation: Suggested Citation