How does firm diversification impact innovation?

ABSTRACT

This study sheds light on the relationship between business diversification and innovation. A diversification strategy is both a driver of sunk costs and strategic slack. Strategic slack is a valuable reserve of knowledge, usable to foster innovation. Using linear models, we explore the interplay between research and development (R&D) and organisational slack in large and diversified companies listed on the Euronext 100 Index. We consider the diversification pattern over time, and its interactions with the following three categories: sunk costs, slack resources, and R&D. The results show an antithetic effect of diversification and slack on R&D expenditures. In contrast to unabsorbed and potential slack, diversification and sunk costs hinder innovation. However, diversification is a huge source of strategic slack and, thus, has a positive effect on innovation, indirectly.

KEYWORDS:

• R&D
• sunk costs
• resource slack
• diversification

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Beatrice Orlando is Ph.D. in Business Management and Corporate Finance. She is adjunct Professor of Strategies for Business Growth at Sapienza University of Rome and adjunct Professor of Health Management at UNINT – Rome. She also is a chartered account. Previously, she had been working as adjunct Professor of Business Management in different universities, such as the University of Perugia. The main research focus is on innovation and decision-making. In particular, she has been studying innovation adoption and diffusion, as well as open innovation and innovative performance of firms. In the decision-making fields, the focus is on risk, uncertainty, and ambiguity effects on decision-making process.

Antonio Renzi is Associate Professor and Qualified as Full Professor of Business Management at Sapienza University of Rome (Italy), where he teaches General Management and Entrepreneurship and New Ventures Finance. He affiliates to the Department Management of Sapienza University of Rome. He got a Ph.D. in Business Management. He became Adjunct Professor at Perugia University (Perugia University, Italy) and then Associate Professor. He is referee of some scientific journals. He worked as Visiting Scholar at the following Universities: New York University (Stern School of Business, New York City, USA); Baruch College (Zicklin School of Business, New York City, USA). He has been Visiting Professor of General Management and Corporate Finance at Universidad del Salvador (Buenos Aires, Argentine). His current research interests are about entrepreneurship, risk-return analysis, innovation management and strategic management.

Giuseppe Sancetta is Associate Professor and Qualified as Full Professor of Business Management at Sapienza University of Rome, where he teaches Management and Corporate Restructuring. He affiliates to the Department Management of Sapienza University of Rome. He got a Ph.D. in Business Management, he became Assistant Professor and then Associate Professor. He is referee of some scientific journals. He is interested in corporate strategy, enterprise risk, intangibles and performance measurement, corporate restructuring, and corporate governance and he published several books and articles on these items. He is auditor and consultant for national and international companies.

Nicola Cucari is currently a Ph.D. candidate in Business Management at Sapienza University of Rome. He received his Bachelor and Master degrees in Business Management from Sapienza University of Rome. He is been a visiting researcher at University of Huelva (Spain) – Department of Management and at University of Hohenheim (Germany) – Institute of Marketing and Management. He has participated in various national research projects. His primary research interests focus upon innovation management and corporate governance.

ORCID

Beatrice Orlando http://orcid.org/0000-0003-0949-7300

Antonio Renzi http://orcid.org/0000-0003-0354-7362

Giuseppe Sancetta http://orcid.org/0000-0002-8255-0262

Nicola Cucari http://orcid.org/0000-0002-8177-7764