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The Role of Sunk Cost and Slack Resources in Innovation: A Conceptual Reading in an Entrepreneurial Perspective

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Abstract

This paper proposes a conceptual reading of the interplay between sunk costs and slack resources in innovation, adopting an entrepreneurial perspective. Antecedent literature mostly depicts the relationship between slack and innovation as an inverse u-shaped curve. However, this approach is way too unrealistic and it does not take in account both the different impact of heterogeneous types of slack and of sunk costs. We argue that not all slacks positively contribute to innovation and, hence, the u-shaped relationship is merely verified in case of highly flexible slack resources. In addition, the pre- sence of sunk costs is a friction factor, which makes the first part of the curve less steep. Therefore, entrepreneurs are solicited to innovation by the presence of some easy recoverable slack types, as financial or knowledge ones. On the converse, a consistent level of sunk cost may discourage their innovative activ- ity. In this setting, absorbed slack resources increase the level of sunk costs.

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According to various writers, organizational slack serves to reduce goal conflict, to reduce information processing needs, to promote political behavior, or to facilitate certain strategic behaviors. The salient feature is that the slack construct is usually discussed without a concurrent attempt at empirical measurement. In this article I propose several operational measures, and develop one that allows the use of secondary (financial) data.
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The research regarding complex organizations is scarce at this time. Few research studies have investigated the function both of the open, uncertain systems and the closed, certain systems of different organizations. This book is cited as a "conceptual inventory;" its main purpose is to formulate possible propositions to further study the similarities and differences of organizational behaviors across disciplines. It explores such issues as organizational design, technology and structure, and assessment of organizations. The analysis then examines the ways in which the following variables and concepts impact an organization: human variables, discretion, control of complex organizations, and the administrative process. Based upon the conducted research, both external sources (generalized and contingency) and internal sources (interdependence) of uncertainty are identified among complex organizations. Although most organizations seek a state of self-control, the means by which they achieve this state differ between organizations. The differing responses of administrators to uncertainty within their respective organizations are explored. Possible areas of future research are proposed, including the utilization of both operational and conceptual research. (AKP)
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We present a dynamic empirical model of a firm's R&D decisions that is consistent with the existence of sunk R&D costs, taking into account that these costs may differ between small and large firms, and among different technological regimes. We estimate a multivariate dynamic discrete choice model using firm-level data of Spanish manufacturing for 1990-2000. Conditional on firm heterogeneity and serially correlated unobservable factors, we find that R&D history matters. This true state dependence allows inferring the existence of sunk R&D costs associated with performing R&D. Sunk R&D costs are found to be higher for large, high-tech firms. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics.
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In this article, we examine whether the option value of keeping an operation alive will deter firms from exiting an industry. We find that uncertainty dissuades firms from exiting an industry, but only when the sunk costs of entering and exiting that industry are sizeable. Moreover, we argue and find that sunk costs can be influenced by the technological intensity of an industry, by the extent to which a firm competes on the basis of innovation, and by the firm's diversification strategy. Copyright 2009 The Author 2009. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.