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Financial munificence, R&D intensity, and new venture survival: critical roles of CEO attributes

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Plain English Summary While capital is essential for new ventures to innovate and survive, is having more of it always good? Our research shows “No” because more money may “spoil the child” by reducing the benefits that new ventures enjoy from R&D investment. We analyzed 791 new technology ventures across six years and found evidence of a side effect of munificent financial resources, such that when ventures have high levels of financial munificence, they garner fewer survival benefits from increasing R&D. This side effect is weakened when ventures have CEOs who are more experienced, highly educated, or female. These findings extend previous research on the limitations of financial munificence by showing its negative moderating effect on the R&D–survival relationship. For entrepreneurs and venture capitalists in the industry, we advise caution regarding the role of abundant financial resources in new ventures.
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Financial munificence, R&D intensity, andnew venture
survival: critical roles ofCEO attributes
AricXuWang· KevinZhengZhou
Accepted: 21 December 2021
© The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2022
reducing the benefits that new ventures enjoy from
R&D investment. We analyzed 791 new technol-
ogy ventures across six years and found evidence
of a side effect of munificent financial resources,
such that when ventures have high levels of finan-
cial munificence, they garner fewer survival benefits
from increasing R&D. This side effect is weakened
when ventures have CEOs who are more experienced,
highly educated, or female. These findings extend pre-
vious research on the limitations of financial munifi-
cence by showing its negative moderating effect on
the R&D–survival relationship. For entrepreneurs and
venture capitalists in the industry, we advise caution
regarding the role of abundant financial resources in
new ventures.
Keywords Financial munificence· R&D intensity·
New venture survival· Behavioral theory of the firm·
CEO attributes
JEL classification D21· L26· M13· O3
Adversity reveals genius; fortune conceals it.
Horace, ancient Roman poet (65–8 BC).
1 Introduction
Financial munificence is defined as the degree
to which firms are relatively abundant in or less
Abstract Although financial resources are criti-
cal to new ventures, is having more of them always
a good thing? Intrigued by industry observations and
building on behavioral research into the limitations of
munificent resources, we argue that financial munifi-
cence can have a negative moderating effect on the
impact of R&D investment on venture survival. We
further propose that three CEO attributes (i.e., work
experience, education, and gender) can mitigate this
negative moderating effect. Analyses of a six-year
longitudinal dataset of 791 new technology ventures
provide strong support for our hypotheses. We con-
tribute to the behavioral research on how resource
munificence matters for new ventures by examining
the indirect downside of financial munificence and
demonstrating how certain CEO attributes can miti-
gate this effect.
Plain English Summary While capital is essen-
tial for new ventures to innovate and survive, is hav-
ing more of it always good? Our research shows
“No” because more money may “spoil the child” by
School ofBusiness, Sun Yat-sen University, Guangzhou,
Faculty ofBusiness andEconomics, The University
ofHong Kong, Pokfulam, HongKong
Small Bus Econ (2022) 59:1641–1659
/ Published online: 10 January 2022
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
... For example, financial slack enables firms to Supplier portfolios and firm innovation target innovation by buying out innovative ventures, establishing R&D alliances, and collaborating with public research institutions (Lungeanu et al., 2016). In such cases, financial slack encourages firms to spread their attention over multiple alternative innovation sources with high payoffs, which then diverts limited organizational efforts away from supplier portfolios (Tyler and Caner, 2016;Wang and Zhou, 2022). ...
... Specifically, our results indicate that financial slack flattens and flips the U-shaped effect of SPC on firm innovation. This finding is in line with the previous literature, which suggests financial slack will divert firms' innovation efforts (Tyler and Caner, 2016;Wang and Zhou, 2022). Financial slack distracts firms' efforts to apply knowledge searched from supplier portfolios and impedes firms' obtaining innovation benefits from either dispersed or concentrated supplier portfolios. ...
Purpose – Firms are increasingly depending on supplier portfolios in the quest for firm innovation. However, whether concentrated supplier portfolios are beneficial to innovation remains highly disputed. This study aims to investigate the effect of supplier portfolio concentration on firm innovation and the contingencies that shape this effect. Design/methodology/approach – The authors build on the knowledge search view to theorize a U-shaped effect of supplier portfolio concentration on firm innovation and further propose that the U-shaped effect is contingent on financial slack and growth opportunities. The authors collected panel data from 1,320 manufacturing firms in China. The negative binomial regression analyses were performed to test the hypotheses. Findings – Supplier portfolio concentration has a U-shaped effect on firm innovation. This U-shaped effect is weakened and flipped by financial slack but strengthened by growth opportunities. Originality/value – The findings extend current understandings of the influence of supplier portfolio on firm innovation by clarifying the U-shaped effect of supplier portfolio concentration on innovation and the circumstances under which supplier portfolio concentration is more effective for firm innovation.
... Organizational slack can be allocated to the resources needed for entrepreneurship of firms [67] and can effectively absorb the negative impact brought by creative activities. On the contrary, some scholars believe that too much slack will have a negative impact on the innovation and survival of new ventures [68]. Firms with too much slack will breed inertia and a sense of superiority and inhibit aggressive venture capital investment [69]. ...
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How does dependence on sales to the government affect new venture performance and survival? And what can new ventures do to improve performance when they increasingly sell more to the government? Responding to these questions, we challenge longstanding but still untested theoretical assumptions that suggest new ventures who increasingly sell more to the government impede their performance and survival. Specifically, we utilize the Kauffman firm survey panel data, integrating resource dependence and stakeholder theories to argue and find support for a curvilinear relationship between new venture sales to the government and venture performance. Then, in efforts to help mitigate negative effects of government dependence, we suggest how offering high-tech products and government financial support can moderate this curvilinear relationship, helping strengthen performance the more that new ventures sell to the government. Finally, we find a linear relationship between new ventures that sell more to the government and survival.
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Unabsorbed slack resources are critical for organizational innovativeness and success but research regarding the relationship between unabsorbed slack and firm outcomes has resulted in mixed findings. We build on upper echelons theory to shed light on the mostly overlooked role of decision makers in slack resource deployment. We investigate how the CEO's expertise influences slack resource deployment in computer software firms' exploratory and exploitative activities. Using panel data, our findings show that unabsorbed slack is associated with an increased share of exploration and a decreased share of exploitation in firm's activities. These relationships are weakened in firms led by CEOs with longer firm tenure or wider functional background breadth. In the case of CEOs with technical education, the negative relationship between slack and exploitation becomes positive, while the link between slack and exploration becomes negative. Additionally, our post-hoc analysis reveals a more precise non-linear account of the main effect relationships.
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By taking insights from the Behavioural Theory, this study analyses how performing below aspiration levels influences innovation efficiency. Furthermore, this research analyses whether firms respond differently to performance pressures depending on certain factors at the organizational level, such as financial slack and family management. Conducting a panel data analysis on 3,116 observations of Spanish manufacturing firms over the 2001-2013 period, we find that performing below aspiration levels improves the firm’s conversion rate of innovation efficiency in both the short and the long term. Furthermore, this study confirms that two contingencies, namely the levels of financial slack and family management, are quite relevant towards gaining a full understanding of the complex nuances associated with the investigated core relationship.
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Data is a fundamental impediment to a better understanding of the multifaceted process of new firm creation. With better data, we can form a better understanding of the causes, constraints, and outcomes associated with the decision to launch a new business. Towards this end, the Kauffman Foundation commissioned an eight-wave panel of businesses that were formed in 2004, chronicling a single cohort’s evolution from birth through important business milestones. This issue of Small Business Economics focuses on papers that use the Kauffman Firm Survey to examine new research questions in entrepreneurship. Articles in this issue analyze new research topics in entrepreneurship as well as shed light on enduring questions in the literature.
New ventures almost by definition possess fewer resources than do established firms. Even in well‐funded entrepreneurial companies, many resources associated with the organizational infrastructure, such as organizational practices, policies, and routines, are not in place. Yet academic research emphasizes a firm's resources for their ability to generate economic rents. Does this imply that an entrepreneurial firm must necessarily be at a performance disadvantage vis‐à‐vis established firms? And is this performance disadvantage likely to be sustained in the long run if the entrepreneurial firm remains in the undesirable position of continually playing resource “catch‐up” to established firms? How can we explain entrepreneurial firms that surpass large firms endowed with substantial resources?
This study sought to explore the existing academic literature on female entrepreneurship to assess how this field of research is organized in terms of publications, authors, and periodicals and/or sources. In addition, the research focused on mapping knowledge networks through citation and co-citation analysis and identifying natural clusters of the main keywords used. The study also examined the challenges (i.e., opportunities and difficulties) the literature reveals for the study of female entrepreneurship. That is, the knowledge gained from the bibliometric study (i.e., what has already been researched and the limits of these studies) was used to identify what research opportunities are present in this area. The articles gathered in the search were submitted to a bibliometric analysis using VOSviewer and TreeCloud software. The results obtained from the analysis of document citations reveal three clusters: (1) entrepreneurial profile, (2) gender identity and theoretical conceptualizations, and (3) the entrepreneurial process context. By studying the articles’ citation profile, this study’s findings contribute to a better understanding of the flow of production and research-related practices in this stimulating area of research, which is still in its infancy phase.
The literature on corporate diversification has argued for and established the case that companies overdiversify in a product market sense (i.e., enter into unrelated product markets where they may not fully cover their cost of capital). Yet even without engaging in unrelated diversification, managers need to make resource allocation decisions in a variety of activities that a company conducts to consummate its business. In this article, we focus on R&D activity, and we discuss the effects that the uncertainty, boundary ambiguity, feedback latency, R&D lumpiness, and legitimacy that characterize technological contexts can have in making overinvestment in R&D likely. Specifically, in this article we (a) draw attention to the construct of activity overinvestment, and specifically R&D overinvestment; (b) use the received literature to argue that there exists a prima facie case for examining this construct and its antecedents in order to evaluate the extent and implications of R&D overinvestment; and (c) make the more general case that the resource allocation literature needs to study the issue of activity overinvestment systematically.
Using two longitudinal panel datasets of Chinese manufacturing firms, we assess whether state ownership benefits or impedes firms’ innovation. We show that state ownership in an emerging economy enables a firm to obtain crucial R&D resources but makes the firm less efficient in using those resources to generate innovation, and we find that a minority state ownership is an optimal structure for innovation development in this context. Moreover, the inefficiency of state ownership in transforming R&D input into innovation output decreases when industrial competition is high, as well as for start-up firms. Our findings integrate the efficiency logic (agency theory), which views state ownership as detrimental to innovation, and institutional logic, which notes that governments in emerging economies have critical influences on regulatory policies and control over scarce resources. We discuss the implications of these findings for research on state ownership and firm innovation in emerging economies.
We examine how venture CEOs effectively engage their boards in the strategy-making process. Using the inductive multiple-case study approach, we track CEO-board interactions inside and outside the boardroom in depth and over time through rare observations of board meetings and rich interview access to CEOs and their boards of directors. Our primary theoretical contributions are to the resource dependence perspective. We clarify the resource v. power tradeoff as a fundamental tension in venture CEO-board relationships. Further, we add a much-needed process framework to resource dependence by highlighting how venture CEOs use 4 behaviors to resolve this tradeoff in an effective strategy-making process. Finally, we contribute a fresh view of the venture CEO-board relationship - i.e., spotlighting the CEO (not board) and boards as CEO-director dyads (not groups). We conclude by noting implications for other key corporate governance perspectives, and indicating boundary conditions for our framework. Overall, we deepen the conversation at the nexus of resource dependence theory and venture governance. Keywords: Corporate governance, new ventures, strategy-making process