This study contributes to the literature on CEO decision-making and firm innovation.
Prof. KIM, SANGKYUN
As the business environment is rapidly changing, firms are required to formulate and implement strategies which help them to adapt to environmental and technological changes, to achieve innovation and long-term competitive advantages, and even to survive. Strategy scholars view a company's chief executive officer (CEO) as the most powerful actor in the decision-making process and call for further research to understand the role of CEOs in the innovation process beyond the simple relationship between CEOs' personal characteristics and financial performance.
Building on labor market evaluations and legacy conservation motivation perspectives that explain risk aversion by CEOs facing a short career horizon, this study seeks to unpack the mechanisms linking a CEO's career horizon to a firm's breakthrough innovations. Using 10-year panel data from 681 U.S. firms, we find that a short career horizon induces a CEO to become risk-averse and thus forego investing in risky breakthrough innovations because they could harm the firm's short-term performance, endangering job prospects and CEO legacies in the short term. The results also show that the impact of a short career horizon on breakthrough innovations is partially mediated by a reduction in R&D spending. Furthermore, different performance implications associated with a firm’s exploitation and exploration activities affect a CEO's willingness to commit to such breakthrough innovations. That is, when a firm leverages internal knowledge within a familiar technological domain (i.e., a focus on exploitation), this mitigates the behavioral tendencies of a CEO with a short career horizon, such as not pursuing breakthrough innovations, while such behavioral tendencies are exacerbated when a firm applies external technologies with an unfamiliar trajectory (i.e., a focus on exploration).
This study contributes to the literature on CEO decision-making and firm innovation. First, our study contributes to the literature on CEO decision-making by elucidating a mechanism that can explain the influence of a CEO’s career horizon on a firm’s ability to generate breakthrough innovations. Second, we emphasize the role of CEOs in the innovation process by suggesting that motivational factors can shape a CEO’s willingness to allocate firm resources to risky projects, which in turn can affect firms achieving breakthrough innovations.
Practically, this research provides insights to those seeking to develop breakthrough innovations and manage organizational learning and innovation process for their firms. The alignment between a CEO’s willingness to take risks and a firm’s emphasis on organizational learning in both familiar and unfamiliar technological trajectories has an influence on firm innovations. It implies that CEOs play an important role in producing breakthrough innovations and that a strategic alignment between the willingness to take risks and the firm’s engagement in risky strategies can enable the firm to achieve greater innovations.