Do resource-constrained early-stage firms balance their internal resources across business activities? If so, should they?

Abstract

This article investigates whether resource-constrained early-stage firms perform better if they allocate their resources to various in-house business activities (e.g., marketing, R&D, etc.) rather than to one activity, and if they do, we explore why. We use the resource orchestration theory lens to formulate and then analyze a budget-constrained resource-allocation model that guides hypothesis development. The hypotheses focus on the performance of resource allocation strategies and are tested on a sample of 4,928 early-stage firms from the Kauffman Firm Survey dataset. We find that the relationships between firm performance and each pure strategy—aimed to allocate all of the firm’s resources to either a market- or knowledge-based activity—are inverted U-shaped, meaning that the firm achieves superior performance with a balanced strategy that distributes its resources between the two activities. This study shifts the focus from established firms (with adequate resources) to resource-constrained early-stage firms to extend the literature advocating for a balance between market- and knowledge-based activities thereby shedding light on the importance of the product-market fit for superior performance.