Impacts of Exploration and Exploitation on Firm's Performance and the Moderating Effects of Slack: A Panel Data Analysis

Abstract

The concept of exploration and exploitation has received increasing attention from researchers and managers. Yet, there are few empirical studies on the dynamic effects of exploration and exploitation based on panel data. In addition, the literature is divided in predicting the effects of organizational slack on exploration and exploitation. This study extends the current literature by examining the dynamic effects of exploration and exploitation on the firm's performance. This study further categorizes organizational slack into absorbed and unabsorbed slack, and reveals that each has its own unique moderating effect on exploration and exploitation. This resolves the conflicting view of how organization slack affects exploration and exploitation. Based on a panel data of 125 high technology firms collected using a text mining technique, our analysis reveals a three-stage “horizontal S” relationship between exploration and firm's performance. This study also identifies that absorbed slack facilitates exploitation but impairs exploration, while unabsorbed slack facilitates exploration.