Innovation and Ambidextrous Transition: The Implications for China and Beyond

Abstract

Intrigued by recent scandals of Chinese public firms in manipulating earning reports, this paper examines the relationship between managerial choices of exploitation vs. exploration, earnings management, and firm risk in China. Building on Teece’s PFI framework and the innovation ambidexterity literature, we propose the term of ambidextrous transition to encapsulate the dynamic process of deploying exploitation and exploration to changing environments. Using a large Chinses dataset consisting of 10,122 firm-year observations (2,430 public firms) spanning from 2007 to 2017, we find that an exploitation-dominant strategy in China helps curb earnings management and that ambidextrous transition helps mitigate firm risk. Results from this study offer important implications for our understanding of the innovation strategies adopted by firms in China and other emerging economies with similar institutional limitations.