Innovation failure and innovation direction change in entrepreneurial firms

Abstract

Entrepreneurial firms are recognized for their posture of innovativeness and experimentation, risk taking, and pro-active pioneering of new markets, which may lead to more frequent innovation failures. A failure is an unwelcome result, often stigmatized and buried, but also can bring valuable experience. Although there is theoretical evidence suggesting that failures signal organizational needs to change, to date we are not aware of any rigorous empirical studies that address whether organizations change their extant technological trajectories or innovation directions when they experience innovation failures. How do entrepreneurial firms learn from prior failed innovation? To answer this question, we build on organizational learning and entrepreneurial innovation literature, and propose that types and timings of innovation failures can shape entrepreneurial firms' innovation direction. Focusing on entrepreneurial pharmaceutical firms, and using firm-technological class level innovation activity to capture their changes of innovation direction, we develop and empirically test two central arguments. First, entrepreneurial firms shift away from extant technological trajectories when exploratory innovation fails, while strengthening the innovation activities in extant technological trajectories when exploitative innovation fails. Second, failure timing matters: the later these technological failures are recognized, the stronger are the negative effects of exploratory failures, and the weaker are the positive effects of exploratory failures effects. Theoretical and practical implications are addressed.