Performance Shortfall, Feedback Interpretation and R&D Search: The Differential Effects of Peers’ Performance Below Historical and Social Aspirations

Abstract

AbstractA firm's interpretation of its performance feedback has vital implications for R&D search. Advancing this developing stream of research within the problemistic search theory, we theorize and empirically examine the interpretive effects of performance‐based cues from peer firms on the focal firm's R&D search intensity. Specifically, we study the impact of two cues, that is (1) shared performance shortfall – focal firm's performance shortfall that is shared with industry peers and (2) relative performance shortfall – number of firms with performance shortfall of greater intensity than the focal firm. We theorize that these cues determine if the firm assesses its performance shortfall as shared with the industry peers (or unique to the firm) and non‐controllable (or controllable). Based on this interpretive assessment, firms differentially trigger either self‐enhancement or problem‐solving modes, which deters or motivates them to pursue R&D search. Furthermore, we theorize the divergent influences of these cues based on whether firm performance is below historical (own past performance) or social (industry peers’ performance) aspiration levels. We find empirical support for our theoretical predictions on 2,691 firm‐year observations belonging to 872 Indian manufacturing firms from 2010 to 2017. This study contributes to the literature on problemistic search and offers managerial implications.