The effect of performance feedback on strategic alliance formation and R&D intensity

Abstract

This study explores whether performance feedback influences firms to form a strategic alliance or engage in R&D, both of which are risk-taking activities. Based on the behavioral theory of the firm and the resource-based view, this study shows that both low- and high-performing firms may engage in risk-taking activities by forming a strategic alliance or engaging in R&D as an organizational response to performance feedback. That is, low-performing firms are more likely to address underperformance in the short term – to solve the immediate performance problem – by forming a strategic alliance, whereas high-performing firms, which have slack resources to sustain their competitive advantage in the long run, will more likely engage in R&D activity over the long term. In addition, the moderating effect of two boundary conditions — government R&D investment and the level of industry competition — are examined to understand the relationship between performance feedback and organizational responses. The results show that as a firm's financial performance falls below its aspiration level, it has a higher probability of forming a strategic alliance. However, as a firm's performance rises above its aspiration level, it has greater R&D intensity. Government R&D investment and industry competition moderate the relationship between the firm's performance feedback and its risk-taking behavior. This research extends recent studies to further explore the effect of performance feedback on firms' strategic decision-making based on their performance feedback.