Toward a Contingency Perspective on Organizational Slack: Evidence from the Pharmaceutical Industry

Abstract

We employ theories of organizational search and agency costs to propose a contingency perspective that reconciles mutually contradictory prior findings on the relationship between organizational slack and innovation. First, we argue that influences of organizational slack depend on the type of innovation considered—whether we consider exploitative innovation or exploratory innovation. Further, the influences of absorbed slack and unabsorbed slack are distinct. The ways in which certain types of innovations are enabled by organizational slack is conditioned by distinct modes of organizational search associated with alternative types of innovation, as well as by the extent to which effective shareholder monitoring is ensured. An empirical analysis of 37 Japanese pharmaceutical firms’ new product developments over a 20-year period supports our argument. With these findings, hitherto unreported aspects of mutually complementary relationships between a behavioral theory of the firm and an agency theory are proposed.