High risk, low return (and vice versa): the effect of product innovation on firm performance in a transition economy

Xu Li and Freek Vermeulen

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Common wisdom suggests that high-risk strategies will be associated with high expected returns and vice versa. Focusing on the effect of new product development on firm performance, in this paper we argue that this relationship may reverse in a market undergoing substantial institutional transition. We examine domestic pharmaceutical firms in China during the 1990s and find that in this context, introducing new products was associated with lower average firm profitability but higher variance. In conformity with our predictions, these relationships were stronger in areas where the rate of institutional change was higher and for product types that took longer to develop. Thus, we explain why, for particular strategic actions, high risk may be associated with low returns. A key conceptual corollary of these findings—and for strategic management research in general—is that firms may sometimes be more focused on the potential upside of their actions than on the expected value of those actions.

Keywords: technology and innovation management; business policy and strategy; quantitative orientation (search for similar items in EconPapers)
JEL-codes: J50 (search for similar items in EconPapers)
Date: 2021-10-27
New Economics Papers: this item is included in nep-cna and nep-sbm
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Citations: View citations in EconPapers (6)

Published in Academy of Management Journal, 27, October, 2021, 64(5), pp. 1383-1418. ISSN: 0001-4273

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:120268

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