External Shocks, R&D Investment, and Firms’ First-Time Digital Innovation

Abstract

This research builds upon problemistic search theory to explain why and when external shocks may lead to firm first-time digital innovation, a novel and risky solution. Problemistic search theory posits that the serious problems faced by firms may trigger their problemistic search scope for solutions through two processes: discovery process and evaluation process. Our theorization explains why external shocks such as the COVID-19 create novel or radical problems for firms, and thus trigger firms’ problemistic search scope for solutions in the discovery process, increasing firms’ willingness to delve into first-time digital innovation. Furthermore, problemistic search theory also suggests that in the evaluation process, the evaluation of solutions depends on both the firm's own experience (i.e., firm's prior R&D) and the experiences of others (i.e., firms’ social linkages). To be specific, cognitive entrenchment and inertia embedded in the firm's prior research and development (R&D) may, however, pose barriers to the evaluation of first-time digital innovation. Moreover, a firm's linkage with digital firms can potentially alleviate such cognitive barriers. Using a difference-in-differences design based on data from Chinese published firms, we find empirical support for our theoretical predictions. This research deepens our understanding of the literature on firms’ digital innovation, problemistic search theory, and R&D.