Time matters: Curvilinear effects of underperformance duration on the innovation behavior of firms

Abstract

Innovation is crucial for a firm's survival and success. While prior behavioral research has investigated the relationship between underperformance intensity and firm innovation behavior, there has been limited focus on how prolonged underperformance shapes organizational learning mechanisms that influence firms' balancing of exploitative and exploratory innovation behaviors. Drawing on the behavioral theory of the firm (BTOF) and organizational learning literature, we argue that the duration of underperformance triggers firms' strategic shifts in innovation priorities, forcing firms to navigate temporal tensions between short-term problemistic search and long-term technological capability renewal. We propose a U-shaped relationship between firms' underperformance duration and the share of exploratory innovation within their overall innovation portfolio, reflecting shifting from path-dependent refinement to radical adaptation. We further explore its boundary from the external stakeholder pressure mechanism, and hypothesize that this relationship is weakened by the firm's government innovation subsidy but strengthened by analyst coverage. Using longitudinal data of 582 publicly listed Chinese firms in the high-technology manufacturing industry between 2010 and 2018, we find support for our hypotheses. This study advances BTOF and innovation literature by integrating a time-dynamic framework. Implications for theory and practice are discussed.