Exploration and exploitation in product and process innovation in the chemical industry

Bauer Manuel, Leker Jens

Abstract

In this study, we investigate the direct effects that balancing R&D budget allocation betweenexploratory and exploitative innovation activities has on new product performance.Furthermore, we distinguish between product and process exploratory and exploitativeinnovation activities to derive a more detailed insight on the exploration/exploitationperformancerelationship. We integrate these two important categories of innovative activityin a framework that could help senior managers to decide how to allocate scarce R&Dresources within an innovation portfolio to maximize returns. Based on a unique data set ofinternal financial R&D budget data from strategic business units in the chemical industry wefound that new product performance is curvilinear related with the degree to which acompany engages in exploration (at the expense of exploitation) which holds true for both,product and process innovation. But in process innovation, exploration requires more fundingto achieve maximal performance and an imbalance of exploration and exploitation has lesssevere consequences when compared to product innovation.