Organizational slack and firm innovativeness in a transitional

economy: the role of strategic proactiveness and IPR protection

strength

Yan ZHANG1, Xue-rong PENG2, Ke-yan Shou3

1, 2 ,3School of Management, Zhejiang University, Hangzhou, China

(E-mail: zhangyan2010@zju.edu.cn; Address: 1105A Management Building, Zijinggang Campus,

Zhejiang University, Hangzhou 310058, China)

Abstract: In this study, we examine the

relationship between organizational slack and

firm innovativeness in transitional economy.

Based upon it, we identify two moderators

including strategic proactiveness and IPR

protection strength, which influence the

relationship between organizational slack and

innovation significantly. A research framework

of organizational slack and innovativeness is

proposed then. Moreover, the theoretical

contributions and managerial implications are

discussed at the end of this study.

Key words: Organizational slack; transitional

economy; strategic proactiveness; IPR protection

strength

I. INTRODUCTION

The concept of organizational slack and

innovation are important elements in the

research field of strategic management.

Organizational slack has also received much

attention because it enable the firms to buffer

from shortages of funds, also it has potential to

foster innovation(Bourgeois III, 1981). Previous

research has argued that there exists a positive

relationship between organizational slack and

kinds of exploration activities, including

innovation(Nohria,Gulati, 1996), risk

undertaking(Singh, 1986) and adaptation

(Kraatz,Zajac, 2001). However, other research

suggests that the exist of organizational slack

could bring about cautious decision making and

risk aversion, which reduce exploration (Mishina,

Pollock, Porac, 2004) and the incremental

adaptation or exploitation increases (Tan,Peng,

2003). Besides the argument of positive

relationship, Nohria and Gualti(1996)proposed

that an inverted U-shaped relationship exists

between slack and innovation, the results support

their hypothesized relationship. Geiger and

Cashen(2002)examined the impact of

organizational slack on innovation from a

multidimensional perspective. The results

suggested that both of available slack and

recoverable slack have an inverted U-shaped

relationship with innovation, the potential slack

has a positive relationship with innovation.

However, neither of them has identified the

moderating variables which could affect the

relationship between organizational slack and

innovation.

We focus on the research question, what is

the relationship between organizational slack

and innovation? And what moderating variables

affect that relationship? The purpose of this

study is to extend the work of Geiger and

Cashen(2002)by examining the moderating

effects between organizational slack on

innovation under the context of China’s

transitional economy. We attempt to examine

how strategic proactiveness and Protection

strength of IPR moderate the relationship

between organizational slack and innovation.

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Several propositions are proposed based on

variety explainations and theories. At the end of

this paper, we propose a framework of

organizational slack and innovation.

II. THEORY AND PROPOSITION

DEVELOPMENT

A. Organizational slack

Nohria&Gulati(1996) defines slack as “the

pool of resources in an organization that is in

excess of the minimum necessary to create a

given level of organizational output”. Voss,

Sirdeshmukh(2008) argues that slack refers to

the stock of excess resources available to an

organization during a given planning

period(Nohria,Gulati, 1996; Sharfman, Wolf,

Chase, Tansik, 1988). Organizational slack is

divided into three types which is consistent with

the most common typology, available slack,

recoverable slack, and potential slack resources

(Sharfman, Wolf, Chase, Tansik, 1988). In order

to explore the impact of different types of

organizational slack on innovation in detail, we

follow the typology proposed by

Sharfman,Wolf,Chase(1988)in this paper.We

analysis the impacts of three sorts of slack on

innovation separately.

Available slack refers to the resources

available to firms and not yet committed for

particular distributions. Recoverable slack

represents resources that have already been

absorbed by the firms, but which could be

recovered by means of increased efficiencies.

Potential slack represents the future ability of

firms to generate resources.

B. Organizational slack and innovation

Nohria and Gulati(1996) was the first

researcher whom propose an inverted U-shaped

relationship between organizational slack and

firm innovation. He held the views that slack had

both positive and negative impact on innovation.

There are several reasons could explain the

positive impacts of slack on firm innovation. Of

them the main reason is that slack resources

could enable organizations protected from the

uncertainty of the innovative projects. Because

the firms owned organizational slack have extra

resources to buffer or decrease the loss from

failures. The negative impacts of slack on

innovation are mainly from an agency theory

perpective. This theory argues that managers

tend to maximize their own personal wealth by

means of slack resources instead of the

firms’(Jensen, 1986). Firms without

organizational slack are likely to emphasis

short-term performance and innovation is

ignored (Nohria, Gulati, 1996). They also argue

that since slack increse, more projects occurs,

thus lead to more innovation. However,

innovation will diminish when the excess

resources accumulate beyond a certain point,

poor resource decisions and projects may occur.

Available slack and innovation

In line with the logic above, managers are

likely to become more relaxed in their decision

making because of the available resources.

Therefore, managerial decision making is

influenced by available slack and follows an

inverted U-shaped relationship (Geiger,Cashen,

2002).

Proposition 1: The available slack has an inverse

U-shaped with innovation

Recoverable slack and innovation

Recoverable or absorbed slack refers to

resources that are embedded in the firm in the

form of excess expenses. It is expected that

innovation will stop to increase when the

recoverable slack beyond a certain point. The

control over innovative projects will be sufferred

as recoverable slack increases(Jensen, 2010),

and excess recoverable slack may decrease

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innovation within the firm.

Proposition2: The recoverable slack has an

inverse U-shaped with innovation

Potential slack and innovation

Of the three types of slack, potential slack

is the least likely to play a key role in the

internal funding considered to be important for

funding R&D activities. We expected that more

innovative activities are encouraged as potential

slack increases. However, the increased potential

slack will not decrease innovation within a firm.

The explaination is that as potential slack

increases, experimentation and innovative

projects difficult to controlled will unlikely to

occur because potential slack is not a current

resource within the firm.

Proposition 3: The potential slack has a positive

relationship with innovation

C. Moderating effect of strategic proactiveness

In order to reap the benefits of market

opportunities or suppress competitive or

regulatory threats, firms need more strategic

proactiveness. Strategic proactiveness is the

specific attributes of ‘strategic proactiveness

organization’, this enables an organization adjust

their products or market positioning field

constantly, utilizing the market opportunities,

emphasizing the flexibility of technology

systems and administrative systems in order to

promote the realization of organizational goals

quickly, this attribute enables an organization to

get with the future needs(Liu,Chen, 2007).

Strategic proactiveness emphasises on the

technical advance, develop new products and

new markets, the organizations of strategic

proactiveness are more inclined to take the

initiative to search for cross-border knowledge

in order to achieve sustained innovation(Sidhu,

Volberda, Commandeur, 2004). We argue that

the strategic proactiveness will moderate the

relationship between organizational slack and

innovation through two ways. Firstly, the

strategic proactiveness organizations will pay

more attention to innovation, assess the quality

of organizational slack which are invested into

innovation projects carefully, to avoid producing

some poor innovation projects. Secondly, more

strategic proactiveness organizations are likely

to seize the opportunity and use of slack

resources rationally, thus mitigating the adverse

effects of excess slack resources on innovation.

Therefore, we propose the following

propositions:

Proposition 4: The effect of available slack and

innovation is stronger when strategic

proactiveness is high rather than low.

Proposition 5: The effect of recoverable slack

and innovation is stronger when strategic

proactiveness is high rather than low.

Proposition 6: The effect of potential slack and

innovation is stronger when strategic

proactiveness is high rather than low.

D. Moderating effect of protection strength of IPR

Despite the theoretical and economic

significance of transitional economy, little has

been learned about the relationship between

slack and innovation, especially when the

relationship may be influenced by strategic

proactiveness and Protection strength of IPR in

the context of transitional economy. The impact

of IPR protection on technology market is

mainly focused on two aspects, they are to

promote technological innovation, reduce the

technical transaction costs and facilitate the

technology transfer. Traditional theory holds that

the IPR protection system (especially the

protection of the patent system) plays a certain

role in promoting innovation incentives and

technological progress. Merges and

Nelson(1990)found that, if innovators can not

benefit from the subsequent of the product

development, there is no incentive for R&D, and

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stronger IPR protection will influence the

subsequent innovative research, and improve the

ability of intellectual property will prevent

innovation rather than promote innovation.

However, we argue that such theory is not

suitable for transitional economy, the actual fact

is that the firms tend to invest more

organizational slack into innovative activities

when IPR protection is stronger, if the

innovative achievements could be protected well,

high return on innovations will in turn stimulate

innovation investment, and creating a virtuous

circle. For example, through a survey in

developing countries, 80 percent of companies

said that if the domestic IPR has been

strengthened, they will increase domestic R&D

investment in order to promote innovation. IPR

protection strength will moderate the inverted

U-shaped relationship between two sorts of slack

(available slack and recoverable slack) and

innovation. It will also positively moderate the

positive relationship between potential slack and

innovation.

Proposition 7: The effect of available slack and

innovation is stronger when IPR protection is

strong rather than weak.

Proposition 8: The effect of recoverable slack

and innovation is stronger when IPR protection

is strong rather than weak.

Proposition 9: The effect of potential slack and

innovation is stronger when IPR protection is

strong rather than weak.

III A RESEARCH FRAMEWORK OF

ORGANIZATIONAL SLACK AND

INNOVATION IN TRANSITION

ECONOMMY

Based upon the discussion above, we

propose a research framework of organizational

slack and innovation in transition economy.

Figure1 A research framework of organizational

slack and innovation in transition economy

IV. DISCUSSION AND CONCLUSION

A. Theoretical contributions

Firstly, most of the previous literatures

focus on the Western countries, while

transitional economy context have been ignored

for a long time. This paper focuses the impact of

organizational slack on innovation under the

context of transitional economy, extending the

research context of this topic. Also, some new

insights have been founded. Secondly, we have

identifies two moderating variables between the

relationship of organizational slack and

innovation, and we argue that strategic

proactiveness and protection strength of IPR

paly important roles between the main effect.

B. Managerial and policy implications

Managers should strengthen the cultivation

of organizational strategy proactiveness, can not

be satisfied with the status quo, emphasizing

product areas or market positioning adjustment

constantly, utilizing market opportunities

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efficiently as well. It’s of great necessity for

enterprises to establish a perfect intellectual

property system. The establishment of suitable

intellectual property strategy is of great

importance to protect their core technology and

knowledge achievements(Li,Yang, 2012). The

relevant departments of the State should

strengthen the legal system of intellectual

property protection system, try their best to

make China’s IPR more comprehensive and

stronger(Li,Yang, 2012).

C. Conclusions

The concept of organizational slack and

innovation are central elements in the strategic

management field. We focus on the research

question of what’s the impact of slack on

innovation in transitional economy. We explore

the specific impact of three sorts of slack on

innovation, examining the moderating roles of

strategic proactiveness and IPR protection

strength. A research framework of organizational

slack and innovation is proposed then. We argue

that firms’ innovativeness which benefits from

slack will achieves maximum when strategic

proactiveness is high and IPR protection is

strong.

ACKNOWLEDGEMENTS

The authors gratefully acknowledge support

for this research from the National Natural

Science Foundation Key Project(71132007);

“China's economic transformation and

innovation development”, The Third Funded

Projects of National “985 Project ”.

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