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

Li, Xu ORCID: 0000-0003-3888-3235 and Vermeulen, Freek (2021) High risk, low return (and vice versa): the effect of product innovation on firm performance in a transition economy. Academy of Management Journal, 64 (5). pp. 1383-1418. ISSN 0001-4273

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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.

Item Type:	Article
Official URL:	https://journals.aom.org/journal/amj
Additional Information:	© 2021 Academy of Management Journal
Divisions:	LSE
Subjects:	H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Date Deposited:	22 Sep 2023 12:03
Last Modified:	15 Nov 2024 01:27
URI:	http://eprints.lse.ac.uk/id/eprint/120268

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