How to Compose Innovation Portfolios: Flexibility or Commitment?

Information Systems and Operations Management

Speaker: Jochen Schlapp (FSFM)

Salle Bernard Ramanantsoa

Abstract: 

When composing their innovation portfolios, firms can tap different sources of initiatives: they can rely on their internal R&D units and invest in projects that are promoted internally; or they can access external innovators and strategically acquire projects that originated outside their boundaries. We ask: How should a firm allocate its scarce resources across the different sources? When dedicating resources to external initiatives, a firm can gain access to previously unexplored innovation projects; yet, such a draining of resources also induces fierce internal competition for the remaining resources which can severely distort the firm’s allocation efficiency. We study this tradeoff by designing a stylized game-theoretic model, and we identify the firm’s optimal resource allocation policy. We find that, in general, the firm should maintain flexibility by not pre-committing resources to any of the project sources. Yet, we also find two exceptions to this general rule: First, if the internal competition for resources is overly strong, then the firm may find it optimal to forgo any internal innovation projects. Second, when internal and external projects are relatively similar, then the firm should reserve some of its resources for one of the sources, while keeping flexibility about how to allocate the remaining resources.