The Impact of Firm Resources On Innovation

European Journal of Innovation Management
The impact of firm resources on innovation

Irem Demirkan,
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Irem Demirkan, (2018) "The impact of firm resources on innovation", European Journal of Innovation
Management, https://doi.org/10.1108/EJIM-12-2017-0196
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Impact of firm
The impact of firm resources resources on
on innovation innovation
Irem Demirkan
Loyola University Maryland, Baltimore, Maryland, USA
Abstract Received 20 December 2017

Purpose – The purpose of this paper is to propose that the resources that a firm owns and has full control Revised 11 March 2018
(firm-level resources) and resources that a firm access through direct connection with other firms (network-level 30 March 2018
Accepted 4 April 2018
resources) will impact firm innovation when effectively deployed by the firm. While previous research examined
these factors separately, the author takes a holistic view and looks into their effects on innovation
simultaneously. The author also introduces the moderating effects, i.e. the variables that can enhance firm
innovation through their interaction with internal and external resources.
Design/methodology/approach – The author tested the role of financial resources and slack resources in the
form of cash slack and human slack at the firm level, and network size, network tie strength, and network
diversity at the network level on the firm innovation. Using generalized negative binomial model with
Huber-White procedure, the author analyzed 306 firms from the biotechnology industry over a span of 17 years.
Findings – The analysis suggests that cash slack impact innovation negatively. However, this link is
moderated by firm size such that for large firms cash slack affects innovation positively. Network-level
resources all positively impact innovation and have more economic impact on firm innovation than
firm-level resources. Furthermore, although human slack negatively affects innovation, its interaction
with network size enhances innovation.
Originality/value – The research makes important contributions to both strategic management and
innovation literatures especially when, the author considers the role of firm-level slack in driving firm
innovation. Previous research reported conflicting findings about the availability of slack resources and
firm performance. The results showed that the relationship between slack resources and firm innovation is
negative and significant, both for available slack and human slack. This finding parallels with previous
research which reported that constraints such as lack of slack resources can actually facilitate innovation.
The author also contributes to the literature by introducing boundary conditions which can enhance firm
innovation through their interaction with firm-level internal and network-level external resources. In this
respect, to the author’s knowledge, this is among the first studies to combine the slack literature focusing on
firm-level resources with the literature on network-level resources.
Keywords Innovation, Networks, Slack resources, Biotechnology industry, Human slack
Paper type Research paper
Introduction
Organizational researchers have long studied the question of “what drives firm innovation?”
from many different perspectives. Researchers have identified numerous factors such as
industry characteristics, firm-level and intra-organizational characteristics, and managerial
incentives (see Ahuja et al., 2008 for a detailed review) as antecedents of innovation.
Some studies have asserted that the presence of different internal organizational resources,
such as financial resources (Penrose, 1959), positively affects the innovation process.
Firms that are rich in financial resources are more likely to take advantage of new
opportunities than those with financial constraints and hence invest more in innovation.
Similarly, slack resources, resources in excess of those needed for basic operations, have
been reported to have effects on firm innovation (Hoegl et al., 2008; Nohria and Gulati, 1996).
Some other studies have stressed the role of resources that a firm accesses through its
network relationships as the main driver of innovation. Studies that focus on the role of
inter-organizational relationships, such as Ahuja (2000), have shown that a firm’s network
characteristics in the form of direct ties, indirect ties, and structural holes has an impact on
its innovation. European Journal of Innovation
Management
While these studies have contributed to our understanding of the roles of internal and © Emerald Publishing Limited
1460-1060
inter-organizational firm resources that drive firm innovation, there is still lack of research DOI 10.1108/EJIM-12-2017-0196
EJIM that looks into these factors simultaneously. In other words, organizational literature still
lacks an effort that investigates the roles of firm’s internal resources in tandem with its
external (i.e. network) resources and understand the relative significance of each in driving
firm innovation. The current study is a step in this direction.
First, we propose the need to look into the role and co-existence of organization’s internal
and external resources that affect the productive opportunities for firm innovation. It is
quite established in the innovation management literature that existing internal resources,
both in the form of tangible resources and in the firms of employee skills and knowledge,
play an important role in fostering firm innovation. A firm’s internal resources can be
crucial in generating radical innovations (Ahuja and Katila, 2004). Similarly, resources that
are accessed through firm’s external relationships, in the form of research and development
collaborations, managerial ties, strategic alliances, may bring in resources to the firm (hence
the term external resources), that benefits the firm innovation (Wang and Li-Ying, 2015;
Shu et al., 2012). Specifically, in this research we recognize network resources as a source of
competitive advantage for firms and accordingly propose to test the relative significance of
which of these resources, firm-level internal resources or network-level external resources
that are accessible through firm’s networks, matter more for firm innovation.
Second, previous research reported contradictory findings on whether “slack resources

are good or bad for innovation.” Nohria and Gulati (1996) showed that the both too much
and two little slack may be detrimental to firm innovation, suggesting an inverse U-shaped
relationship between slack resources and firm innovation. Since this seminal work, research
on the effects of slack on performance and innovation has theorized that some contingencies
may alter these effects such as industry patenting intensity (Herold et al., 2006), industry
environment (Bradley, Shepherd and Wiklund, 2011), industries’ regulatory environment
(Martinez and Artz, 2006), venture capital (VC) and angel investors (Vanacker et al., 2013),
strategic choices (Troilo et al., 2014), and firm age (Paeleman and Vanacker, 2015).
While these studies provided critical insight into the performance effects of slack under
different contingencies, they lacked a holistic look into the firm-level and network-level
resources. We suggest that there can be important interdependencies between firm-level and
network-level resources. To this end, we introduce two moderating effects, namely, firm size
(as a moderator for the slack-innovation link) and human slack (as a moderator for network
size-innovation link) to better understand how firms can enhance their innovation through
their internal and external resources.
Theory and hypotheses

In our study, we are particularly interested in identifying the type of resources that are
important in driving firm innovation. Organizational literature on innovation has recognized
the significance of firm-level resources such as financial resources as a positive contributor
of firm innovation (Bierly et al., 2009). Similarly at the firm level, recent studies have
concluded that firm-level slack resources, defined as resources available to the firm that
can be easily deployed to various uses (Chen et al., 2012; Mishina et al., 2004; Nohria and
Gulati, 1996), are essential to the innovation in the form of research and development
strategies of firms (Mousa and Chowdhury, 2014). At the inter-firm-level (network level)
studies have stressed the role of resources that a firm accesses through its network
relationships, such as local R&D collaborations (Wang and Li-Ying, 2015), managerial ties
(Shu et al., 2012), as the main driver of innovation. These studies, such as Ahuja (2000), have
shown that a firm’s network characteristics in the form of direct ties, indirect ties, and
structural holes have a positive impact on its innovation.
These studies have contributed to our understanding of firm-level and network-level
resources that may affect the firm’s innovation. However, we think that unless we look at
both firm-level and network-level resources from an integrative perspective, we will not be
able to capture what really matters for fostering innovation at the firm level. Building on the Impact of firm
past literature, we consider the role of financial resources that are available for innovation resources on
and slack resources in the form of cash slack and human slack at the firm level, and network innovation
size, network tie strength, and network diversity at the network (inter-firm) level on the firm
innovation. We also explore the moderating effects by looking into the interactions between
firm-level and network-level resources. Examining contingency effects of firm-level
and network-level resources will reveal the strength of relationship between firm-level and
network-level resources and firm innovativeness.
Firm-level resources: financial resources

Peteraf (1993) asserts that financial resources can be a source of competitive advantage even
though they are not themselves unique or difficult to imitate. This is mostly because firms
that have financial resources can take advantage of new opportunities and are better
equipped to respond to threats from their environments. Firms with financial resources are
therefore have the “means” to put into activities that can increase firm innovation.
Santoro (2000) and more recently Santoro and Chakrabarti (2002) show that firms that are
better off financially can invest more in processes that will enable them to create new
products. Studies on firm innovation also indicate that organizations with greater financial
resources invest more in innovative activities, because they can afford to take more risk and
can absorb the cost of failure more easily (Gassmann and von Zedtwitz, 2003; Wischnevsky
and Damanpour, 2005). Financial resources stimulate more innovation because more financial
resources mean more flexibility to experiment with new ideas, bringing in more and better
qualified people to generate ideas, supporting more customer surveys, and more prototype
testing which are all potentially draining financial resources (Hoegl et al., 2008). When the firm
has more financial resources, it will have more leverage to put money into areas that in
the short run potentially extract resources, such as innovation. Specifically, in the case
of biotechnology firms where the main activity of the firm involves the application of
biotechnology techniques to produce goods or services and/or to perform biotechnology
research and development, availability of financial resources will be directly related to more
innovation. Therefore, we propose that:
H1. Firm-level financial resources positively impact firm innovation.
Firm-level resources: slack resources

Organizational slack is the resource difference between those under a firm’s control and the
minimum amount required for its survival (Cyert and March, 1963; Nohria and Gulati, 1996).
Slack can be regarded as a sort of resource endowment because slack, or its absence, is the
cumulative legacy of past performance and reflects the resource stock that a firm has
accumulated over time (Amason and Mooney, 2002). While slack resources and if and how
they contribute to firm performance have been widely discussed in the organizational
literature, traditional emphasis has been on financial slack resources. Organizational slack
has been broadly conceptualized along at least two dimensions: absorbed slack and
unabsorbed slack (Sharfman et al., 1988). Tan and Peng (2003, p. 1251) pointed out that
absorbed slack (excess costs in organizations) is not easy to redeploy, while unabsorbed
slack (currently uncommitted resources) is more easily redeployed elsewhere, allowing for
greater managerial discretion. In our study, unabsorbed slack is more relevant as it can be
easily redeployed to activities related to innovation and thus has an immediate effect on
firms’ innovation.
Recently, the research on slack resources has also recognized the need to open up this
concept and look into slack resources from a fine-grained perspective. Accordingly,
Mousa and Reed (2013) discussed the role of not only financial slack, but also innovational
EJIM and managerial slack in assessing the role of slack resources as information for initial public
offering investors.
Although slack resource can fuel many different activities in the firm, we argue that
slack resource is more likely to result in innovation for several reasons. First, according to
the classical definition by Bourgeois (1981), organizational slack acts as a cushion that
allows the organization to initiate strategic action with respect to changes in the
environment. From this standpoint, slack acts as a facilitator of new strategic behavior,
since it is the resource that is in excess of the amount required for firm’s survival. A firm
with slack resource has the ability to look for alternatives and experiment with new areas
(Nohria and Gulati, 1996).
Second, slack resource provides insurance to a firm’s current viability, allowing it to
devote more attention to the concerns of future viability. Firms can take on more risks
through exploration, experimentation, and free association (Holmqvist, 2004; Salge, 2012;
Simsek et al., 2007) when they have more slack resources. And third, with an increase in
slack resources managers become less concerned about the risks of failure, since
organizational slack give them extra resources to buffer the organization from losses due to
such failures. This allows for more experimentation within the firm. Accordingly on the
relationship between slack resources and firm innovation, we suggest that:

H2a. Firm-level slack resources in the form of cash slack and human resource slack
positively impact firm innovation.
Although we focus on a positive relationship between slack resources and firm performance
in the form of firm innovation, the organizational literature has suggested that the findings
on this relationship have been rather ambiguous (Daniel et al., 2004; Paeleman and
Vanacker, 2015). Nohria and Gulati (1997) suggested that slack may create conditions which
foster undisciplined management of innovation projects (i.e. funding of projects that
shouldn’t be funded, termination of projects that should be continued, etc.) and can lead to
negative innovation outcomes under poor internal control systems (i.e. agency theory,
escalation of commitment phenomena, power and politics, etc.). Hence, some recent research
has suggested that constraints such as lack of resources, which can translate into lack of
slack resources, can actually facilitate innovation. Proponents of this view argue that
presence of slack may actually mean inefficiency and that it signals lack of entrepreneurial
spirit and innovation (Mishina et al., 2004). Indeed, Bradley, Wiklund and Shepherd (2011)
showed that greater financial slack leads to exploitation of current resources rather than
exploration of new opportunities. Similarly, the literature on creativity argue that the default
approach in creative tasks is to simply acquire elements that fit with existing solutions,
rather than going through the more consuming process of searching for novel solutions to
the problems at hand (Ward, 1994). Moreover, Moreau and Dahl (2005) showed that
individuals are most innovative when given fewer rather than more resources for solving an
innovation problem. So, when individuals are presented with less resources they are more
likely to recognize and come up with an unexpected idea. Hoegl et al. (2008) label this
negative relationship between the organizational slack and innovation link as “less is more.”
In support of this argument, Paeleman and Vanacker (2015) showed that firms with
constraints both in financial and human resources exhibit better performance relative to
firms with abundance in these resources. Therefore, we also suggest that:
H2b. Firm-level slack resources in the form of cash slack and human resource slack
negatively impact firm innovation.
In this study, we specifically focus on two types of firm-level slack: cash slack and human
slack, since different slack types may interact differently with firm innovation. Firms can
immediately employ cash slack to productive activities such as innovation. Cash slack then
can easily be adjusted to the needs of the firm and to the demands of a certain situation Impact of firm
(Penrose, 1959). On the other hand, human slack, which is the investment in capabilities resources on
and skills in human resources above the level required for task completion (Rahrovani and innovation
Pinsonneault, 2012), is not easily redeployable. Human slack is context dependent and is
more tied to the nature of organizational routines than cash slack (Mishina et al., 2004;
Mousa and Chowdhury, 2014). In other words, it is not easy to deploy one employee for the
other or benefit from him/her for a different type of work without a certain adjustment
period. Overall, human expertise and knowledge is more difficult to transfer across
situations (Szulanski, 2002) than more generic slack resources. Excess employees enable the
firm the flexibility to explore new areas if a need arises. For example, as the scientists of the
biotechnology firms increase, these firms can engage in more innovation projects, or more
“brains” can work on their projects and hence increase their productivity and innovation.
Slack in human capital is a pool of resources that can be used to utilize in times of need.
However, at the same time the sticky and context dependent nature of human slack can
make it harder to quickly switch these resources from one project to another. Moreover,
keeping these resources might be costly in terms of the real cost invested in human
resources and in terms of the costs related to the morale of the employees. These costs might
affect firm innovation in a negative way.

Previous research examining the firm-level slack resources in the form of what is currently
available to the firm and firm innovation link reported contradictory findings. Nohria and
Gulati (1996) showed that the both too much and two little slack may be detrimental to firm
innovation, suggesting an inverse U-shaped relationship between slack resources and firm
innovation. Simsek et al. (2007) suggested that future research should examine the possible
different effects of slack resources in small and larger firms, as larger firms may differ
from smaller ones for many reasons such as their more complex organizational systems,
principal-agent conflicts of interest, etc. Based on these observations, we argue that the firm
size is one important factor affecting the relationship between cash slack and innovation.
In the first place, slack may change according to the availability of organizational resources.
Hence, small firms may mostly use their resources for immediate survival and may not
accumulate slack resources. On the other hand, larger firms may have the means to
accumulate slack resources and use the slack for the firm in the form of projects that would
not get funded such as the innovative projects. A similar explanation may be that small firms
may be more likely to allocate cash slack for growth of their firms rather than for innovative
projects. On the other hand, for large firms especially, slack resources may provide
discretionary funding for new projects, improving processes and developing new markets
(Bradley, Shepherd and Wiklund, 2011). Furthermore, small firms may also lack financial
management capabilities possessed by large and established firms who may have developed
more experience in resource allocation (Ang, 1991). Hvide and Moen (2015) showed that an
abundance of financial resources do more harm than good for entrepreneurial companies
where higher liquidity may induce less dedicated management in these firms. Based on these
observations, we argue that such behaviors may lead to inefficiencies in deployment of slack
resources on the part of small firms. Therefore, we suggest that:
H3. Firm size will moderate the relationship between firm-level cash slack resources and
firm innovation, such that this relationship will be negative for small firms
and positive for large firms.
Network-level resources: network size

Inter-firm-level relationships enable firms to access critical resources and create competitive
advantages. Therefore, firm’s inter-firm relationships constitute its “network resources”
because they extend the opportunity set of the firm (Gulati, 1999). Powell et al. (1996)
EJIM assert that firms operating in industries where know-how is critical must develop
skills necessary for both in-house research and cooperative research with external partners.
In the biotechnology industry, particularly with close relationships in co-authorships,
research collaboration networks facilitate the flow of knowledge among organizations
(Mowery et al., 1996). These networks also offer the firm the benefit of extended know-how
(Su et al., 2009). Through such inter-firm relations, organizations also understand the
need for further exploration of novel ideas in order to exploit their findings in a commercial
context (Powell et al., 1996).
However, most of the time firms do not know from which collaboration partners they can
most benefit depending on particular situations and changing research contexts (Peng and
Wang, 2000; Zucker et al., 1998). Therefore, we suggest that it is beneficial for the focal firm
to keep its network as large as possible. Keeping a large network enables firms to increase
the probability of partners that are valuable for the new knowledge creation challenges
faced by the firm. Moreover, there is a higher possibility that a firms’ network would include
weaker ties (Granovetter, 1973) within a larger network; for instance, Peng and Zhou (2005)
point out the importance of having both strong and weak ties within one’s network.
Exposure to new ideas also comes from interaction with those to whom we are weakly tied,
since such individuals might be included in many different circles and have access to
information and resources that the focal firm may not. Therefore, the following is suggested:
H4. Network size positively impacts firm innovation.
When firms are conceived as bundles of resources, resources may interact with one another
and enhance or suppress each other’s effects on performance (Black and Boal, 1994).
Paeleman and Vanacker (2015) examined the performance effects of distinct bundles of
slack resources and reported that firms can combine more of a specific resource with less of
another resource to achieve superior performance. We extend these arguments and suggest
that there can be important interdependencies between firm-level and network-level
resources. Hence, we propose that the positive effect of network resources in the form of
network size will depend on the availability of human resources that could be directed
into network building activities. Most network building and in later stages sustaining these
network-based activities require human slack. For a network resource to produce valuable
outcomes such as innovation, cooperation, proximity, and repeated exchanges are necessary
to effectively transfer tacit knowledge among network members ( Jones et al., 1997).
Such repetitive exchanges require human capital beyond the requirement for the ongoing
activities of the firm. The larger network the firm has, the more the need for human slack is.
In their study of network competence, Ritter and Gemünden (2003) suggest that a
company’s effectiveness of networks require a high degree of human resource management
geared toward network-oriented activities. Accordingly, we concur that the larger the firm’s
network is, the more the need for human slack will be. Having a large network and
coordinating human resources with the sustainability of the network-based relationships
will give the firm an opportunity to use its firm-level human slack in an efficient manner.
Availability of human slack devoted for network building and eventually sustaining
activities will therefore enhance the relationship between network size and innovation:
H5. Human slack will moderate the relationship between network size and firm
inovation, such that this relationship will be negative for firms with small networks
and positive for firms with large networks.
Network-level resources: network diversity

We define network diversity as the similarity or differences of firms within its network. From a
network theory perspective, similarity of contacts may introduce redundancy in the network.
Redundancy in the network ties may have a negative effect in terms of the innovation of the Impact of firm
firm, since repeated relationships might suffer from similarity of ideas and might hinder resources on
the development of new knowledge. While non-redundant ties (Burt, 1992) are advantageous in innovation
explorative learning and the inclusion of new ideas into the network, redundant ties may not
contribute as much because networks composed of redundant ties usually only provide access
to same information over and over (Burt, 1992). Without diversity in networks, there is a
danger that as firms in the network become increasingly alike through imitation, thus such
networks may be less effective at generating new knowledge. Similarly biotechnology industry
requires the “right mix” of people from different scientific and functional backgrounds in order
to collaborate and exchange information (Pisano, 2006, p. 76). Thus, we suggest that:
H6. Network diversity positively impacts firm innovation.
Network-level resources: network tie strength

Granovetter (1973) defines relational strength in terms of the time and emotions invested in
a relationship in addition to the reciprocity involved between actors. From this standpoint,
the duration of network ties with one specific partner could be a measure of the success of a
certain relationship (Geringer and Hebert, 1991). For example, Parkhe (1993) found out that
in a strategic alliance, the level of perceived opportunistic behavior is negatively related to
the history of cooperation. This suggests that the stronger and more repeated the
relationships are, the better the cooperative and collaborative performance between
the partners is. Moreover, in the context of the biotechnology industry high level of
uncertainty and risk may induce the firms to ally more frequently and more intensely with
existing partners. Repeated collaboration increases the ability to predict the potential
success of a given project with a given partner (Gulati, 1995) increasing trust among the
partners and inducing firms to continue to look for ways to work together. Trust becomes
very important in competitive environments such as the biotechnology industry and firms
prefer to work with partners that they trust in order to reveal their trade secrets innovation
being most important of them. Moreover, in trust-based environments, members within the
network understand each other better and hence firms need less mediation to work together.
This creates an environment where many creative projects spur:
H7. Network tie strength positively impacts firm innovation.
Firm-level resources and network-level resources

Lavie’s (2006) article suggest that ownership or control of resources is not a necessary
condition for competitive advantage where an interconnected firm can extract value from
resources that are not fully owned or controlled by its internal organization. Supporting these
theoretical propositions, empirical work (Ahuja, 2000; Lee et al., 2001; Rothaermel, 2001; Stuart,
2000) demonstrated that network partners play a significant role in shaping the competitive
advantage of the firm. For example, Rothaermel (2001) showed that incumbents in the
biopharmaceutical industry achieved higher performance when leveraging the
complementary resources of new technology providers. Inter-firm collaborations allow
the firms not only to leverage their own resources by the resources of their partners in the
network but also to manage uncertainty by pursuing multiple opportunities
(Bradley, Wiklund and Shepherd, 2011; Gulati, 1999). As suggested by Gulati (1998),
collaboration networks enable rapid access not only to partners’ complementary skills,
but also to new technologies, or new markets.
Many scholars posit that in industries where knowledge is a key driver of competitive
advantage, innovation is driven by a firm’s external partnerships (von Hippel, 1988).
Proponents of “open innovation” model argues that valuable ideas can come from inside or
EJIM outside the firm and can go to market from inside or outside the firm as well (Chesbrough,
2003; Laursen and Salter, 2006). Millson et al. (1996) argue that to overcome the limitations of
internal resources, firms should make more use of partnering arrangements with others to
accomplish their innovative goals. In industries such as biotechnology, knowledge is
sophisticated and widely dispersed, and thus, not easily produced or captured inside the
boundaries of a firm (Powell et al., 1996). In such complex innovation contexts, where
knowledge obsolesces at a rapid rate (Liebeskind et al., 1996), success depends on the ability
of firms to appreciate and utilize distinctive knowledge from outside the firm (Boland and
Tenkasi, 1995). In a context of firms working together to produce innovations, this suggests
that firms can improve one another’s innovation capabilities through exchanging and
reflecting on input and feedback provided by the members of the network. For example,
Stuart (2000) found that the technological capabilities of partners contributed to the sales
growth and innovation rates of semiconductor firms. In the biotechnology industry,
research collaboration networks provide firms access to external knowledge which help
them extend their know-how and innovativeness (Mowery et al., 1996). For example, Su et al.
(2009) showed that internal capabilities and external partnerships have positive interaction
effects on product and process innovativeness in the Taiwanese biotechnology industry.
While we propose that both firm-level internal resources and inter-firm-level network
resources positively influence innovation, based on the above studies and observations, we
argue that network resources, through complementing and leveraging firm-level internal
resources and especially enhancing the know-how and innovative capabilities of network
members, will have higher levels of impact on innovation as compared to internal resources:
H8. Network-level resources have a greater effect on innovation than firm-level resources.
Above hypotheses are summarized in Figure 1.
Method
Data
We chose the biotechnology industry in the USA as our research setting. Accordingly, we
identified a sample of publicly traded biotechnology firms that are listed in Recombinant
Capital (ReCap), because we need complete financial data to validate their performance
index (Hoang and Rothaermel, 2005). We developed our firm-level co-authorship network
based on these firms. Specifically, we studied the co-authorship networks of biotechnology
firms in our sample. The co-authorship network of a firm consists of its set of direct,
Internal (firm-level)
resources
• Financial resources Firm size
• Slack resources
(cash slack and H3
human slack) H1, H2a, H2b,
H8?
Firm innovation
External (network-level)
resources
• Network size
• Network diversity H5
Figure 1. • Network tie-strength H4, H6, H7,
Summary of H8? Human slack
hypotheses
dyadic ties and the relationships between these ties, with the firm at the center of the Impact of firm
network as the focal actor (Hite and Hesterly, 2001; Wasserman and Faust, 1994). resources on
Accordingly, each network consisted of a focal biotechnology firm and a set of alters, i.e., innovation
research institutions, universities, or pharmaceutical firms connected to the focal firm
(Wasserman and Faust, 1994). Using the ISI-Social Citation Index (SCI), for each year and
each biotechnology firm in our sample, we identified the organizations that the researchers
from a specific biotechnology firm had co-authored with a scientific article. In our network
setting, the focal biotechnology firm and its alters are linked if their affiliated researchers
wrote a paper together. Using SCI, we tracked the co-authorships from each biotechnology
company in our sample for a period of 17 years (from 1990 to 2006). Subsequently, our study
covers publicly traded biotechnology firms between the years 1990 and 2006 inclusively.
We obtained yearly patent counts, co-authorship network data, and firm- attribute data for
the firms in our sample. The panel used for the analysis includes specific variables for the
period 1990-2006. Due to some missing variables as well as two-year lagged independent
variables, an observation number of 2,240 remained in the sample with 306 firms. Our
sample compares favorably with previous samples used in Rothaermel and Hess (2007) and
Demirkan and Deeds (2014).
Variables
Dependent variable. We measured firm innovation by the number of patents issued by the
US Patent and Trademark Office (USPTO) in a given year. Patents are an important and
widely used measure of innovation (Ahuja, 2000; Rothaermel and Hess, 2007). Patents not
only represent technological novelty (Griliches, 1990) but also have an economic significance
(Zaheer and Bell, 2005). We took the patent data from Thomson Scientific’s Delphion
database and verified using the Technology Profile Report of USPTO.
Independent variables. We measured firm-level financial resources as the ratio of firm’s
research and development expenses to its number of employees. This measure of financial
resources takes into effect the available financial resources for innovation per employee and
also controls for the size effects. This variable measures the amount of financial resources
that goes to each employee for R&D spending (Ortega-Argilés et al., 2010).
We measured firm-level slack resource by using a firm’s cash slack (unabsorbed slack),
which is the ratio of current assets to current liabilities (Chen et al., 2012). Current assets are
assets that can be converted to cash easily or used in business within a relatively short
period of time. They consist of cash, marketable securities, receivables, and other short-term
assets. Current liabilities are financial obligations that have to be paid within a year.
Measurements regarding the human slack are fairly recent in the literature. Recently
Mousa and Chowdhury (2014) calculate human slack as (firm employees/firm sales-industry
employees/industry sales) (for a similar calculation also see Mishina et al., 2004). According
to this measurement positive human slack indicates that the firm has more firm-level human
resources at its disposal than its industry peers and negative human slack implies
that managers are constrained in terms of firm-level human resources with respect to their
industry peer. Following these studies and taking into account the uniqueness of the
biotechnology industry, we measured firm-level slack resource, human slack, as firm
employees/firm assets − industry employees/industry assets. We used firm assets and
industry assets in lieu of firm sales and industry sales because in biotechnology industry
firms typically have very little or no products in the markets and thus very little sales
(Deeds and DeCarolis, 1999). We obtained the data for firm assets from the COMPUSTAT
database for all firms within a company’s four-digit SIC code.
We measured a network-level resource, network size, for a given year t as the firm’s total
number of network partners (Bae and Gargiulo, 2004). For example, for year t if the firm’s
EJIM researchers had collaborated with researchers from ten organizations, then the network size
of that specific firm is coded as 10, which is a count variable.
In measuring network diversity, we followed the methodology developed by
Baum et al. (2000). Diversity in the network is based on the Hirschman-Herfindahl
index and computes diversity as one minus the sum of the squared proportions of a firm’s
number of collaborations with a specific partner in year t, divided by its total number of
collaborations. For example, a firm that has total co-authorship collaborations of six,
five with organization A and one with organization B, network diversity would score
[1 − ((5/6)2 + (1/6)2)]/6 ¼ 0.046. In our sample, network diversity ranges between 0 and
0.9135 with values closer to 0 showing less diversification and values closer to 1 showing
more diversification in the network.
Following Demirkan and Deeds (2014), we measured another network-level resource,
network tie strength, by the percentage of times that the focal firm collaborated with the
partners which are in the firm’s network for three consecutive years relative to others.
Our sample firms collaborated on average 31 percent times with its existing partners in
three consecutive years.
We controlled for firm size, firm age, profitability, research and development intensity,
and firm location. We measured firm size as the natural logarithm of total assets, firm age as
the firm’s incorporation year minus the observation year, and firm R&D intensity as the
ratio of R&D expenditures to total assets. All independent and control variables are lagged
for two years. This takes into account the amount of time lapse between the amount of
patent application and patent issue dates as a measure of innovative performance.
The summary of our variables and measurements are included in Table I.
Data analysis
We applied a negative binomial model for our analysis because our dependent variable, the
number of patents issued to the firm, is a non-negative integer with a limited range. Under
these conditions Poisson or negative binomial models are appropriate; negative binomial
models correct for overdispersion and have been used in other studies of overdispersed
dependent variables (Haunschild and Sullivan, 2002; Marquis, 2003). The variance of our
dependent variable is 74.39 while the mean is 4.60; the variance is significantly larger than
the mean. The distribution of our dependent variable is displaying signs of overdispersion,
or greater variance than might be expected in a Poisson distribution; therefore, we used the
generalized negative binomial model with Huber-White procedure (Petersen, 2009)[1].
Variables Measurement
Firm-level financial resources The ratio of firm’s research and development expenses to its
number of employees
Firm-level slack resource, cash slack The ratio of current assets to current liabilities
Firm-level slack resource, human slack Firm employees/firm assets − industry employees/industry assets
Network size The firm’s total number of network partners
Network diversity Based on the Hirschman-Herfindahl index
Network tie strength The percentage of times that the focal firm collaborated with the
partners which are in the firm’s network for three consecutive
years relative to others
Table I. Firm size The natural logarithm of total assets
Summary of variables Firm age The firm’s incorporation year minus the observation year
and measurement Firm R&D intensity The ratio of R&D expenditures to total assets
Results Impact of firm
Table I reports the means, standard deviations, and correlations for the variables in our resources on
models. Total number of observations is 2,240 from 306 unique firms. The mean value for innovation
our dependent variable which is the two-year ahead number of issued patents is 4.60. At the
firm-level, financial resources have a mean of 166.20 with a standard deviation of 192.70,
cash slack resources have a mean of 2.01 and human slack resources have a mean of
positive levels (0.00243) meaning on average firms in the biotechnology industry have more
firm-level human resources at its disposal than its industry peers. Given the unique nature
of the biotechnology industry, these two variables, namely cash slack and human slack
resources, merit further attention. Our summary statistics in relation to current assets over
current liabilities (i.e. cash slack) are comparable to the firms in biotechnology industry.
The mean value for this variable is 2.01, over one threshold means that on average the
companies in our sample have currents assets almost two times more than the current
liabilities. Because pharmaceutical companies must make large capital expenditures on
R&D, they must be able to maintain adequate levels of liquidity and effectively manage
their characteristically high levels of debt. This is also acceptable ratio amount as per the
biotechnology industry standards, because biotechnology firms typically fund their growth
ventures that are mostly in the form of innovative scientific activities, with high level of debt
and equity. Since most biotechnology firms invest in high-risk innovative activities with a
longer investment return period, the management tries to borrow long-term loans as well as
equity financing and/or carry cash slack to finance and stimulate further innovation
activities and their day to day operations. High liquidity ratio also indicates that they are
able to pay their short-term obligations successfully while maintaining high level of current
assets such as cash, prepaid expenditures, inventory, marketable securities, and account
receivable. Higher current ratio is also an indication of higher working capital. Managers
ensure that the firms have enough cash to pay their current liabilities to survive longer
periods, especially biotech companies expect the return of their R&D expenditures and
innovation investment in a longer term. That is why management prefer to have higher
current asset to current liabilities ratio (Pike and Neale, 2009; Watson and Head, 2010).
The statistic regarding the human slack in Table II also contributes to our understanding
for the unique characteristic of the biotechnology industry in the sense that positive values
for human slack for the biotechnology firms in our sample can mean: first, human resources
have high importance in this industry since innovative performance of these firms depends
on the skills and management of these skills. Literature also shows that, for example, human
capital is a key signal of start-up performance for biotechnology firms (Baum and
Silverman, 2004); second, investments in human resources and investments in fixed assets
produce products that embody innovation, i.e. to produce the outcome to sell customers
(Wyatt, 2008). Most biotech firms do not have the fixed assets to produce and bring the end
product to the market, therefore they follow a low-risk strategy to ally with big
pharmaceutical companies (Brower, 2005), and hence limit their investments in fixed assets;
third, in industries characterized with uncertain environments firms gain advantage
through increased investments in knowledge assets and decreased investments in fixed
assets (Miller and Shamsie, 1996).
At the network-level, Table II shows that network size has a mean of 11.54, that is there are
approximately 11 organizations in a firm’s network. The average network diversity measure
in our sample is 0.42; therefore, our sample has moderate level of diversity considering values
closer to 0 showing less diversity. The mean value for network strength is 31 percent, which
means on average 31 percent of the time firms in our sample have collaborated with the
partners that were in their network for three consecutive years.
Table II also shows the correlation between the variables. We report Pearson’s
correlation statistics. Significant correlations indicate negative relationship between
matrix
EJIM
Table II.
and the correlation

Descriptive statistics
No. Variable Mean SD Min. Max. 1 2 3 4 5 6 7 8 9 10 11
1 Issued
patents (t + 2) 4.6 8.62 0 44 1
2 Financial
resources 166.2 192.7 0 4186.66 0.0546* 1
3 Slack
resources,
cash slack 2.01 11.45 1 496 −0.0142 −0.0153 1
4 Slack
resources,
human slack 0.00243 0.009 −0.00 0.32 −0.0961** −0.1334** 0.0126 1
5 Network size 11.54 22.23 0 133 0.4917** 0.0248 −0.0145 −0.0719* 1
6 Network
diversity 0.42 0.37 0 0.91 0.2854** 0.1237** −0.0353* −0.0791* 0.3637** 1
7 Network tie
strength 0.31 0.34 0 1 0.3771** 0.0785** −0.0290*** −0.0775** 0.5560** 0.6226** 1
8 Firm age 10.91 6.94 0 39 0.1360** −0.5069* −0.0109 −0.0206 0.1720** 0.0897** 0.1131** 1
9 Firm size 0.82 0.97 −1.74 3.12 0.3382** −0.2017** 0.0057 −0.1024** 0.3085** 0.1088** 0.1629** 0.3182** 1
10 ROE −0.46 1.66 −7.71 5.35 0.0573** −0.1028** 0.0396 −0.0300 0.0457*** 0.0055 0.0263 0.0138 0.1385** 1
11 RDInt 8.58 26.24 0 166.46 −0.0460* 0.1867** −0.0103 −0.0220 −0.0377*** 0.0234 0.0174 −0.0852** −0.5621** −0.0486* 1
Notes: *p o0.05; **po 0.01; ***po 0.10
innovation variable at year (t + 2) and some network characteristics and slack measures, Impact of firm
such as the human slack, which are consistent with our regression results. resources on
Approximately, 40 percent of our dependent variable, number of issued patents, for innovation
innovation is equal to 0; therefore we applied a zero-inflated negative binomial regression
model that censors the observations that have the value of 0 for this variable. The signs of
the estimated coefficients at negative binomial and zero-inflated negative binomial
regressions are similar, but the magnitude of the coefficients decrease (i.e. standard errors
increase) for all independent variables in the zero-inflated model because of the reduction in
the number of observations. The direction of causality is the same. Table III shows the
results for our study.
Model 1 in Table III includes our analysis with independent variables only, while Model 2
includes independent variables and the interaction effects. Model 2 also includes incidence
rate ratios (IRRs) to make the economic interpretation easier (Rothaermel and Hess, 2007).
We interpret the full model, namely Model 2, for our results. In Model 2, results of the
zero-inflated negative binomial model suggest that our H1 is not supported. In other words,
we do not find a significant relationship between the firm-level financial resources and
firm innovation. Contrary to our expectations this finding may suggest that in the case
of biotechnology firms, firm-level financial resources may not be as important as other

firm-level resources.
For the firm-level slack resources, we hypothesized a positive relationship in H2a and
negative in H2b. While the results in Model 2 suggest significant relationships between
firm-level cash slack and human slack resources and firm innovation at the p o0.05
and p o0.01 levels, respectively, these relationships are negative, supporting our H2b.
This finding lends further support for the arguments that slack resources may actually
mean inefficiency and may lead to lack of innovation (Mishina et al., 2004). Accordingly,
our H2a is not supported.
The interaction between firm size and slack resources in Model 2 is positive and
significant at p o0.05 level. This finding indicates that firm size positively moderates the
relationship between slack resources and firm innovation supporting H3. That is, for larger
firms the relationship between firm-level slack resources and innovation becomes positive.
Model 1 Model 2
Variables Coeff. (SE) t-stat IRR Coeff. (SE) t-stat
Intercept −0.853 (0.20) −4.18* 0.4767 −0.740 (0.21) −3.47**

Financial resources 0.000 (0.00) 1.07 1.000 0.000 (0.00) 1.04
Slack resources, cash slack −0.018 (0.02) −0.84 0.925 −0.077 (0.04) −2.06*
Slack resources, human slack −76.84 (12.46) −6.16** 1.07e−39 −89.731 (14.51) −6.18**
Network size 0.008 (0.00) 5.41** 1.007 0.007 (0.00) 4.53**
Network diversity 0.670 (0.08) 7.77** 1.968 0.677 (0.08) 7.86**
Network tie strength 0.557 (0.09) 6.08** 1.709 0.535 (0.09) 5.86**
Firm age 0.051 (0.00) 8.77** 1.054 0.052 (0.00) 8.75**
Firm size 0.202 (0.04) 4.45** 1.143 0.134 (0.05) 2.46**
ROE 0.006 (0.01) 0.50 1.007 0.007 (0.01) 0.59
RDInt 0.002 (0.00) 1.59 1.001 0.002 (0.00) 1.55
Cash slack × Firm size 1.045 0.044 (0.02) 2.22*
Human slack × Network size 2.586 0.950 (0.40) 2.33*
Location dummies Yes Yes
Table III.
No. of observations 2,240 2,240 Effects of firm-level
No. of clusters 306 306 and network-level
Wald χ2 785.13** 780.80** resources on firm
Notes: *p o0.05; **p o 0.01; ***p o 0.10 innovation
EJIM In other words, the use of slack resources in the form of cash slack and how it contributes to
firm innovativeness is different for small and large firms, this is one of the important
contributions of our study. Our finding for H3 is depicted in Figure 2.
H4, H6, and H7 look into the role of network resources in firm innovation. Model 2 in
Table II suggests these variables are all supported at the po0.01 level. These findings confirm
the findings of the previous literature in the sense that network-level resources have important
consequences for firm innovativeness especially in the case of the biotechnology industry.
In H5, we suggest the moderating role of human slack on the relation between the
network size and firm innovation. Although our study supports the argument that firm-level
slack resources in the form of human capital may be detrimental to firm performance, it may
have a reverse effect for firms having large networks. Our analysis find a strong support for
this argument that H5 is significantly supported at p o0.05 level. This is another strong
contribution for our study that merits further discussion. This significant finding for H5 is
depicted in Figure 3.
H8 looks into the differing effects of network-level and firm-level resources and proposes
that network-level resources have a greater effect on innovation than firm-level resources.
5
Low firm size
4.5
High firm size
4
Firm innovation (t + 2)
3.5
2.5
2
Figure 2.
Interaction of 1.5
firm-level cash
slack and firm size 1
Low cash slack High cash slack
4.5 Low HS
High HS
4
Firm innovation (t + 2)
3.5
2.5
Figure 3. 2
Interaction of
firm-level human 1.5
slack (HS) and
network size 1
Low network size High network size
While our data analysis confirms that network-level resources, namely the network size, Impact of firm
network diversity and tie strength, are significant determinants of firm innovation, in order resources on
to assess H8 we look into the economic impact of each variable through analyzing IRRs in innovation
Model 2. That is, we look into the effect of each firm-level and network-level variable at their
significance levels. At the firm-level financial resources has the IRR of 1.000, and the factor
difference is 0 (IRR-1). That is, keeping the other variables constant, for each thousand dollar
increase in the financial resources there is no substantive increase in the number of patents
granted. Firm-level resource, cash slack, has the IRR of 0.925 and accordingly factor
difference of −0.075. In other words, holding other variables constant, for each unit increase
in cash slack resources firm’s number of patents decreases by 7.5 percent. This finding
supports H2b in the form of cash slack, about the direction of the relationship between slack
resources and innovation; that is, if slack resources of the firm increases, then the number of
patents of the focal firm decreases, and vice versa. Cash slack and firm size interaction on
the other hand contributes slightly more to firm innovation as well as 4 percent.
Another firm-level resource, the human slack, has a more complicated relationship when
it comes to interpretation of IRR. This variable has an IRR of 1.07e−39, and accordingly
factor difference of −1. When considered alone, human slack decreases the yearly
innovation rate by a factor of almost 100 percent, controlling for the other variables.
This finding maybe harder to interpret given our findings suggest a strong negative
relationship between human slack and innovation.
At the network level, on the other hand, network size has the IRR of 1.007. The factor
difference is 0.007, 0.7 percent. This implies that holding other variables constant for each
member increase at the firm’s network, firm’s number of patents increase by 0.7 percent, and
this finding is significant. The IRR for network diversity is 1.968 and factor difference is
96 percent. According to factor difference, holding other variables constant, each unit increase
in the diversity index leads to an increase of 96 percent in firm’s innovation. Finally, at the
network-level tie strength has the IRR of 1.709, a factor difference of 70 percent. This finding
shows that, holding other variables constant, an increase in the number of network members
that a firm has in previous ties increases the number of patents granted by 70 percent.
One important finding that merits attention is our finding regarding the moderating role of
network size between firm-level human slack and innovation relationship. While analyzed
separately, these two variables have somewhat weak IRR, but their combined IRR is 2.586, with
a factor difference of 1.586, in other words 158 percent. This suggests that for firms that span
larger networks carrying a human slack may be very beneficial for the firm innovativeness.
This finding is plausible given that networks require intense, repetitive, and time-consuming
interactions. Having human resources devoted for such interactions eventually pays off with
more increases in firm innovativeness. This is an important contribution because we show that
what matters for firm innovativeness for firms in the biotechnology industry is actually the
efficient interaction of some firm-level and network-level resources.
A comparison of economic impact of firm-level and network-level variables shows that
network-level variables have more economic impact on a firm’s innovation than both of the
firm-level variables. Moreover, among network-level variables, network diversity has
the largest impact on innovation (96 percent), followed by the tie strength (70 percent),
and finally the network size (0.7 percent). While this finding supports our H8, it also
contributes to arguments that suggest the quality of the network, such as how diverse the
network members are and how strongly they are connected, has more impact on firm
innovation than the quantity, i.e. the network size.
Discussion
Previous studies examined the roles of internal and inter-organizational firm resources that
drive firm innovation separately. To address this gap, we took a step ahead and took an
EJIM integrated perspective and simultaneously investigated the roles of firm resources in
tandem with network resources in understanding firm innovation. In looking at the role of
resources at different levels, we also explored the moderating role of firm size for cash
slack-innovation link, and the moderating role of human slack for the network
size-innovation link. In this respect, our study combines the slack literature focusing on
firm-level resources with the literature on network-level resources and we provide direction
for the decision makers in managing both internal and external resources to increase
firm innovation.
Contrary to our expectations, we found that financial resources, as the amount of
research and development expenses devoted per employee, do not have significant effects
on firm innovation. In other words, as we will expand on this further below, network-level
resources have significantly stronger impact on innovation than firm-level resources.
When tested separately, financial resources show a low but significant positive correlation
with innovation but when analyzed together with network-level resources, their impact
becomes non-significant. This result supports the contention that firms should rely on
inter-firm linkages to foster innovation, since focusing only on internal R&D is not sufficient
in creation of significant scientific breakthroughs (Rothaermel and Hess, 2007). Especially in
the biotechnology industry, knowledge needed for innovation is very sophisticated and
widely dispersed and therefore cannot be easily produced inside the boundaries of the firm
(Powell et al., 1996).
Our research makes important contributions to both strategic management and
innovation literatures especially when we consider the role of firm-level slack in driving firm
innovation. Previous research reported conflicting findings about the availability of slack
resources and firm performance. Our results showed that the relationship between slack
resources and firm innovation is negative and significant, both for cash slack and human
slack. This finding parallels with previous research which reported that constraints such as
lack of slack resources can actually facilitate innovation (Hoegl et al., 2008; Mishina et al.,
2004; Moreau and Dahl, 2005). Another explanation for this negative relationship may relate
with the environmental characteristics of the industry under question. Daniel et al. (2004), in
their meta-analysis of the slack-performance studies, showed that industry type affects this
relationship. Similarly, Bradley, Shepherd and Wiklund (2011) reported that slack results in
higher performance for firms operating in more stable environments than in dynamic
environments. Put differently, slack resources have the greatest impact on performance in
stable environments where opportunities must be firm rather than environment driven.
The negative relationship between slack and innovation may be due to the dynamic
character of the biotechnology industry under examination in this study, which is
considered to be highly competitive and uncertain.
Our study significantly contributes to the literature by identifying moderating variables
that affect the relationship between firm-level slack resources and innovation. First of these
moderating effects is that of the firm size. To the authors knowledge, the relationship
between the firm size and slack resources, in the form of cash slack and how they contribute
to innovation, is an under-explored one. Our analyses show that in the biotechnology
industry, firm-level slack resources positively impact innovation for large firms; however,
this relationship is negative for small firms. We think this is plausible because most of the
time small firms are also the entrepreneurial ones. In other words, they may not depend on
slack resources to innovate because they may already have the culture and the will to
innovate. Therefore, slack resources are deployed toward growth and innovation-seeking
opportunities. Another explanation for the negative slack-innovation relationship in small
firms may be that presence of slack may divert the attention of small firms more to growth
than to innovation. Indeed, Bradley, Wiklund and Shepherd (2011) showed in a study of
SMEs that slack has a positive effect on firm growth. Smaller firms may be more likely to
use the slack for growing their firms, for example, for recruiting new personnel or building a Impact of firm
better physical place, etc. as compared to large sized ones. Abundance of financial resources resources on
may also lead to less dedicated management in entrepreneurial firms (Hvide and innovation
Moen, 2015), which may have detrimental consequences for firm innovation. For example,
Hoegl et al. (2008) suggest that if financial resources are “artificially” constrained by
management, teams who are expected to innovate in the firm may develop negative
reactions, driving them to “fight” for more resources, rather than focusing on their project
task. Moreover, the inefficient usage of slack resources has also been explored in the finance
literature. For example, Jensen (1993) reported that internal control systems of publicly
held corporations have generally failed in dealing effectively with environmental changes
and innovation and Ang (1991) suggested that lack of professionalism in management or
poor financial management capabilities are more likely to be present in smaller firms
than larger ones. All in all, our study demonstrates that the “less is more” argument
(Hoegl et al., 2008) is valid particularly in smaller firms.
Second of the moderating effect relates to the relationship the role of network size between
firm-level human slack and firm innovation. We show in our findings that for firms that have
large networks it is valuable to the firm in the form of innovation to keep human slack. This is
a significant finding that merits discussion. Given that network-based relationships require
additional time and investment to reap the benefits of these relationships, our findings suggest
that human slack plays an important role while deploying human resources for the benefits of
networking. Having a large network and coordinating human resources with the
sustainability of the network-based relationships will give the firm an opportunity to use
its firm-level human slack in an efficient manner and use the information available through
networks for innovative activities. Availability of human slack devoted for network building
and eventually sustaining activities and then directing the content derived from these
relationships to innovative activities benefits the firm as a whole. This result also explores the
relationship between firm-level and network-level resources.
At the network-level, we found that network size, network diversity, and network tie
strength are all significantly and positively affect innovation. Our economic impact analysis
shows that keeping a diverse network as a resource pays off the firms with more innovation.
This finding is in line with previous research which suggested that inter-organizational
collaborations tied to diverse types of partners may lead to even higher innovation
performance in the biotechnology industry (Owen-Smith and Powell, 2004; Powell et al., 1996).
For firms operating in the biotechnology industry, we found that it is very important to form
network-based relationships.
While our findings confirm findings of past studies (Demirkan and Demirkan, 2012;
Oliver, 2004; Owen-Smith and Powell, 2004), we contribute to the literature by showing that
in the case of biotechnology industry network-level resources have a greater effect on
innovation than firm-level resources. A few number of previous studies tested the
interactive effects of internal capabilities and external partnerships on firm performance
(e.g. Lee et al., 2001; Su et al., 2009; Zaheer and Bell, 2005); however, their focus was on
internal capabilities such as R&D or manufacturing capabilities as compared to the financial
and slack resources focus of our study. This finding also has significant implications for
managers because the knowledge of what type of firm-level resources a firm benefits from
enables managers to invest in mechanisms to further foster effective network resources and
network types.
Limitations, future research and concluding remarks

Our study focuses on the biotechnology industry, therefore the findings might not be
generalizable to other industries. Biotechnology industry is one of the unique industries where
we need to be careful in using traditional measurements of variables. Biotech firms and
EJIM industry deal with challenges and uncertainties. Biotech firms, for example, need to expense
their entire R&D expenditures that would in accounting terms decrease their current period
income. This might hurt their accounting quality because they do get the benefit when they
recognize expenses, but this accounting regulation forces companies to be mindful about their
R&D decisions. International Financial Reporting Standards lets companies to capitalize
development part of R&D. If companies spend their money for R&D then their assets also
decrease on the left hand side, i.e. assets decrease with R&D expenses as well as their retained
earnings. Both numerator and denominator part of the R&D intensity changes. Since this
regulation is applicable to every company in our sample, we do not expect that would make
measurement error in our study[2]. Hence, we suggest future researchers to take into account
certain uniqueness of the industry in their studies. Moreover, due to data limitations our
research does not include some other firm-level variables such as quantifiable employee skills
that may be important in generating firm innovation. Besides, the presence of VC investors
may affect the slack-innovation link since they generally advocate running firms in the most
efficient way possible (Vanacker et al., 2013). Future research should include these factors to
provide a wider understanding of how the interplay between firm and network-level resources
affect innovation, specifically in the case of VC-backed entrepreneurial firms.
To conclude, the integrated perspective pursued in the present study enabled us to

show that network-level resources have more economic impact on firm innovation than
those of firm-level resources, in other words, network-level resources matter more for firm
innovation. To this end, we show the importance of having both types of resources but at
the same time deliberate management of these resources for increased innovation
outcomes for the firm. The study also provides a deeper insight into the role of slack
resources in boosting innovation, by identifying firm size and network size as moderating
factors. For large firms, cash slack enhances innovation and for firms with large networks,
human slack enhances innovation. We hope these findings will not only contribute to the
debate in the slack-performance literature but also provide important avenues for future
research in the area.
Notes
1. This method produces White standard errors, which are robust to within cluster (i.e. within firm)
correlation. Data are clustered by a firm identifier and year dummies are also created. These
standard errors then allow observations in the same firm to be correlated, but would assume that
observations in the same firm with different years are uncorrelated.
2. The author thanks the anonymous reviewer for pointing out this point.
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Corresponding author
Irem Demirkan can be contacted at: idemirkan@loyola.edu
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The Impact of Firm Resources On Innovation

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The impact of firm resources on innovation

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Abstract Received 20 December 2017

Second, previous research reported contradictory findings on whether “slack resources

Theory and hypotheses

Firm-level resources: financial resources

Firm-level resources: slack resources

relationship between slack resources and firm innovation, we suggest that:

affect firm innovation in a negative way.

Network-level resources: network size

Network-level resources: network diversity

Network-level resources: network tie strength

Firm-level resources and network-level resources

and the correlation

of biotechnology firms, firm-level financial resources may not be as important as other

Intercept −0.853 (0.20) −4.18* 0.4767 −0.740 (0.21) −3.47**

Limitations, future research and concluding remarks

To conclude, the integrated perspective pursued in the present study enabled us to

less more?”, Research Policy, Vol. 37 No. 8, pp. 1382-1391.

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