Abandoning innovation projects, filing patent applications and receiving foreign direct investment in R&D
Introduction
Innovation is inherently risky, unpredictable and often oriented toward the long-term, with a substantial failure rate of approximately 40%–50% (Castellion and Markham, 2013). Firms that have abandoned innovation projects1 often initiate technological searches beyond their knowledge base to break free from their failure traps (Su and McNamara, 2012). Foreign direct investment (FDI) in research and development (R&D) is one channel that is frequently used to transfer resources, such as new or advanced technologies, across national borders (Liu and Wang, 2003). The experience of abandoning innovation projects therefore organically attracts foreign investors who are able to exploit their superior capabilities, transfer these capabilities to the indigenous firms and help inefficient firms improve (García et al., 2013). In addition to capital, FDI allows firms to upgrade their technological know-how through training programs or technical assistance (Sultana and Turkina, 2020), and this is an important step of post-investment management. Having experience of failed innovation projects may also attract inorganic asset-exploiting foreign investors who want to substitute the innovation project with one from their home country or shift responsibility for innovation to more technologically capable parent firms (García et al., 2013).
Moreover, foreign investors also closely track signals of innovation abandonment because evidence shows that abandoned innovation projects are often aimed at attractive markets, which are more likely to be foreign, and exhibit high foreign market growth rates, making them highly relevant. This finding is based on Cooper and Kleinschmidt's (1990) study of 250 new industrial products from 125 industrial product firms. Firms that have abandoned innovation projects may require higher levels of FDI to help them conduct a more thorough home market due diligence in terms of competition, distribution networks, consumer preference and international expansion opportunities (Gu and Lu, 2011).
The literature on signaling in innovation has overemphasized the intra-organizational implications of the experience of abandoning innovation projects but has overlooked it as a negatively valenced signal to the investment community – even though it indicates the existence of intermediate outputs that represent a critical developmental stage of innovation. It is becoming standard practice for firms to disclose information about innovation abandonment (Carman, 2019; Mcgee and Lee, 2020) (see Appendix 1 for examples). This signal improves information transparency and mitigates one of the major obstacles faced by foreign investors – information asymmetry (Audretsch et al., 2012; Kang and Kim, 2010). This study aims to shed light on how such signals affect firms’ outcomes by focusing on the experience of abandoning innovation as a signal and how this affects FDI. Therefore, to address the aforementioned limitations and ambiguity, the first research question of this study is: RQ1 – Does the experience of abandoning innovation projects help firms attract more foreign direct investment in R&D?
Moreover, signalers send multiple signals to improve the likelihood of accurate interpretation (Filatotchev and Bishop, 2002). Prior studies of signaling have examined the relative importance of one type of signal in the presence of another (Connelly et al., 2011), focusing mainly on the interplay between positive signals. Within these studies, some positive signals were extrinsic and captured the attention of external stakeholders (Dai et al., 2018) – such as alliances, partners (Hu et al., 2017) and the market as a whole (Micheli and Gemser, 2016) – and some were intrinsic and firm-controlled – including scientific, market-based, location-based and historical signals (Hu et al., 2017; Micheli and Gemser, 2016). However, it is noteworthy that an investigation into the interplay between positive and negative signals is, so far, absent from the discussion in signaling-theory literature (Fischer and Reuber, 2007). Given that firms do, in fact, send both types of signals to external stakeholders – either voluntarily or under compulsion – it is essential for managers to understand how oppositely valenced signals impact efforts to gain support and access resources from foreign investors.
In particular, the signal of abandoning innovation projects intrinsically entails higher uncertainty regarding returns on investment; such uncertainty can only be reduced with additional information on a firm's ability to recover from the negative experience. Venture capital firms screen potential portfolio firms to select those with the best growth perspectives based on innovative potential, which can be indicated by positively valenced signals, such as patent applications (Audretsch et al., 2012; Engel and Keilbach, 2007). As such, the following question was posed: RQ2 – How does the interaction between experiences of abandoning innovation projects and filing patent applications impact foreign direct investment in R&D?
Consequently, the main contributions of this study are twofold. First, it adds to signaling theory by demonstrating the effectiveness of one negatively valenced signal – the experience of abandoning innovation projects – for attracting FDI in R&D. Previous research into the experience of abandoning innovation projects is limited to the intra-organizational context (Desai, 2015; Madsen and Desai, 2010). The ways in which external investors react to these failures is still poorly understood (Urbig et al., 2013). This study builds a direct link between the internal and external context and theoretically explains how experiences of abandoning innovation can be positively associated with FDI. This provides a response to the scant body of research on negatively valenced signals (Connelly et al., 2011) and enriches the literature on recovering from innovation failure.
Second, there is a lack of research into the interplay between different types of signals (Micheli and Gemser, 2016) as well as how signal receivers – foreign investors – can perceive a mixture of signals differently (Connelly et al., 2011). We theorize the ways that oppositely valenced – positive and negative – signals interact in signal portfolios and whether they mutually strengthen, weaken, or neutralize one another's influence on attracting FDI in R&D. This investigation is valuable as it questions whether bundling signals with conflicting valences is effective, allowing investors to develop a meaningful evaluation of a firm's intrinsic quality (Fischer and Reuber, 2007). This question provides additional insight into traditional signaling theory, which assumes that firms process signals in isolation rather than assessing them holistically (Spence, 2002; Steigenberger and Wilhelm, 2018).
The next section reviews the relevant literature, hypothesizing that the experience of abandoning innovation projects promotes FDI and that this effect is moderated by patent applications, as shown in Fig. 1. Following this, the data and methods adopted for testing the hypotheses are presented and the results are discussed. The paper concludes with a discussion of the findings and their implications.
Section snippets
Signaling theory
Signaling theory has been widely adopted in management and economics studies on acquisition premiums and post-initial public offering acquisitions (Reuer et al., 2012). The theory posits that firms possess observable, unalterable attributes, as well as unobservable attributes that are subject to manipulation (Spence, 1978). To bridge the information gap, stakeholders search for signals - observable actions - to provide information on a firm's unobservable attributes and likely outcomes (Spence,
The experience of abandoning innovation projects and foreign direct investment in R&D
The experience of abandoning innovation projects does not merely indicate a mismatch between ex-post innovation results and ex-ante innovation targets (Leoncini, 2016). It also signals to foreign investors about learning-by-failing opportunities and managerial attention allocation, which mitigate investors’ perceptions of undue risks and market rumors. This means investors are better informed about potential returns and better equipped to understand how their R&D investments can be used most
Data
The dataset used in this study was compiled from Spain's Community Innovation Survey (CIS), which was administered by the Spanish National Statistics Institute. Spain's CIS is a firm-level panel dataset that provides a vast amount of information to quantify firms' innovation activities and evaluate innovation capabilities and outputs. The questionnaire was based on the European CIS, which has high levels of interpretability, reliability and validity (Laursen and Salter, 2006) and has been
Hypotheses testing
Table 3 shows the results of Models 1–4. H1 predicted that the experience of abandoning innovation projects would have positive effects on foreign direct investment in R&D. As Table 3, Model 2 demonstrates, ABANDON (β = 0.609, p < 0.01) was positively related to FOREIGN. In other words, when a firm had an experience of abandoning innovation projects, it was more likely to procure foreign direct investment in R&D; therefore, H1 was supported. Patent application activity exhibited significant and
Theoretical implications
This study provides theoretical and empirical support for the signaling role of the experience of abandoning innovation projects in spurring foreign direct investment in R&D and is one of the few to examine the combined impact of positively and negatively valenced signals on attracting such funds. It contributes to signaling theory by expanding its application in innovation literature in two ways. First, it was confirmed that the experience of abandoning innovation projects is a negatively
Acknowledgments
This work is supported by National Natural Science Foundation of China (Grant No. 71804198), Human and Social Science Foundation of Ministry of Education of China (18YJC790149), and China-UK Innovation and Development Association (Grant No. RF350137).
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