Firm-level Effects of Staged Investments in Innovation: The Moderating Role of Resource Availability

Integrating insights on firms’ resource availability with bounded rationality and real options arguments, we propose that resource-abundant and resource-constrained firms reap different effects from a staged approach to innovation. We argue that resource availability triggers overoptimism and managerial discretion, and thereby impedes adequate resource reallocation in staged innovation projects, leading to different effects of staging at the firm level. An empirical analysis of 2,790 German firms confirms that a staged investment approach leads to a higher number of newly started and abandoned innovation projects in resource-abundant firms than in resource-constrained firms. Supplementary analyses suggest that this is indeed because resource-abundant firms demonstrate more overoptimism and managerial discretion. We discuss implications for the real options literature, as well as managerial implications for innovation investment decisions.