Three Essays on Firm Innovation

The ability to continuously develop and commercialize new and valuable knowledge and products is essential to firms’ growth and survival. Managing innovation is an inherently challenging task as the process of generating new combinations deviates from doing business as usual. This thesis consists of three quantitative empirical investigations each dealing with strategic choices managers may make to increase innovation performance. All three chapters rely on datasets constructed using multiple data sources including the Community Innovation Survey (CIS) data, the Integrated Database for Labor Market Research (IDA), and patent data from the European Patent Office (EPO).
Chapter one draws on human capital theory to develop hypotheses on how hiring former entrepreneurs affect firm innovation measured as sales from innovation. The empirical analysis suggests that firms can increase their innovation performance by hiring entrepreneurial human capital especially when these hires occupy middle ranks in the firm hierarchy and when the quest is for innovation of more incremental rather than radical nature.
The second chapter applies theory from the economics of science literature to the setting of industrial innovation and provide the first large scale evidence on the role of physical capital in the form of research equipment for firm innovation. The findings of this paper suggest that firms tend to underinvest in research equipment, but that overinvestment also occurs which may be driven by strong complementarity between human and physical capital such that a balance in R&D expenditures allocated across the two is an important driver of innovation performance.
Finally, the third chapter looks at how pay dispersion among R&D employees may alter innovation performance, specifically, when it comes to knowledge production. Drawing on compensation theories including social comparison theory and expectancy theory, this chapter theorizes and finds a non-linear relationship between pay inequality and knowledge production measured as patents. While pay differentials up to a certain point motivate employees as they are being rewarded for their qualities, higher levels of pay dispersion may invoke feelings of distrust and hinder collaboration.
In sum, this thesis seeks to advance theories related to knowledge production and innovation management with the aim of also providing interesting managerial insights.