CEO Regulatory Focus Effect on Firm Innovation Mode

Abstract

CEOs face a number of options regarding how to lead their firms in pursuing innovation. Two important modes of innovation are internal innovation through R&D and external innovation through acquisition activity. Past research considering the choice between innovation modes has been scarce, and has primarily considered institutional ownership, boards of directors, and technological and knowledge aspects of firms seeking innovation. Although some scholars have considered the effect of psychological characteristics, such as hubris, on firm innovation investment, little work has considered the effect of psychological and cognitive characteristics of individual decision makers on the choice between different innovation modes. I address this concern from an upper echelons perspective using regulatory focus theory, specifically how CEO regulatory focus affects firm innovation modes. Regulatory focus theory considers a promotion focus wherein individuals seek to achieve a desired goal by seeking achievement-oriented activities that will approach the goal, while a prevention focus seeks to avoid negative outcomes through caution and careful planning. Previous work has shown promotion focus and prevention focus to be orthogonal variables rather than ends of a continuum. I theorize that CEO regulatory focus will affect firm innovation mode according to CEO preferences for seeking achievement through high opportunity actions or for avoiding risk and threats through more cautious and controllable actions. In addition, I consider a number of organizational and environmental moderators that theory suggests affect CEO discretion, including institutional ownership, firm performance, and environmental dynamism and munificence. Previous research shows a link between these variables and innovation decisions, meaning that they may be impactful moderators of CEO preferences. The context of the study is publicly-traded companies in high technology, specifically the electronic components, computer equipment, and pharmaceutical industries. These industries are largely driven by innovation and are selected to be broad enough to allow for variance in industry climate. Hypotheses are tested using a linear dynamic panel-data estimation model. Although the results fail to support many hypothesized relationships, two primary findings appear. First, firms led by promotion-focused CEOs tend to engage in more external innovation with no corresponding relationship with internal innovation, and second, firms led by prevention-focused CEOs engage in a more stable level of internal innovation while firms led by promotion-focused CEOs tend to vary levels of internal innovation investment.