On the Relationship between Organizational Slack and the Level of Innovation of Firms

The concepts of organizational slack and innovation are central elements in the literature. Innovation is of central importance as it is vital for organizational renewal and survival. The literature stands divided on the effect of organizational slack, which can be defined as the pool of resources in organizations that is in excess of the minimum necessary to produce a given level of output, on innovation. Three conflicting views can be distinguished. Proponents of slack argue that slack allows organizations to experiment and that it is a necessary condition for fostering innovation. Agency theory turns this perspective upside down. In this view, slack may be a source of agency problems, which breeds inefficiency. Therefore, it considers slack to be negatively related to innovation. Besides these two views there is also a group that takes a middle position: too little slack and too much slack are both bad for innovation, which leads to the prediction that there is a curvilinear relationship between slack and innovation. The study uses an existing dataset, which contains information about 300 innovating South African organizations. Results show that higher levels of slack lead to higher levels of innovation. No evidence is found for either a negative or curvilinear relationship.