Performance Shortfalls and R&D Investment Change: Aspirations, Actions, and Expectations

Built on the Behavioral Theory of the Firm, the paper examines how firm response to performance feedback is influenced by firm expectation on the likelihood of an action to close the performance gap. Using firm level change in R&D intensity as a problemistic search behavior, we explore how performance shortfalls relative to social and historical aspirations may prompt underperforming firms to adjust its R&D investment intensity, and how the magnitude of this adjustment is moderated by firm resources, past experience, industry and market conditions. We conduct our analysis using a longitudinal sample of Chinese firms listed on the ChiNext Board between 2009 and 2017. Our results indicate that underperforming firms increase their R&D intensity to a larger degree than their over-performing peers and periods when these firms have substantial cumulated R&D spending, abundant organizational slack, and are competing in more dynamic industries. We also document that these moderating factors influence relationships between social and historical aspirations and R&D investment decisions in a distinct way. We conclude that firm internal resources, capabilities and external industry and market conditions all affect firm expectations, and consequently shape the direction and magnitude of organizational actions in response to performance aspirations.