The Effect of Performance below Aspiration on R&D and High-tech Acquisitions: The Moderating Role of Underperformance Duration*

This study examines how firms allocate capital resources between internal R&D and the acquisition of external high-tech firms in response to performance shortfalls relative to aspiration levels. Drawing on Cyert and March’s (1963) concept of the localness of search, it argues that firms initially prioritize internal R&D over high-tech acquisitions when facing performance shortfalls. Additionally, the study investigates whether the duration of underperformance influences this tendency, proposing that prolonged underperformance—indicative of a significant misalignment between a firm’s resources and its environment—reduces the preference for internal R&D relative to high-tech acquisitions. The analysis focuses on the proportion of capital allocated to R&D relative to the total capital spent on R&D and high-tech acquisitions. Using fractional and tobit regression models on a dataset of 1,452 U.S. manufacturing firms, the findings reveal two key insights: (1) firms are more likely to allocate resources to R&D than to high-tech acquisitions in response to performance shortfalls, and (2) this preference diminishes as the duration of underperformance increases. These findings contribute to the behavioral theory of the firm by demonstrating how search activities evolve across different stages of underperformance. While short-term performance shortfalls prompt firms to adopt local solutions, prolonged underperformance drives a shift toward distant and exploratory strategies. This research also offers insights for corporate managers and policymakers, emphasizing the importance of adapting innovation strategies to the evolving nature of performance challenges.