High Risk, Low Return (and Vice Versa): The Effect of Product Innovation on Firm Performance in a Transition Economy

Li, X and Vermeulen, F (2021) High Risk, Low Return (and Vice Versa): The Effect of Product Innovation on Firm Performance in a Transition Economy. Academy of Management Journal, 64 (5). pp. 1383-1418. ISSN 0001-4273

Abstract

Common wisdom suggests that high-risk strategies will be associated with high expected returns, and vice versa. Focusing on the effect of new-product development on firm performance, in this paper we argue that this relationship may reverse in a market undergoing substantial institutional transition. We examine domestic pharmaceutical firms in China during the 1990s and find that, in this context, introducing new products was associated with lower average firm profitability but higher variance. In conformity with our predictions, these relationships were stronger in areas where the rate of institutional change was higher and for product types that take longer to develop. Thus, we explain why, for particular strategic actions, high risk may be associated with low returns. A key conceptual corollary of these findings—also for strategic management research in general—is that firms may sometimes be more focused on the potential upside of their actions than on the expected value of those actions.