Two faces of failure in innovation: a multinomial logit approach

In innovation literature, some view firms' failures as negative to their innovative behaviour, while others argue that failures have a net function – learning from failure. However, we question whether classic linear regression methods constrain understandings of patterns by presenting only one side of the cause-and-effect relationship. This paper complements conventional approaches to literature by characterising the forms of innovation behaviour as mutually exclusive alternatives. Through an empirical approach evaluating mutually exclusive alternatives, we detected that firms' failures simultaneously affect both the probability of choice to increase innovation investment and that to decrease innovation investment. Our results suggest that there is a certain threshold for the degree of failure to trigger innovative behaviour. When this is kept at a low level, innovative behaviour, rather than conservative behaviour, is more likely to be triggered. However, at a high level, companies could choose to increase their innovation investment; but they could also do the exact opposite at any time. Overall, attempts to model the innovation decision-making process as one on choosing the best out of mutually exclusive alternatives allows us to simultaneously compare the probability of innovation behaviour, elucidating the multidimensional aspects of innovation.