Pulling the Plug? Investigating Firm-Level Drivers of Innovation Project Termination

Abstract

Firms need to innovate and develop dynamic capabilities to create a sustainable competitive advantage. Due to this pressure, firms in high-tech industries invest a high percentage of their revenues in innovation. Despite the vast amount of available innovation success stories, only one in five innovation projects will ever reach the market. It is important to understand the drivers of project termination as innovation expenditures embody a sizable investment for many firms, and may have a significant impact on firms’ innovation performance. Therefore, being able to recognize unfeasible projects (earlier) avoids continued investments and releases resources that can be invested in more profitable projects. This paper investigates firm-level factors determining the termination of innovation projects based on a sample of 4,385 firms in Czech Republic and Germany. We find that firm size, R&D activities, organizational agility, and the level of internationalization are positively associated with innovation project termination. Surprisingly, marketing innovation also positively associates with project termination. Our results contribute to a better understanding of why some firms are better at identifying unsuccessful projects (earlier) than others. Identifying generalizable factors provides complementary insights to project-level factors of project termination which can have a remarkable impact on firms’ profitability and survival.