Effects of ambiguity on innovation strategies

Abstract

Technological innovations significantly influence individual firms and other innovations, such as financial innovations. The future of a firm depends on its innovation investment strategy. According to the literature, innovation investments are affected by ambiguity. This study examines how ambiguity affects the innovation strategies of managers. We show that the innovation strategies of ambiguity-averse managers differ from those of ambiguity-neutral managers. Unlike ambiguity-neutral managers, ambiguity-averse managers consider a broader variety of innovation strategies for a wider range of future innovation arrival times. Regarding the profitability of a future innovation, ambiguity-averse managers delay the investment decision until the profitability of the innovation is less ambiguous. Moreover, we examine innovation strategies under various conditions, including the risk of innovation outdatedness, management disputes, and the varying volatility of innovations.