The role of sunk cost and slack resources in innovation: A conceptual reading in an entrepreneurial perspective

Abstract

This paper proposes a conceptual reading of the interplay between sunk costs and slack resources in innovation, adopting an entrepreneurial perspective. Antecedent literature mostly depicts the relationship between slack and innovation as an inverse u-shaped curve. However, this approach is way too unrealistic and it does not take in account both the different impact of heterogeneous types of slack and of sunk costs. We argue that not all slacks positively contribute to innovation and, hence, the u-shaped relationship is merely verified in case of highly flexible slack resources. In addition, the presence of sunk costs is a friction factor, which makes the first part of the curve less steep. Therefore, entrepreneurs are solicited to innovation by the presence of some easy recoverable slack types, as financial or knowledge ones. On the converse, a consistent level of sunk cost may discourage their innovative activity. In this setting, absorbed slack resources increase the level of sunk costs.