When Being Large Is Not an Advantage: How Innovation Impacts the Sustainability of Firm Performance in Natural Resource Industries

Abstract

This paper provides an in-depth study of how incremental innovation, a ubiquitous factor, affects the sustainability of performance of small- and large-sized firms differently. Specifically, this work examines the sustainability of firm growth in natural resource industries. In these industries, innovation is mainly based on processes in the form of incremental changes, and the adoption of innovations has significant sunk costs. We argue that, before incremental process innovation, firm performance is directly proportional to firm size. However, in the presence of incremental innovation events, firm performance is inversely proportional to firm size since smaller firms pose higher strategic flexibility and can adopt innovations faster. Our empirical findings highlight the relevance of incremental innovation as an inflection point of firm performance, creating a competitive opportunity window for small firms and a sustainability threat for large firms.