Firm Age, Proximity to the Past R&D, and Innovation

Previous studies have found that firm age has a negative effect on R&D and innovation. While firm rigidity has been thought to explain this negative effect of age, it has not been measured empirically. Using the USPTO patent database, this study empirically unpacks the black box of firm age effects on innovation. Using cosine similarity, we directly measure a potential mediating variable, the extent of reconfiguration of firms' R&D portfolios (which we call firms' own R&D proximity). We empirically demonstrate the mediating role of rigidity in the firm age effects on innovation. We also confirm the trade-off between R&D quality and quantity. Specifically, we find that higher R&D proximity (i.e., firms that reconfigure their portfolios less) is associated with lower invention quality while producing more inventions. The empirical results provide a managerial implication that if firms continue to conduct R&D in the same area, their R&D quality will decline. It implies that as firms age, changing the area of R&D becomes an important managerial issue, and if they can make this change, they are likely to produce higher quality results in R&D.