Ambiguity aversion in the front-end of innovation

Abstract

There have been repeated appeals for further scientific inquiry into the early stages of innovation in the firm, referred to as the front-end of innovation. Currently, we lack a clear understanding of front-end decision-making processes. Conceptually, the front-end stages of innovation are likely to include decisions involving ambiguity rather than risk. One way to view the innovation process is that considerable effort is expended on risk-reduction. That is to say, the innovation/new product development process converts amorphous ideas into tangible products that have a maximum chance of success in the commercial marketplace. However, this may lead to a preference for advancing product concepts where risk, in terms of clear probabilities, can be more easily established. At the same time, those new ideas and product concepts that are ambiguous may be discarded or screened out simply because it seems difficult to discover the probability estimates associated with their outcome success. This is ambiguity aversion, and it has been found to be an important predictor of decision making under uncertainty. Using a framework based on decision theory and the theory of expected utility, I propose and test a model in which ambiguity aversion has a detrimental effect on the performance of front-end innovation activities due to a suppression of decision-making comprehensiveness. Innovation culture and innovative capacity also play important roles in the success of front-end innovation activities. The data is collected from a sample of managers (N = 175) with active roles in innovation management. In summary, the results of a revised model serves to provide a valuable framework through which firms and managers can improve front-end of innovation performance. Multiple directions for future research are also discussed.