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JOMXXX10.1177/0149206315575710Journal of ManagementTerjesen, Patel / In Search of Process Innovations

Journal of Management
Vol. XX No. X, Month XXXX 1­–26
DOI: 10.1177/0149206315575710
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In Search of Process Innovations: The Role of


Search Depth, Search Breadth, and the Industry
Environment
Siri Terjesen
Indiana University
Lund University
Pankaj C. Patel
Ball State University

Although a significant corpus of work focuses on the impact of search strategies on product
innovations, we have a limited understanding of search strategies for process innovations,
including the potential role of the industry environment. Process innovations are central to
improving a firm’s productivity and contributing to efficiency and gross domestic product growth.
As a result of the complexity of identifying, developing, and implementing process innovations,
firms increasingly draw on external sources of knowledge. Building on key tenets in the knowl-
edge search, innovation, and industry environment literatures, we investigate search strategies,
process innovations, and industry dynamics in a sample of 505 firms spanning 23 manufacturing
industries. We find that search breadth is negatively related to process innovation outcomes and
that search depth is positively related to process innovation outcomes. Furthermore, high indus-
try process heterogeneity mitigates the negative impact of search breadth on process innovation
such that firms employing broad search strategies in highly process heterogeneous industries are
more likely to introduce process innovations. In industries with greater productivity growth, the
positive relationship between search depth and process innovation is stronger.

Acknowledgments: Both authors contributed equally to this paper. We thank Steve Michael and the anonymous
reviewers for their insightful feedback and suggestions on prior versions. We are grateful to Alan Kitson and
Michael Hughes for making the survey data available through the Cambridge Centre for Business Research Survey
of Knowledge Exchange Activity by United Kingdom Businesses. The Economic and Social Research Council and
the UK Data Archive provided data access. The original data creator, depositor, or copyright holders; the funder
of the data collection; and the UK Data Archive bear no responsibility for the analysis or interpretation of the data.
The survey data used in the study are Crown copyright. A prior version of this paper was a finalist for the Chan
Hahn award for best paper in operations management at the Academy of Management in 2012. A previous, abbrevi-
ated version of the paper appears in the Academy of Management Proceedings.

Corresponding author: Siri Terjesen, Kelley School of Business, Indiana University, 1309 E. 10th St., Bloomington,
IN 47405, USA.

E-mail: terjesen@indiana.edu
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2   Journal of Management / Month XXXX

Keywords: contingency theory; industry productivity growth; industry process heterogeneity;


process innovation; search breadth; search depth

Introduction
Firm managers must actively identify and integrate external knowledge from sources such
as supply chain partners, competitors, consultants, commercial labs, higher education institu-
tions, standard setting bodies, and industry associations, among others. This knowledge is
subsequently stored in the organization’s memory (i.e., equipment, systems, procedures, rou-
tines, and managers) and becomes “organizational knowledge” that can be harnessed to
enhance a firm’s innovation activities (Gopalakrishnan, Bierly, & Kessler, 1999). As most
firm innovations are based on absorbed knowledge from others (Cohen & Levinthal, 1990;
March & Simon, 1958), external search strategies are imperative to innovation.
Search strategy refers to an “organization’s problem-solving activities that involve the
creation and recombination of technological ideas” (Katila & Ahuja, 2002: 1184) and can be
classified in terms of search breadth and search depth (Laursen & Salter, 2006). Search
breadth refers to the number of diverse external stakeholders a firm seeks knowledge from;
search depth refers to how intensively a firm draws from each external stakeholder (Laursen
& Salter). A firm’s search behavior is shaped by prior experiences and current needs.
According to Laursen and Salter, “It is difficult for many organizations to determine the
‘optimal’ search strategy in terms of ‘broader and deeper’, especially in situations where
there is turbulence in the knowledge base of the firm” (134). Thus, a firm’s optimal search
strategy is driven by internal knowledge requirements and environmental context. Despite
growing interest in external knowledge search, there are gaps in our understanding of how a
firm’s search strategies can enhance its ability to create process innovations.
Extant research on external knowledge search focuses on product innovation (Ahuja &
Katila, 2002; Laursen & Salter, 2006), that is, new outputs or services for customers
(Utterback & Abernathy, 1975). There is limited understanding of how firms devise knowl-
edge search strategies to develop process innovation (Keupp, Palmie, & Gassmann, 2011),
that is, the creation or improvement of production or distribution activities. As Reichstein
and Salter put it, “Process innovation has often been considered a second-order innovative
activity, a rather dull and unchallenging cousin of the more glamorous product innovation”
(2006: 653).
This gap is surprising given the fundamental distinctions and complementarities between
product innovations and process innovations (Utterback & Abernathy, 1975). Compared to
product innovations, process innovations involve more proprietary aspects of the value
chain and are less likely to be reverse-engineered (James, Leiblein, & Lu, 2013). Furthermore,
firm level process innovations greatly enhance performance by reducing costs (Bernstein &
Kök, 2009) and increasing quality (Terziovski & Guerrero-Cusumano, 2009), flexibility
(Reichstein & Salter, 2006), and responsiveness (Craighead, Hult, & Ketchen, 2009).
Although process innovations are less tangible and less obvious to the customer than new
product introductions, process innovations are more effective in creating competitive

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Terjesen, Patel / In Search of Process Innovations   3

advantage (Gopalakrishnan et al., 1999). At the macrolevel, process innovations are a major
source of economic progress (Hollander, 1965), driving efficiency improvements that sig-
nificantly contribute to gross domestic product growth (Mankiw, Romer, & Weil, 1992) and
justify government support for innovation (Michael & Pearce, 2009).
Despite the importance of process innovation to firm success, we know little about the
antecedents to process innovation (Keupp et al., 2011), such as the role of search strategies
and the external environment (Laursen & Salter, 2006). Scholars call for work that incorpo-
rates industry structures in understanding process innovation (Balasubramanian, 2011;
Caves, 1998; Lenox, Rockart, & Lewin, 2007) and, specifically, the need to consider process
innovations that enhance scale efficiencies (Knudsen, Levinthal, & Winter, 2014). The pres-
ent study responds to these calls by drawing on knowledge search, process innovation, and
industry environment literatures to investigate the following: How does a firm’s search
breadth and search depth strategy affect its level of process innovation? Is the impact of
search strategy on process innovation contingent on the industry environment?
We propose a model (see Figure 1) where search breadth is negatively related to process
innovation and search depth is positively related to process innovation. We expect that search
breadth will have a negative impact due to the extensive absorptive capacity resources
required to transform multiple sources’ tacit and systematic knowledge into process innova-
tions. Search depth is likely to enhance process innovation outcomes as a result of the deeper
levels of trust and communication among partners and the focused attention on key knowl-
edge sources. We then consider two moderating effects of the environment—industry pro-
cess heterogeneity and industry productivity growth—whose importance has recently been
demonstrated in the economics literature (Essletzbichler & Rigby, 2005; Petrin & Levinsohn,
2013). Industry process heterogeneity is based on diversity in labor and capital inputs and
captures the extent to which firms in the industry rely on heterogeneous input-output conver-
sion processes. Industry productivity growth results from productivity improvements by
existing firms, technological changes exogenous to the industry, and firm entry and exit in
the industry. We expect that high industry process heterogeneity will mitigate the negative
impact of search breadth on process innovation such that firms employing broad search strat-
egies in highly process heterogeneous industries are more likely to introduce process innova-
tions. We expect that industries with greater productivity growth will further strengthen the
positive relationship between search depth and process innovation.

Theoretical Development and Hypotheses


Existing search strategy literature focuses on product innovation outcomes. Although not
previously explored, broad and deep search strategies may have unique relationships to pro-
cess innovation due to its distinctiveness from product innovation. For example, compared to
product innovations, process innovations are more likely to be complex, costly to implement,
sourced internally, and composed of tacit knowledge that is systemic to the firm’s knowledge
base (Gopalakrishnan et al., 1999). Process innovations are slower to develop (Damanpour
& Gopalakrishnan, 2001) and require more trial and error learning to realize their full poten-
tial (Pisano, 1997).
Product and process innovations occur at distinct stages of the industry life cycle
(Anderson & Tushman, 1990; Utterback & Abernathy, 1975). The initial stage is described

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4
Figure 1
Proposed Model

Industry Process Heterogeneity


• Highly process heterogeneous industries have greater
diversity in labor and capital substitution elasticity.
• Firms operating in highly process heterogeneous industries
must search broadly to synchronize customer preferences,
Search Breadth competitor actions, and supplier capabilities.
• Tacit knowledge is essential to process innovations but is • Absorptive capacity and attention-based view: broad search
hard to obtain when searching diverse collaborators. allows the firm to become aware of industry variations in
• Converting external knowledge to process innovations processes and to identify novel recombinations.
requires systematic changes. • Broad search prevents a focal firm from being constrained by
• Absorptive capacity (Cohen & Levinthal, 1990; Zahra & a specific resource base in this environment.
George, 2002): broad search includes diverse sources
of knowledge that are difficult to absorb due to cumulative
learning necessary for process innovations.
• Attention-based view (Ocasio, 1997): firms that
‘oversearch’ will struggle to focus on the most important
sources and thus to reap process innovation gains from
their search. Hypothesis 1: - Hypothesis 3: +
Process
Search Depth Innovation
• Deep search facilitates tacit knowledge transfer which is Hypothesis 2: + Hypothesis 4: +
critical to developing process innovations.
• Extended and deep exposure to a particular source leads to
novel knowledge re-combinations which are particularly
Industry Productivity Growth
useful when developing process innovations. Knowledge • Industry productivity growth results from intraindustry
acquisition is cumulative and path dependent, requiring innovations, new technologies from new entrants, and
processes and routines to assess, assimilate, and apply exogenous technology shocks.
which is facilitated by deep search ( Kogut & Zander, 1992); • The presence of a dominant input-output conversion

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the focal firm engages in trial and error learning with an process in a highly productive industry requires firms to
external source (Laursen & Salter, 2006) which results in rely on deeper knowledge bases of external sources and
norms, habits, and routines for knowledge exchanges with develop more intensive (compared to more diverse)
select partners. knowledge combinations.
• Interactions which are characterized by high social • Shared knowledge, symbols, and language developed
integration mechanisms (e.g., trust) lead to greater through deep searches allows transfer of tacit knowledge
knowledge acquisition, assimilation, and application. which enables process innovations.
• Attention-based view: firm managers have limited attention • Deep searches facilitate creativity and rapid integration
resources and will focus on those ties that generate into existing firm systems, enabling firms to seek and
sufficient knowledge, especially from sources that share intensively exchange productivity enhancing knowledge.
tacit knowledge and resources.
Terjesen, Patel / In Search of Process Innovations   5

as an “era of ferment in which competition among variations of the original breakthrough


culminates in the selection of a single dominant configuration of the new technology”
(Anderson & Tushman: 606). This is an “uncoordinated” stage in which firms compete on
product innovations in order to acquire customers and establish a technology standard and in
which process innovations are very limited (Utterback & Abernathy). This era of ferment
ends with the emergence of a dominant design and is followed by an “era of incremental
change” that elaborates on the dominant design (Anderson & Tushman). In this second “seg-
mental” stage, firms initiate more process than product innovations in order to establish
efficiencies (Utterback & Abernathy). This era of incremental change closes with the next
discontinuous technology innovation that then unfolds into a new era of ferment (Anderson
& Tushman). Subsequent work suggests that product innovations lead to process innovations
(Damanpour & Gopalakrishnan, 2001) and vice versa (Pisano, 1997).

Search Breadth and Process Innovation


A firm with a broad search strategy seeks to access a wide range of external knowledge,
for example, about customers, technologies, and processes. A large literature indicates that
broad search strategies often have an inverted-U relationship to product innovation (Ahuja &
Lampert, 2001; Katila & Ahuja, 2002; Laursen & Salter, 2006; Lee, Park, Yoon, & Park,
2010). The only published study of search breadth and a combination of both product and
process innovation reveals a positive, linear impact (Leiponen & Helfat, 2010). We advance
the perspective that process innovations are inherently different from product innovations
and that an inverted-U or positive linear relationship should not be assumed. Rather, we sug-
gest that the relationship between search breadth and process innovation is linear and nega-
tive. A combination of two prominent cognition and knowledge theories—absorptive
capacity and the attention-based view—supports this potential negative effect.
Absorptive capacity theory (Cohen & Levinthal, 1990) explains how a firm’s ability to rec-
ognize the value of external knowledge, assimilate it, and apply it is critical to firm innovation.
A firm’s absorptive capacity includes the potential for knowledge acquisition and assimilation
as well as the realized transformation and exploitation of the knowledge (Zahra & George,
2002). A firm that searches broadly across many sources may not absorb the new sources’
knowledge because of a limited stock of prior knowledge. As Cohen and Levinthal argue,

Learning is cumulative, and learning performance is greatest when the object of learning is
related to what is already known. As a result, learning is more difficult in novel domains, and,
more generally, an individual’s expertise—what he or she knows well—will change only
incrementally. (131)

Further corroborating the difficulty in absorbing knowledge broad sources, Ocasio’s (1997)
attention-based view is concerned with the “precious resource” of managerial attention and
how decision makers’ actions are derived from the issues and answers they focus on and the
particular context. Ocasio suggests that decision makers who focus their attention on a limited
set of issues are more likely to sustain competitive advantage. This argument is based on the
key challenge of a focal firm’s broad strategy: paying attention to a variety of knowledge
channels, each with its own processes, routines, norms, and roles (Dasgupta & David, 1994;
Laursen & Salter, 2006). In the context of search breadth, firms would fail to focus their

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6   Journal of Management / Month XXXX

attention by utilizing too many external communication channels (Laursen & Salter). In this
case of “oversearch,” undersearch breadth firms will struggle to focus their attention on the
important source(s) of process innovation inputs and fail to reap gains from their search.
Furthermore, the transformation and exploitation of external knowledge from a variety of
sources into process innovations involves significant trial and error. The focal firm must
develop and maintain a breadth of internal operational routines, and these costs may outweigh
the benefits of knowledge conversion towards process innovation. These costs are particularly
high for a focal firm attempting to create complex and systematic process innovations (Ettlie
& Reza, 1992; Gopalakrishnan et al., 1999). High costs are also incurred when the develop-
ment requires changes to the focal as well as cascading processes across operational activities.
As process innovations are slow to implement, these interdependencies may be particularly
costly to manage (Leonard-Barton & Deschamps, 1988). We expect the following:

Hypothesis 1: A firm’s greater search breadth is negatively related to process innovations.

Search Depth and Process Innovation


The second knowledge search strategy, search depth, is related to how deeply a firm
accesses external knowledge. Firms with a deep search strategy intensely explore fewer
external sources that they consider to offer important knowledge inputs. A rich literature
documents mixed findings on the relationship between search depth and product innovation;
studies report both inverted-U (Laursen & Salter, 2006) and positive linear (Katila & Ahuja,
2002) relationships. These findings highlight the potential benefits and costs of search depth
with respect to product innovation but do not provide guidance on the role of search depth in
increasing process innovation. We anticipate a linear, positive relationship between search
depth and process innovation.
Absorptive capacity theory also offers useful insights for understanding the potential rela-
tionship between search depth and process innovation. A major tenet of absorptive capacity
is that knowledge acquisition is cumulative and path dependent (Kogut & Zander, 1992).
That is, a firm that has developed the processes and routines to access, assimilate, and apply
knowledge is more likely to invest in relationships to search deeply and be able to continue
to acquire and transfer knowledge from a few external sources. The focal firm initiates trial
and error learning with an external source (Laursen & Salter, 2006). In this process, the focal
firm establishes sets of norms, habits, and routines for knowledge exchanges with select
partners. Deeper searches facilitate the development of greater levels of trust, communica-
tion, and understanding with an external source (Laursen & Salter). Through these intense
collaborations, firms develop common meanings, symbols, and language that are essential to
process innovation implementation. Taken together, absorptive capacity theory suggests that
these interactions, which are characterized by high social integration mechanisms, are likely
to lead to greater knowledge acquisition, assimilation, and application. This effect is particu-
larly pronounced when tacit knowledge is transferred (Leonard & Sensiper, 2000) and is thus
critical to the development of heavily tacit knowledge-dependent process innovations
(Gopalakrishnan et al., 1999). Absorptive capacity theory also suggests that deep search
strategy may be most helpful for solving well-defined problems such as those associated with
process innovations. For example, Hewlett-Packard implemented new injection modeling
processes and equipment on the basis of intense interactions with a particular plastic supplier

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Terjesen, Patel / In Search of Process Innovations   7

(Leonard, 1998). Thus, consistent with absorptive capacity theory, deep searches enable a
firm to transform knowledge into process innovations.
Ocasio’s (1997) attention-based view also offers insights into the relationship between
search depth and process innovation outcomes. This theory suggests that firm managers have
limited attention resources and will focus on those ties that generate sufficient knowledge,
especially from sources that share tacit knowledge and resources. Given firm managers’ over-
all attention limits, there is a need to “self-regulate” in terms of focusing only on key sources
and exploring these relationships more deeply (Koput, 1997). Through repeated interactions
and observation of outcomes, firm managers can develop a better understanding of what
source offers the right idea and allocate attention to the source. Thus, a firm manager who has
identified an important and proven source of external knowledge is more likely to invest in
this relationship, despite the potential opportunity cost of acquiring knowledge from other
firms (breadth). Through interactions with these few external entities, the focal firm possesses
the ability to best access, assimilate, and apply the knowledge. For example, a manager’s
intense interaction with a particular supplier may provide detailed and implementable knowl-
edge about a new technology for supply, storage, or distribution. Taken together, extended and
deep exposure to a particular source leads to novel knowledge recombinations that are useful
when developing process innovations. Thus, we expect the following:

Hypothesis 2: A firm’s greater search depth is positively related to process innovations.

Contingent Effects of Industry Process Heterogeneity and Productivity Growth


Contingency theory suggests that to maximize performance, organizations should fit their
strategies, structures, and processes to their environment (Lawrence & Lorsch, 1967; Thompson,
1967), implying that a firm’s search strategy must be aligned to its industry environment. Few
studies consider environmental contingency factors that influence knowledge search and inno-
vation performance outcomes (Wu & Shanley, 2009), despite seminal contributions to absorp-
tive capacity and the attention-based view, which highlight the importance of context. Ocasio
proposed that “the environment of decisions is of infinite complexity and firms are bounded in
their capacity to attend to all (or even most) environmental stimuli that impinge, directly or
indirectly, upon any particular system” and, therefore, decision makers must “focus on, and
what they do, [based] on the particular context they are located in” (1997: 190, 193).
As a resource’s value is contingent on its environment (Priem & Butler, 2001), we expect
that search breadth and depth strategies’ impacts on process innovation are moderated by indus-
try characteristics. We focus on two components that reflect the environment’s turbulence and
divergence: industry process heterogeneity and industry productivity growth. Compared to pro-
cess heterogeneity, where there is uncertainty regarding the dominant input-output conversion
processes, productivity growth aims at improvements to dominant conversion processes.

Industry Process Heterogeneity, Search Breadth, and Process Innovation


Industry process heterogeneity captures the extent to which firms have different input-
output conversion processes that are based on aggregate substitutions in labor and capital
inputs. This diversity of processes might result from fragmentation in products, industry life
cycle (especially early), or variations in labor and capital substitution elasticity due to capital

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8   Journal of Management / Month XXXX

constraints. Highly process heterogeneous industries have high rates of unpredictability and
change in both labor and capital substitution elasticity and may lack a predominant design or
have many niches (e.g., focused differentiation). For example, in recent years, the fuel cell
industry is characterized by high levels of process heterogeneity as firms experiment with
multiple conversion processes. Recent studies document the highly process heterogeneous
nature of manufacturing industries (Essletzbichler & Rigby, 2005).
We expect that firms operating in industries characterized by increasing industry process
heterogeneity will benefit from broader search strategies. Our line of reasoning is based on
insights on industry process heterogeneity dynamics, absorptive capacity, and attention-based
view.
Firms operating in highly process heterogeneous industries lack full information to syn-
chronize customer preferences, competitor actions, and supplier capabilities. In these
highly process heterogeneous industries, firms must develop flexible structures and simul-
taneously engage in extensive boundary spanning and integration (Orton & Weick, 1990;
Thompson, 1967). Thus, broad search strategy enables the focal firm to examine a reper-
toire of potential sources and then to determine which process innovations “fit” best with
their internal resources. This view is consistent with the tenets of absorptive capacity and
attention-based view theories, such that broad search allows the firm to become aware of
industry variations in processes and to identify novel recombinations. Under higher levels
of industry process heterogeneity, firms that search and develop a broad loci of process
recombinations are more likely to remain viable. Thus, in a highly process heterogeneous
environment, a firm should incorporate a diverse set of sources to identify a unique solu-
tion to process innovation needs. Broad search helps a focal firm leverage resources out-
side this environment (Rosenberg, 1982). By contrast, deep, focused searches could
increase threat rigidity.
Overall, in industries with greater process heterogeneity, we expect that the costs of search
breadth (argued in Hypothesis 1) are mitigated as industry conditions necessitate broader
searches:

Hypothesis 3: Industry process heterogeneity moderates the relationship between search breadth
and process innovation, such that in industries with high industry process heterogeneity, search
breadth is more positively related to process innovation.

Industry Productivity Growth, Search Depth, and Process Innovation


A second important industry characteristic, industry productivity growth, describes the
change in productivity resulting from input-output conversion efficiency improvements
(Melitz, 2003). Industries have different degrees of productivity growth (Bottazzi, Dosi,
Jacoby, Secchi, & Tamagni, 2010; Disney, Haskel, & Heden, 2003). Productivity growth
results from increasing efficiency through intraindustry innovations, introduction of new
technologies by new entrants (e.g., Nucor’s introduction of minimill technology), and exog-
enous technology shocks (e.g., the invention of computer numeric control machines).
Productivity growth is indicative of convergence on a process technology (i.e., industry pro-
cess heterogeneity) and the race to become more efficient to lower costs. As an example, the
steel industry is characterized by productivity improvements and, thus, high levels of indus-
try productivity growth.

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Terjesen, Patel / In Search of Process Innovations   9

We expect that firms operating in industries characterized by increasing industry produc-


tivity growth will further benefit from deeper search strategies. As standard products are now
manufactured, product variety is reduced, and the key task of productivity improvement is
central to developing isolating mechanisms (Knudsen et al., 2014). Our arguments are again
based on the nature of process innovation and insights on absorptive capacity and the atten-
tion-based view regarding search strategies in particular industry environments.
Relying on search depth is especially important in industries characterized by high levels
of productivity growth as the presence of a dominant conversion process requires firms to
rely on deeper knowledge bases of external sources and develop more intensive (compared
to more diverse) knowledge combinations. The systemic and complex nature of process
innovations require that firms engage deeply in searches in order to be better able to under-
stand, adapt, and improve the efficiency of operational routines. Shared knowledge, symbols,
and language developed through deeper searches allow firms to draw on rich knowledge and
develop the knowledge infrastructure to rapidly develop process innovations requiring tacit
knowledge and systemic changes. As an example, as a result of increasing productivity
growth in the early 1970s in the machine tool industry, Black and Decker faced heavy com-
petition from U.S. competitors and foreign manufacturers and worked closely with key
stakeholders to redesign its manufacturing processes to meet consumer needs for low-cost
tools (Meyer & Lehnerd, 1997).
Insights about industry productivity growth can be considered in the context of absorptive
capacity and attention-based view theories. As noted by Cohen and Levinthal, “The prior
possession of relevant knowledge and skill is what gives rise to creativity, permitting the
sorts of associations and linkages that may have never been considered before” (1990: 130).
Thus, when firms face an environment that is characterized by high productivity growth,
deep searches can provide creative solutions that can be readily integrated into existing firm
systems. Zahra and George (2002) focus on conversion efficiency or the ability to convert
knowledge acquired and assimilated in the firm into knowledge transformations in organiza-
tional systems and exploitations through new innovations. As productivity improvements
call for incremental changes, relying on deep knowledge sources allows rapid integration of
external knowledge and incremental improvements. Thus, deep search may be even more
successful at leading to process innovations as the focal firm can now concentrate on key
customers or other critical knowledge sources.
Taken together, we expect that industry productivity growth further enhances the positive
relationship between search depth and process innovation (Hypothesis 2):

Hypothesis 4: Industry productivity growth moderates the relationship between search depth and
process innovation, such that in industries with high industry productivity growth, search depth
is more positively related to process innovation.

Data and Methodology


Data
We utilized archival data from Bureau van Dijk’s FAME, a comprehensive database of
firms, to operationalize industry process heterogeneity and industry productivity growth. The
remaining variables were based on the Kitson and Hughes (2010) U.K. business survey;

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10   Journal of Management / Month XXXX

additional information about the survey is available in Hughes et al. (2010). The survey was
mailed June through September 2008 with a reminder sent in early 2009. To limit skewness
based on size, sector, and region, the survey was based on stratified random sampling. The
11.1% response rate (2,357 of 21,200 firms) is comparable to prior mail surveys to senior
executives (cf. Bartholomew & Smith, 2006). Details on the pilot study and nonresponse bias
are available in Hughes, Kitson, Abreu, Grinevich, Bullock, and Milner (2010).
A component of the survey focused on innovation-related knowledge exchanges with
external sources. In line with earlier Community Innovation Survey studies (Frenz & Ietto-
Gillies, 2009; Grimpe & Sofka, 2009; Laursen & Salter, 2004, 2006; Leiponen & Helfat,
2010), the U.K. business survey drew on traditional measures of search strategies and inno-
vation outputs (e.g., Mairesse & Mohnen, 2002). The subsample consists of 505 manufactur-
ing firms in 23 two-digit Standard Industrial Classification (SIC) codes.

Dependent Variable: Process Innovation


Process innovation captures the firm’s level of process innovation. Respondents indicated
whether their firm introduced one or both of the following process innovations: (a) techno-
logically new or significantly improved methods of producing manufactured products and
(b) technological improvements in supply, storage, or distribution systems for manufactured
products. The respondents were then asked to classify each process innovation as either “new
to the firm but not new to your industry” or “new to your firm and new to your industry,”
which resulted in four process innovations types: (a) methods of producing manufactured
products new to the firm but not new to the industry (n = 172); (b) methods of producing
manufactured products new to the firm and new to the industry (n = 75); (c) supply, storage,
or distribution systems for manufactured products new to the firm but not new to the industry
(n = 72); and (d) supply, storage, or distribution systems for manufactured products new to
the firm and new to the industry (n = 25).
As the indicators are binary, we use recent procedures for operationalizing constructs
with binary indicators. We follow Raykov, Dimitrov, and Asparouhov (2010) who draw on
Muthén (1984). On the basis of the Raykov et al. method, we use a two-parameter logistic
model in Mplus with four dichotomous indicators of process innovation loaded on the
construct of process innovation. Instead of Cronbach’s alpha, which is applicable to con-
tinuous indicators, Raykov’s rho, interpreted in the same way as alpha, is the measure of
interitem reliability among dichotomous indicators. Rho was .72, which is above the rec-
ommended cutoff of .7. Table 1 shows the distribution of innovations across 23 two-digit
U.K. SIC codes.

Independent Variables
For search breadth, respondents indicated (1 = yes, 0 = no) the use of 1 or more of 11 infor-
mation sources for innovation activities over the last 3 years: (a) suppliers of equipment, mate-
rials, services, or software; (b) clients or customers; (c) competitors or other firms in your line
of business; (d) consultants; (e) commercial labs and private R&D enterprises; (f) higher educa-
tion institutions; (g) government or public research organizations; (h) technical standards or
standard setting bodies; (i) conferences, trade fairs, and exhibitions; (j) trade and technical press
and computer databases; and (k) professional and industry networks/associations. This measure

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Table 1
Distribution of Process Innovation Outcomes Across Industries

Supply, storage, or Supply, storage, or


Methods of producing Methods of producing distribution systems for distribution systems for
manufactured products new manufactured products manufactured products manufactured products Search Search
Two-digit Number of to the firm but not new to new to the firm and new new to the firm but not new to the firm and new to depth breadth
SIC code Manufacturing industry firms the industry to the industry new to the industry the industry mean mean

15 Food and beverages 32 12 6 10 3 2.22 0.69


17 Textiles 27 10 7 5 2 1.99 0.59
18 Apparel 7 0 0 1 0 1.79 0.54
19 Leather 4 1 0 0 0 2.02 0.56
20 Wood and wood products 27 8 0 4 0 1.49 0.51
21 Pulp paper and paper products 17 5 1 0 0 1.94 0.58
22 Publishing and printing 44 14 5 8 2 1.96 0.59
23 Coke and refined petroleum 2 2 1 1 1 2.27 0.98
24 Chemicals and chemical 23 10 6 5 2 2.13 0.71
products
25 Rubber and plastic products 27 8 5 5 2 1.77 0.58
26 Other nonmetallic minerals 24 7 2 3 0 1.88 0.59
27 Basic metals 9 5 1 1 0 2.44 0.54
28 Fabricated metal products 3 1 3 1 1 1.58 0.51
29 Machinery and equipment 75 23 7 6 2 1.94 0.67
30 Office machines and 55 21 11 9 4 1.82 0.58
computers
31 Electrical machinery 5 2 1 0 0 2.16 0.62
32 Television and line telephone 21 12 4 4 2 1.97 0.61
33 Medical and optical 20 7 3 0 1 2.15 0.75
instruments

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34 Motor vehicles and trailers 21 5 4 3 2 1.59 0.49
35 Other transport equipment 16 4 2 1 0 1.24 0.45
36 Furniture 3 0 0 0 0 1.79 0.50
37 Recycling 40 15 5 5 1 2.55 0.77
38 Manufacturing firms not 3 0 1 0 0 2.98 0.77
classified elsewhere
Total 505 172 75 72 25 1.99 0.62

Note: SIC = Standard Industrial Classification.

11
12   Journal of Management / Month XXXX

is consistent with prior work that codes possible sources of information with a binary variable
on the basis of the assumption that firms with a higher count search more broadly (Laursen &
Salter, 2006).
Search depth focused on the usage intensity of each of the 11 sources of innovation efforts.
Respondents indicated the degree of importance of a particular stakeholder on a scale from 1
(not at all important) to 5 (highly important). This measure is extended from the binary mea-
surement (1 = used to a high degree and 0 = otherwise) developed by Laursen and Salter
(2006). Our measure offers a more fine-grained analysis of the openness of certain sources.
Prior work indicates that including both search breadth and depth is valuable for gaining
a complete perspective on firm openness (Laursen & Salter, 2006). Both measures include 11
potential sources of innovation efforts, which represent the extended value chain of possible
external inputs to process innovations, from suppliers to customers to public and private
information. For example, a manager might learn about a new way to produce a product from
a consultant, commercial lab, or trade fair. Furthermore, the manager might be exposed to a
new technology for supply, storage, or distribution when talking with suppliers, reading trade
press, or networking at an industry association.
To calculate the industry variables, we started with the two-digit SIC code of all U.K.
firms in the FAME database from 2007 to 2009.
Industry process heterogeneity at time t – 1 captures the extent to which firms have differ-
ent input-output conversion processes. As Essletzbichler and Rigby note,

Following Nelson and Winter (1982), the technology of each plant in an industry is represented
through a pair of input-output coefficients, a labor coefficient measuring the amount of labor
required to produce a unit of output, and a non-labor or “capital” coefficient measuring the amount
of capital (fuel, materials and depreciation) required to produce a unit of output. (2005: 27)

We follow Essletzbichler and Rigby by using labor and technology productivity coefficients
for industry i at time t:
=liIt lI=
t t
wiI ; kiIt k It wiIt ,

where wiIt is the market share of a firm i in industry I at time t. Labor productivity (liIt ) refers
to the efficiency of converting inputs to outputs and is measured as the ratio of natural
t
logarithm(sales)/natural logarithm(number of employees). Technological productivity (kiI )
captures the efficiency of processes in converting inputs to outputs and is typically measured
as asset efficiency, such as return on assets. Drawing on Rigby and Essletzbichler (2006) and
Essletzbichler and Rigby, process heterogeneity is measured with a scatter plot spread for
each SIC industry with the labor coefficient on the x-axis and the capital coefficient on the
y-axis. The spread along the x-axis (heterogeneity in labor coefficient) is

σx =
∑( xcosθ − ysinθ ) 2

.
n

The spread along the y-axis (heterogeneity in technology coefficient) is

σy =
∑( xsinθ + ycosθ ) 2

,
n

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Terjesen, Patel / In Search of Process Innovations   13

Figure 2
Firm and Industry Process Heterogeneity Examples

Firm

Capital Input Coefficient Heterogeneity


Industry mean

Labor Input Coefficient Heterogeneity

Note: The ellipse size represents the absolute variation while the ellipse orientation indicates the maximum and
minimum dispersion. Adapted from Essletzbichler and Rigby (2005).

where θ is tanθ =
( ∑x + ∑y ) + (∑x + ∑y )
2 2 2 2 2
+ 4( ∑xy) 2

.
2∑xy
Thus, θ is the relative substitution rate of labor and technology in an industry. Higher
substitution rates indicate that processes are more flexible as labor can be substituted for
technology and vice versa. Our overall measure of process heterogeneity is the geometric
mean of process heterogeneity for 3 years (2007, 2008, and 2009). Figure 2 depicts firm and
industry process heterogeneity.
Industry level productivity at time t captures the extent to which there are productivity
improvements that result from efforts by existing firms, technological changes exogenous to
the industry, and firm entries and exits in the industry. We start by measuring year-to-year
change in aggregate labor productivity (Melitz, 2003):

Pt = ∑s p ; ∆P it it t , t −1 = ∑s p − ∑s
i∈I
it it
i∈I
it −1 pit −1 ,

where Pt is the aggregate labor productivity in period t at the industry level, sit is the employ-
ment share of firm i in period t, and pit is the labor productivity of firm i in year t. Industry
labor productivity changes as some firms introduce new manufacturing and distribution pro-
cesses or hire/lay off employees. Productivity also increases with new entrants introducing
new process innovations or inefficient firms exiting. We use a geometric mean of ΔPt,t – 1 over
the 3-year period (2007, 2008, and 2009) to assess industry productivity growth changes:

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14   Journal of Management / Month XXXX

∆Pt −1, t −3 = 3 ∆Pt , t −1 × ∆Pt −1, t − 2 × ∆Pt − 2, t −3 .

Control Variables
We include several control variables from survey and archival sources. We control for the
natural log of firm age as older firms are more likely to have established innovation routines
and relationships with external stakeholders. We also control for three firm resources that
have been shown to affect innovation outcomes: R&D, employees, and sales (Leiponen &
Helfat, 2010; Reichstein & Salter, 2006). We control for geographic distribution of sales
using a concentration index of distribution of sales in the following: local area (10 miles),
region, rest of the United Kingdom, rest of Europe, and rest of the world. Finally, as signifi-
cant organizational changes could affect firm process innovations (Ettlie & Reza, 1992),
respondents are asked (1 = yes, 0 = no) whether they engaged in the following: implementa-
tion of significantly changed corporate strategy, implementation of advanced management
techniques, changes in organizational structure, or changes in marketing concepts or strate-
gies. We control for product innovation using a two-parameter logistic model—
“Technologically new or significantly improved manufactured product”: “Innovation new to
your firm but not to your industry?” (= 1) and “Innovation new to your firm and to your
industry?” (= 1). Nonlinear effects of search depth and search breadth identified in prior
studies (e.g., Laursen & Salter, 2006) are included to control for model misspecification.
Finally, to control for industry effects, we include the one-digit SIC code with SIC codes
starting with “1” as the reference category.

Analytical Approach
Table 2 shows the correlations, means, and standard deviations. As common method bias
may affect the respondent scale–based measures (i.e., all except industry process heterogene-
ity and productivity growth), we undertook four steps consistent with the recommendations
of Podsakoff, MacKenzie, Lee, and Podsakoff (2003). First, the original survey by Kitson
and Hughes (2010) provided a glossary, and participants were guaranteed confidentiality.
Second, the study incorporates archival independent variables. Third, we use Harman’s one-
factor test to assess common method bias. Seven factors accounting for 81.39% of variance
(eigenvalue > 1) are extracted; the first factor accounted for 21.32% of variance. Fourth, we
include a method factor in our measurement model to explain the relative variance. The sub-
stantive constructs explain 94.84% of the variance, and the method factor explained 1.08%
of the variance. Overall, common method bias is not a significant threat to the validity of the
findings. The highest variance inflation factor is 6.72, which is below the recommended
cutoff of 10.

Endogeneity
A firm’s propensity for search breadth and depth and for process innovation may be endog-
enous. The Durbin-Wu-Hausman exogeneity test is rejected for both search breadth (p =
.013) and depth (p = .007). Instruments must be strongly related to the predictor variable and
have zero (or very low) correlation with the outcome variable. Although strong instrumental

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Table 2
Correlations, Means, and Standard Deviations

1 2 3 4 5 6 7 8 9 10 11 12 13 14 M SD

  1. Process innovation 1 0.33 0.19


  2. Search breadth −.14 1 0.62 0.32
  3. Search depth .13 .71 1 1.99 1.05
  4. Industry process heterogeneity .21 .15 −.29 1 0.19 0.23
  5. Industry productivity growth −.17 −.17 −.16 −.10 1 0.02 0.07
  6. Age (ln) .09 .13 .15 .13 .12 1 3.37 1.52
  7. R&D (ln)  .16 .36 .29 .13 .11 .29 1 3.82 2.48
  8. Employees (ln)  .13 .31 .23 .07 .11 .46 .76 1 3.08 1.65
  9. Sales (ln) .54 .32 .28 .11 .11 .37 .81 .94 1 7.55 2.01
10. Geographic sales distribution .14 .12 .14 .08 .13 .08 .23 .17 .24 1 0.40 0.23
11. Implementation of .20 .16 .20 .09 .11 .06 .20 .26 .24 −.08 1 0.29 0.47
significantly changed
corporate strategy
12. Implementation of advanced .07 .22 .19 .05 .06 .13 .14 .16 .19 −.07 .31 1 0.14 0.39
management techniques
13. Change in organizational .09 .28 .14 .04 .13 .21 .37 .43 .37 −.16 .45 .44 1 0.20 0.44
structure
14. Changes in marketing .06 .19 .14 .04 .06 .18 .08 .14 .15 −.16 .53 .36 .47 1 0.34 0.49

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concepts or strategies
15. Product innovation .08 .14 .11 −.16 −.09 −.09 .09 .07 −.08 −.09 .19 −.08 −.06 −.06 0.27 0.34

Note: N = 505. Two-tailed test; all correlations above |.13| are significant (at p < .05). ln = natural logarithm.

15
16   Journal of Management / Month XXXX

variables are difficult to identify in social sciences, weak instruments are increasingly accepted
(Angrist & Pischke, 2010; Staiger & Stock, 1997; Stock & Yogo, 2002).
A weak set of instruments must be strongly correlated to search breadth and search depth
but weakly correlated to process innovation. The instrument affecting search depth and
breadth must also be less affected by collaborating organizations. Thus, if collaborating firms
can initiate rules and procedures that enable knowledge exchange, then these instruments are
less exogenous. We use process-related spillovers from geographically distributed industry
firms as instrumental variables. Spillovers indicate less proactive search procedures and
result from complex and path dependent industry norms. The extent of process-related spill-
overs affects the decision to engage in proactive search (e.g., more spillovers require fewer
proactive searches) but may not directly affect process innovations. By contrast, proactive
searches are more likely to increase process innovations. The second and more important
component of process spillovers is geographic distance. Geographic distance is an exoge-
nous variant in the knowledge exchange process; greater geographic distances lower the
exchange of complex process innovation–related knowledge (Breschi & Lissoni, 2001;
Morgan, 2004). Overall, the search for external knowledge to initiate process innovation is
driven by the availability of external knowledge or spillovers. Spillovers that are contingent
on the geographic distribution of competitors are exogenous.
Our instruments are developed from the literature on process-related spillovers in the
industry. Following Ornaghi (2006), we use the spillover from process R&D as an instru-
mental variable:
Yitp = A(λ jt , Ritp , Sitp ) F( Lit , M it , Cit ,U it ),

where Yitp is the output (sum of sales and the change in inventory values using average
inventory method) of industry firm i at time t in the two-digit SIC code level in the FAME
database that includes a majority of U.K. firms. In addition, Yitp is based on inputs of labor
(Lit), materials (Mit), fixed assets (Cit), and capacity utilization (Uit); technology function A(.),
is based on the rate of disembodied technological change (λjt), individual firm research
investments ( Ritp ) , and spillover ( Sitp ) . Taking the log transformation:
yitp = α1lit + α 2 mit + α 3cit + α 4uit + α 5ritp + α 6 sitp1 + α 7 sitp 2 + α 8 sitp 3 + α 9 sitp 4 + vit ,

p
where vit is the random error term and yitp is the log of the first difference from t −1 to t; sit
is calculated on the basis of weighted geographic distances of R&D expenditures that equal
∑ R p w , where R jp is the stock of R&D from firm j that is available to firm i and wij is
j ≠ i j ij
the inverse of geographic distance between firm i and firm j; and α6, α7, α8, and α9 estimates
are based, respectively, on firms with more than 500 employees, 500 or fewer employees,
labor productivity above the industry median, and labor productivity below the industry
median. These four estimates (α6, α7, α8, and α9) are the instruments. We repeat this step for
each two-digit SIC code.
As weak instruments can produce biased estimates and large effect size distortions, the
Cragg-Donald Wald F statistic tests whether the instruments create bias; as the test statistic
was above the critical value, we reject the null that weak instrument estimates are biased.
The Sargan test for overidentification of all instruments is also rejected (p < .01). Overall,

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Terjesen, Patel / In Search of Process Innovations   17

despite weak exogeneity of the four instruments, the tests indicate that these instruments
(Cragg-Donald Wald F statistic above critical value) do not bias the estimate or distort
effect sizes.
The two-stage least squares model (see Table 3) explores the direction of the instruments’
effects on the endogenous variables—search breadth and search depth—to further under-
stand the nature of endogeneity. Instruments related to spillovers reflect the spillover pool in
the industry to “borrow” available knowledge rather than search for new knowledge.
Spillovers from firms with more than 500 employees (α6) are negatively related to search
breadth and search depth (see Table 3). Spillovers from firms with fewer than 500 employees
(α7) are negatively related to broad searches (negative coefficient) and positively related to
deep searches (positive coefficient). As competition among small firms is more intense than
competition between smaller and larger firms, greater spillovers from smaller firms may
require smaller firms to focus on search depth and enhance existing capabilities instead of
exploring new ones through greater search breadth.
Spillovers from firms with labor productivity above the industry median (α8) are nega-
tively related to search breadth but positively related to search depth. R&D spillovers from
highly efficient firms in the industry could indicate highly developed technology regimes and
established knowledge bases. Under such conditions, broad searches may not increase
returns, and deeper searches could enable firms to develop competencies in the presence of
spillovers from more efficient industry players. Although knowledge spillovers from firms
with labor productivity below industry median (α9) are not related to search breadth, they are
positively related to search depth. With increasing spillovers from less efficient firms, typi-
cally less efficient small and medium enterprises in the sample may focus on increasing
search depth to develop existing competencies. Next, we discuss the results.

Results
Table 3 shows the results of the two-stage least squares regression. The first-stage results
for the final model including all predictors is included in Table 3. We now discuss the main
results. Hypothesis 1 proposes that search breadth reduces process innovation and is strongly
supported (β = − 0.0329, p < .01). Hypothesis 2 suggests that search depth increases the level
of process innovation and is supported (β = 0.0370, p < .01). Hypothesis 3 argues that with
increasing industry process heterogeneity, firms with higher levels of search breadth have
higher process innovations, and this hypothesis is strongly supported (β = 0.2753, p < .01).
As shown in Figure 3a, with increasing search breadth, higher industry process heterogeneity
led to greater levels of process innovations, whereas lower levels of industry process hetero-
geneity led to lower levels of process innovation. Finally, Hypothesis 4 proposes that with
increasing industry productivity growth, firms with higher levels of search depth are more
likely to have process innovations, and this hypothesis is supported (β = 0.1331, p < .05).
This interaction is depicted in Figure 3b: With increasing search depth, higher levels of
industry productivity growth increase process innovation levels.
The symmetric interaction effects Search Breadth × Industry Productivity Growth (β =
0.0032, p > .10) or Search Depth × Industry Process Heterogeneity (β = 0.0335, p > .10) are
not significant, indicating that the moderation effects are supported only for our hypothesized
effects. In the knowledge search literature, Laursen and Salter (2006) find inverted-U shape

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18   Journal of Management / Month XXXX

Table 3
Two-Stage Least Squares Regression Estimates for Process Innovation

First Stage Second Stage

Search Search
  Breadth Depth (1) (2) (3) (4) (5)

Search breadth (Hypothesis 1) −0.03** −0.03** −0.03** −0.03*


  (0.01) (0.00) (0.00) (0.00)
Search depth (Hypothesis 2) 0.04** 0.04** 0.03**
  (0.01) (0.01) (0.01)
Industry process heterogeneity 0.29* −0.86*** 0.10** 0.12*** 0.13*** 0.15* 0.13*
  (0.14) (0.19) (0.03) (0.03) (0.04) (0.06) (0.06)
Industry productivity growth −0.13* −0.79* −0.12*** −0.17*** −0.16*** −0.16*** −0.13***
  (0.05) (0.32) (0.03) (0.03) (0.03) (0.03) (0.03)
Search Breadth × Industry Process 0.28** 0.21*
Heterogeneity (Hypothesis 3)  (0.10) (0.09)
Search Depth × Industry Productivity 0.13*
Growth (Hypothesis 4)  (0.05)
Age 2.93* 0.55** 0.01 0.01 0.01 0.01 0.01
  (1.34) (0.20) (0.01) (0.01) (0.01) (0.01) (0.01)
R&D 0.24* 0.15 0.07* 0.07* 0.07* 0.07* 0.07*
  (0.12) (0.12) (0.03) (0.03) (0.03) (0.03) (0.03)
Employees 0.06* 0.11 0.05* 0.05* 0.05* 0.05* 0.05*
  (0.03) (0.08) (0.02) (0.02) (0.02) (0.02) (0.02)
Sales 0.03* 0.27* 0.09*** 0.09*** 0.09*** 0.09* 0.08*
  (0.01) (0.12) (0.03) (0.03) (0.03) (0.03) (0.03)
Geographic sales distribution 0.25 −0.04 0.01 0.01 0.02 0.02 0.02
  (0.26) (0.02) (0.02) (0.02) (0.02) (0.02) (0.02)
Implementation of significantly 0.13 0.28 0.06* 0.06*** 0.06*** 0.06*** 0.06***
changed corporate strategy  (0.19) (0.25) (0.03) (0.01) (0.01) (0.01) (0.01)
Implementation of advanced 0.15 0.14 0.02 0.02 0.02 0.02 0.02
management techniques  (0.31) (0.13) (0.02) (0.02) (0.02) (0.02) (0.02)
Change in organizational structure 0.06 0.10 0.04 0.04 0.04 0.04 0.04
  (0.06) (0.12) (0.02) (0.02) (0.02) (0.03) (0.03)
Changes in marketing concepts or 0.11 0.38 0.01 0.01 0.01 0.01 0.01
strategies  (0.11) (0.29) (0.01) (0.01) (0.01) (0.01) (0.01)
Product innovation 0.02 0.17 0.12* 0.12* 0.12* 0.12 0.12
  (0.01) (0.27) (0.06) (0.06) (0.06) (0.06) (0.06)
Alpha 6: knowledge spillovers from −3.57*** −2.18***  
firms with > 500 employees  (0.75) (0.54)  
Alpha 7: knowledge spillovers from −2.35* 3.25*  
firms with < 500 employees  (0.98) (1.27)  
Alpha 8: knowledge spillovers from −1.47* 1.94*  
firms with labor productivity (0.62) (0.85)  
above industry median 
Alpha 9: knowledge spillovers from −0.82 1.39*  
firms with labor productivity (0.50) (0.60)  
below industry median 
Search Breadth × Industry 0.00 0.00 0.00 0.00
Productivity Growth  (0.01) (0.01) (0.01) (0.01)
Search Depth × Industry Process 0.03 0.03 0.04
Heterogeneity  (0.03) (0.03) (0.03)
Search breadth2 0.00 0.00 0.00 0.00
  (0.00) (0.00) (0.00) (0.00)

(continued)

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Terjesen, Patel / In Search of Process Innovations   19

Table 3 (continued)
First Stage Second Stage

Search Search
  Breadth Depth (1) (2) (3) (4) (5)

Search depth2 0.00 0.00 0.00


  (0.00) (0.00) (0.00)
Industry dummies (one-digit SIC Included Included Included Included Included Included Included
code)  (0.00) (0.00) (0.01)
Constant  0.67*** 2.06*** 0.21*** 0.26*** 0.27*** 0.26*** 0.26***
(0.18) (0.54) (0.02) (0.03) (0.03) (0.03) (0.02)
Adjusted R2 .42 .46 .38 .40 .42 .44 .45
Change in adjusted R2 .02** .02** .02** .02**

Note: N = 505. Unless noted otherwise, the table presents standardized regression coefficients for each measure. Standard errors are
shown in parentheses. SIC = Standard Industrial Classification.
*p < .05.
**p < .01.
***p < .001.

effects between search breadth or search depth and product innovation. The product innova-
tion literature also identifies an inverted-U relationship between innovation efforts and per-
formance outcomes (e.g., Aghion, Bloom, Blundell, Griffith, & Howitt, 2005; J. Chen,
Damanpour, & Reilly, 2010). The more broadly and deeply a firm searches across knowledge
domains, the more likely it is that the firm’s resources will be challenged in terms of under-
standing and ability to increase this distant knowledge from multiple sources. Therefore,
after a certain point, the costs of collaboration may outweigh the benefits. We do not find
significant effects for an inverted-U relationship between search breadth (β = 0.0023, p > .10)
or search depth (β = 0.0008, p > .10) and process innovation. There could be two potential
explanations for the lack of support for an inverted-U effect.
First, as discussed previously, compared to product innovations, process innovations
require modifications to deeply embedded knowledge routines, tasks, and processes. A firm’s
internal structural constraints in manufacturing processes might limit the firm’s ability to
integrate diverse knowledge from broad search and, thus, also limit the potential for facing
high costs when integrating diverse knowledge. Second, although product innovation
research suggests that deeper search leads to declining marginal value of this deep knowl-
edge, process innovations may be different. That is, in the case of process innovations, updat-
ing deeply embedded path dependent knowledge in operational resources may increase the
marginal value of deep knowledge, limiting the potential for an inverted-U relationship. A
firm’s dense relationships among operational knowledge, routines, tasks, and processes may
increasingly provide avenues for applying deep knowledge to process innovations.

Robustness Analysis
Table 4 reports the estimates under alternate specifications. The first row includes the
estimates from the main analysis (see Table 3). First, rather than a joint measure of process
innovation, we assessed whether our findings are robust to individual measures of process

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20   Journal of Management / Month XXXX

Figure 3
Moderation Plots

0.5

0.45
Process Innovation

0.4

0.35

0.3

0.25

0.2
Low Search Breadth High Search Breadth
Low Industry Process Heterogeneity High Industry Process Heterogeneity

(a)
0.5

0.45
Process Innovation

0.4

0.35

0.3

0.25

0.2
Low Search Depth High Search Depth
Low Industry Productivity Growth High Industry Productivity Growth

(b)
Note: The figure depicts moderation effects of (a) search breadth and (b) search depth.

innovations. Sample size differences cause the statistical power to vary in estimation for each
type of process innovation indicator. As indicated in Table 4, the estimates are consistent and
significant for the first three indicators of process innovation but not the fourth. As a result of
the small sample size of the fourth indicator (n = 25), estimates are not reliable; however,
because of high Raykov’s rho, we include the fourth indicator in the main analyses.
Next, we classify firms that report zero process innovations across all four categories (=
0) and firms that report at least one process innovation (= 1). The estimates are significant (at
p < .10) except for Hypothesis 4. We check whether alternate operationalizations of search
breadth or search depth led to different inferences. As an alternate operationalization of

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Terjesen, Patel / In Search of Process Innovations   21

Table 4
Summary of Robustness Tests

Hypothesis 1 Hypothesis 2 Hypothesis 3 Hypothesis 4

  β p β p β p β p

Estimates in main analysis −0.03 < .01 0.04 < .01 0.28 < .01 0.13 < .05
Individual measures of process innovation  
  Methods of producing manufactured products −0.03 < .05 0.03 < .05 0.19 < .05 0.09 < .05
new to the firm but not new to the industry
(n = 172)
  Methods of producing manufactured −0.02 < .10 0.03 < .05 0.18 < .05 0.08 < .05
products new to the firm and new to the
industry (n = 75)
  Supply, storage, or distribution systems for −0.02 < .10 0.03 < .05 0.12 > .10 0.07 > .10
manufactured products new to the firm but
not new to the industry (n = 72)
  Supply, storage, or distribution systems for −0.01 > .10 0.01 > .10 0.00 > .10 0.05 > .10
manufactured products new to the firm and
new to the industry (n = 25)
Dichotomous measure of process innovation  
  Firms reporting zero process innovations −0.26 < .10 0.18 < .10 0.16 < .10 0.10 > .10
across all four categories (= 0) and firms
reporting at least one process innovation (= 1)
Alternate operationalizations of search depth  
and breadth
  Search depth: 1 = (5, highly important; 4, −0.02 < .10 0.04 < .05 0.08 < .10 0.10 < .05
important) and 0 = (1, not at all important;
2, slightly important; 3, somewhat
important)
  Search breadth: 1–3 (reference category = 0), −0.08 < .10 0.03 < .05 0.14 < .10 0.09 > .10
4–6 (reference category = 1), 7–9 (reference
category = 2), and 10–11 (reference
category = 3)

search depth, we follow prior research in employing a dichotomous measure from a Likert-
type response (Grimpe & Sofka, 2009; Laursen & Salter, 2006; Leiponen & Helfat, 2010).
We code high or medium responses (i.e., 5, highly important; 4, important) as 1 and all others
as 0 (i.e., 1, not at all important; 2, slightly important; 3, somewhat important) and found that
the results were consistent in magnitude and direction. Fourth, to further test for nonlinearity
of search breadth, we create dummies for four categories of the number of sources: 1 to 3
(reference category = 0), 4 to 6 (reference category = 1), 7 to 9 (reference category = 2), and
10 to 11 (reference category = 3). The results are mostly consistent with main results.

Discussion
Our study extends prior work by considering the contingent impact of the industry environ-
ment on the search strategy–process innovation relationship. We argue that firms operating in
more process heterogeneous industries with a diversity of input-output conversions are more
likely to benefit from broad search. Our findings support the notion that firm managers do not

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22   Journal of Management / Month XXXX

have full information about which external source will provide the critical knowledge inputs
to innovation. Given this uncertainty, firm managers are inclined to search broadly in order to
be exposed to a large variety of potential knowledge inputs. Rather than face potential losses
of knowledge from errors of omission by neglecting to search across diverse sources, firm
managers are thus more inclined to make errors of commission by examining a multitude of
sources. Managers’ broad search behavior is increasingly prevalent in a high-technology, net-
worked world where the search costs are declining and managers are likely to search a variety
of potential sources at lower costs (Mina, Bascavusoglu-Moreau, & Hughes, 2014).
Next, we investigate the relationship between search depth and process innovation, find-
ing a positive relationship. Our result highlights the distinction between process and product
innovations as prior research on product innovation reported an inverted-U relationship
(Laursen & Salter, 2006). We believe that this distinction is due to the highly tacit and sys-
temic nature of process innovations. Our results suggest that firms can make substantial
process innovation gains by searching deeply and developing repertoires to integrate this
knowledge. Thus, the focal firm may gain from such deep sources after investing substan-
tially in these relationships.
To examine the search depth–innovation relationship in greater detail, we considered the
possible moderating impact of the industry environment. Our results suggest that environ-
ments characterized by high levels of productivity growth will strengthen this relationship.
Our findings provide descriptive evidence of industry differences in process innovations and
search strategies.
Prior research on innovation search was conducted in high-technology firms (West &
Gallagher, 2006) and did not consider industry characteristics. Our study includes firms from
different technology sectors, demonstrating great variance in search breadth and depth strate-
gies and process innovation outcomes across firms and industries.
By integrating absorptive capacity and attention-based theories, our study responds to the
calls for contingency research to incorporate other theories. We also show that two industry
components that are considered in the economics literature—industry process heterogeneity
and industry productivity growth—affect the “fit” of search strategy.

Conclusion
Manufacturing firm managers actively seek and utilize knowledge from external sources
in order to improve their innovation capabilities (Manufacturing Institute, 2008). This study
sought to enhance our understanding of the impact of search breadth and search depth strate-
gies on process innovation outcomes and the contingent impact of the industry environment.
We believe that our findings have considerable theoretical and practical relevance.
Considering that process innovations lead to gains for the firm as well as for industries and
the economy, a better understanding of search strategies contingent on industry conditions
may lead to higher performance.
The negative relationship between search breadth and process innovation is consistent
with Katila and Ahuja’s (2002) investigation of new product introductions in that “over-
search” results in negative outcomes. Firm managers’ tendency to pursue a broad set of
knowledge sources, particularly as the costs of accessing these sources is likely to be decreas-
ing as a result of greater technology and networking, may need to be tempered.

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Terjesen, Patel / In Search of Process Innovations   23

The findings and implications elaborated earlier should be considered in light of two key
limitations that warrant further investigation. First, search breadth and depth strategies might
also be operationalized as the number and depth of new processes that a firm explores. This
promising line of enquiry could be examined by a survey or qualitative methods. Second,
further investigation is warranted to measure and incorporate process heterogeneity and
investigate the mechanisms through which industry level process improvements are identi-
fied, sought, and incorporated at the firm level and the possible role of industry life cycle.
In addition to the recommendations based on the research limitations, we offer several
potential directions for future research. First, firm search strategies are dynamic and change
over time. Future studies could leverage longitudinal data to test industry dynamics and
adaptive firm search strategies to assess process innovation success. Firms can also employ
certain marketing and planning strategies, such as increasing sales and advertising, increas-
ing production breadth and geographic coverage, and later emphasizing marketing efficiency
to survive a recession (Pearce & Michael, 1997). As certain manufacturing industries are
particularly susceptible to economic crises (Economist, 2009), future research could examine
search behavior before, during, and after crises.
Second, as this study established two industry variables as critical to process innovation
strategies, future studies could explore the impact of industry process heterogeneity and
industry productivity growth on other aspects of organization capabilities. For example,
increases in process heterogeneity may lead firms to experiment to identify optimal manufac-
turing and search strategy configurations. Third, given the growing literature that describes
the multiple possibilities for organizing external sources, for example, in collaborative com-
munities or competitive markets (Boudreau & Lakhani, 2009), future research could investi-
gate associated costs and benefits of each. Fourth, as this research focused on the benefit of
search to the firm in increasing process innovation, future research could explore the other
direction—investigating the effect of a firm’s outbound knowledge flows on process innova-
tion. Finally, research could address the desire for radical or incremental process innovations
and corresponding search strategies and industry environments.

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