Approaches to Innovation: Exploitation or Exploration? A Simulation Study

This study attempts to explore how firms’ productive opportunity and performance evolve differently under different assumptions of firms’ motivation and propensity to explore new technology, given the characteristics of the demand. On the one hand, exploiting existing competencies may provide short-term success, but competence exploration can become a hindrance to the firm’s long-term viability. On the other hand, deploying resource combinations as to an externally focused search inherently mitigates the risk of failure, while deploying resource combination as to an internally focused search may dramatically enlarge the set of all possible deployments that are within someone’s ability and means to execute. A computational model using agent-based simulation techniques is proposed. The results of the computational model suggest that the degree of heterogeneity of the market strongly affects the performances achievable through different strategic approaches.