Founder as the microfoundation for slack resources

The ‘microfoundations’ literature (Felin & Foss, Reference Felin and Foss2005; Gavetti, Reference Gavetti2005) has asserted that the micro-level, represented by the levels of individuals and their interactions, is the nested antecedent to collective phenomena at the organisational level (Contractor et al., Reference Contractor, Foss, Kundu and Lahiri2019). The microfoundations perspective thus advocates that organizational phenomena are outcomes of interactions at a level lower than the phenomenon itself and are essentially derived from the individuals’ endowment and characteristics (Felin, Foss, & Ployhart, Reference Felin, Foss and Ployhart2015). Microfoundations research in strategy emphasizes the role of top management of a company in driving strategic decisions and firm-level outcomes (Barney & Felin, Reference Barney and Felin2013) and explicitly explores the inputs of top management on the organisation’s outcomes (Barney & Felin, Reference Barney and Felin2013; Chittoor, Aulakh, & Ray, Reference Chittoor, Aulakh and Ray2019; Sun, Shi, Ahlstrom, & Tian, Reference Sun, Shi, Ahlstrom and Tian2020). Previous studies in this regard attribute the organisation’s outcome to the most important strategic leader, CEO, and assert that CEOs create, embrace, and successfully execute new ideas (Zimmermann, Hill, Birkinshaw, & Jaeckel, Reference Zimmermann, Hill, Birkinshaw and Jaeckel2020), which in turn affect firm behaviour (Bendig, Strese, Flatten, Susanne da Costa, & Brettel, Reference Bendig, Strese, Flatten, Susanne da Costa and Brettel2018; Heavey & Simsek, Reference Heavey and Simsek2017; Kammerlander, Burger, Fust, & Fueglistaller, Reference Kammerlander, Burger, Fust and Fueglistaller2015; Wales, Patel, & Lumpkin, Reference Wales, Patel and Lumpkin2013).

Being the creator of the firm, the founder acts as the most important strategic leader who designs the initial structure and secures funding during the entrepreneurial firm stage (Honjo & Kato, Reference Honjo and Kato2022; Meier & Schier, Reference Meier and Schier2022; Nelson, Reference Nelson2003). The founder normally serves as the chief executive and holds key responsibility for determining the strategic direction and making key decisions (Collewaert, Vanacker, Anseel, & Bourgois, Reference Collewaert, Vanacker, Anseel and Bourgois2021; Jayaraman, Khorana, Nelling, & Covin, Reference Jayaraman, Khorana, Nelling and Covin2000). The founders’ effect is particularly prevalent in emerging economies because of the greater extent of managerial discretion and their stronger influence on firm behaviour even after the flotation (Teng et al., Reference Teng, Li and Tanna2022). While a larger proportion of founders exit their firms through the initial public offering (IPO) in developed economies (Chahine, Filatotchev, & Zahra, Reference Chahine, Filatotchev and Zahra2011; Hendricks, Howell, & Bingham, Reference Hendricks, Howell and Bingham2019), founders in emerging economies perceive their companies as a lifetime achievement and are thus less likely to exit post-IPO (Young, Peng, Ahlstrom, Bruton, & Jiang, Reference Young, Peng, Ahlstrom, Bruton and Jiang2008; Teng & Li, Reference Teng and Li2021). In fact, many newly listed firms in emerging economies are ultimately owned and managed by their founders (Xu, Yuan, Jiang, & Chan, Reference Xu, Yuan, Jiang and Chan2015).

An added factor in emerging economies is the weak role of market-supporting institutions which are generally not well developed and so the government remains a powerful actor (Meyer & Peng, Reference Meyer and Peng2016). Interpersonal networks cultivated by managers thus rise to play a significant role to shape their firm’s strategic choices (Peng et al., Reference Peng, Li, van Essen and Peng2020). For example, prior studies have recognized the importance of the social connections of CEOs in driving the strategic orientations of their firms (Bai, Xiao, Pan, Tan, & Zeng, Reference Bai, Xiao, Pan, Tan and Zeng2023; Zhang, O’Kane, & Chen, Reference Zhang, O’Kane and Chen2020; Zhang, Tan, & Wong, Reference Zhang, Tan and Wong2015).

Being the creator, ultimate owner, and daily manager, the founder is likely to have an individual impact on the organizational structure and strategic direction (Lee, Yoon, & Boivie, Reference Lee, Yoon and Boivie2020; Picken, Reference Picken2017; Rubenson & Gupta, Reference Rubenson and Gupta1997), which are crucial for the newly listed firm’s growth and development in emerging economies (Wang & Song, Reference Wang and Song2016). Empirical studies also support the strategic importance of the founder to organisational development and outcomes. For example, Ling, Zhao, and Baron (Reference Ling, Zhao and Baron2007) find that the founder’s novelty value trend exerts strong beneficial effects in young and small firms while in large and mature firms the collectivism value trend exerts strong effects. Dencker and Gruber (Reference Dencker and Gruber2015) suggest that the interaction between opportunities identification and firm performance is profoundly influenced by the founder. Teng and Li (Reference Teng and Li2021) demonstrate that the founder plays an essential role in driving a firm’s IPO. Given the founder’s important role in the firm’s growth and development, we therefore assert that the founders would have an individual impact in shaping the firm’s resource accumulation and reallocation and can be viewed as the microfoundation of the newly listed firm in emerging economies (Bendig et al., Reference Bendig, Strese, Flatten, Susanne da Costa and Brettel2018; Chittoor, Aulakh, & Ray, Reference Chittoor, Aulakh and Ray2019; Contractor et al., Reference Contractor, Foss, Kundu and Lahiri2019; Huang, Battisti, & Pickernell, Reference Huang, Battisti and Pickernell2021).

Resource slack and R&D intensity

Organisational slack is potentially utilizable resources that can be diverted or redeployed for the achievement of organizational goals (George, Reference George2005, p. 661). In other words, slack refers to the actual or potential resources that an organisation has not committed to expenditure (Bourgeois, Reference Bourgeois1981). Slack resources act as a buffering mechanism to counter internal and external pressures and also as a facilitator to pursue market and competitive opportunities in the long term.

Organizational slack has been broadly conceptualized in two dimensions, absorbed and unabsorbed slack (Bourgeois, Reference Bourgeois1981; Singh, Reference Singh1986). Absorbed slack refers to the resources that have been committed to the firm’s specific uses (Voss, Sirdeshmukh, & Voss, Reference Voss, Sirdeshmukh and Voss2008). Absorbed slack is constrained resources, which are restricted in their use to the firm’s current business. While absorbed slack can be readily used to expand current business, it has less potential to be converted into alternative uses (Singh, Reference Singh1986). By contrast, unabsorbed slack is currently uncommitted resources, which can be more easily redeployed within the organization (Voss, Sirdeshmukh, & Voss, Reference Voss, Sirdeshmukh and Voss2008). Thus, compared to absorbed slack, unabsorbed slack can be readily redeployed and committed to use at managerial discretion by a firm (Tan & Peng, Reference Tan and Peng2003). While unabsorbed slack can also be used to expand the extant business, what distinguishes it from absorbed slack is its comparatively greater potential for being applied to alternative businesses. In this respect, the distinction between absorbed and unabsorbed slack depends on the nature of the redeployed resources. In essence, unabsorbed slack provides more potential than absorbed slack for recombining resources in new ways.

We propose a model – presented in Fig. 1 – of how and when different types of slack can influence R&D investment. The relationship between organisational slack and R&D investment has received much research attention (e.g., Bentley & Kehoe, Reference Bentley and Kehoe2020; Du et al., Reference Du, Kim, Fourné and Wang2022; Kim, Kim, & Lee, Reference Kim, Kim and Lee2008; Lee & Wu, Reference Lee and Wu2016; Lu & Fang, Reference Lu and Fang2013; Teirlinck, Reference Teirlinck2020; Vanacker, Collewaert, & Zahra, Reference Vanacker, Collewaert and Zahra2017). Researchers advocate a positive role for resource slacks in buffering internal and external pressures, through the excessive level of resource reservation, and argue that increased resources (both absorbed and unabsorbed) enable more initiatives to fund projects with uncertain outcomes, thus fostering better performance (Chen & Miller, Reference Chen and Miller2007; Kim, Kim, & Lee, Reference Kim, Kim and Lee2008). Therefore, we propose that:

Figure 1. Theoretical framework.

Slack and R&D intensity: the role of the founder

As indicated in Fig. 1, we propose a contingent approach to understand the slack-R&D investment link based on the firm’s founder. We argue that the founder’s human capital and social ties are likely to have contingency effects on the relationship between absorbed/unabsorbed slack and R&D investment. Specifically, we posit that the founder’s human capital strengthens the slack and R&D intensity relationship. Furthermore, with regard to social ties, we distinguish the founder’s political ties from managerial ties and propose opposite effects on the slack-R&D link: founder’s political ties weaken the relationship between slack and R&D intensity while managerial ties strengthen the slack-R&D relationship.

Dependent variable

Our dependent variable, R&D investment, is measured by the ratio of R&D expenses divided by sales. Such a measure is widely used in strategic management studies (e.g., Kim, Kim, & Lee, Reference Kim, Kim and Lee2008; Lee & Wu, Reference Lee and Wu2016). The data is drawn from the CSMAR database.

Independent variables

Control variables

We include several control variables in the empirical analysis. Following previous studies (e.g., Cucculelli, Mannarino, Pupo, & Ricotta, Reference Cucculelli, Mannarino, Pupo and Ricotta2014; Fischer & Pollock, Reference Fischer and Pollock2004; Garicano, Lelarge, & Van Reenen, Reference Garicano, Lelarge and Van Reenen2016; Zahra & Filatotchev, Reference Zahra and Filatotchev2004), we account for the effects of founder-CEO status, board independence, firm size, firm age and venture capital. All of these variables have been strongly associated with firm performance. We use a dummy variable to capture the effect of founder-CEO status, coded as 1 if the founder has a CEO position and 0 otherwise. To account for the effect of board independence, we use the number of independent directors divided by the total number of directors on the board. Firm size is measured using the natural logarithm of the total assets of the firm. Firm age is calculated using the natural logarithm of the firm’s established days shown in the IPO prospectuses. We use the ratio of venture capital to equity to measure the effect of venture capital with data obtained from the IPO prospectuses. Finally, we control for time-specific and industry-specific effects using appropriate dummies. Table 1 provides the description and data sources of all the variables.

Table 1. Variable definitions and sources

Table 2 reports the summary statistics and the correlations among the independent variables, indicating no serious issues of multicollinearity.

Table 2. Summary statistics

Note:

*** Statistical significance at 1% level (p-value < .01).

** Statistical significance at 5% level (p-value < .05).

* Statistical significance at 10% level (p-value < .1).

Model specification

To evaluate the effect of founders’ human capital and social ties on the slack-R&D relationship, we specify our regression model as follows:

(1)\begin{equation}R{D_{it}} = {\beta _1}Founde{r_{it}} + {\beta _2}Slac{k_{it}} + {\beta _3}Founde{r_{it}} \times Slac{k_{it}} + {\beta _4}{Z_{it}} + {\beta _5}Dummies + {\beta _0} + {\varepsilon _{it}},\end{equation}

where $R{D_{it}}$ refers to R&D investment in firm $i$ at year $t$; $Slack$ represents absorbed slack or unabsorbed slack; $Founder$ denotes the effects of founder’s human capital and social ties; $Z$ stands for the set of control variables; and $Dummies$ refer to year and industry-specific factors; $\beta $ is to the coefficient of each independent variable and ${\varepsilon _{it}}$ is the error term, ${\varepsilon _{it}} \sim iid\left( {0,\sigma _\varepsilon ^2} \right)$. The interaction term, $Founde{r_{it}} \times Slac{k_{it}}$, accounts for the moderating effects of founder’s human capital and social ties on the relationship between slack and firm performance.

Given the unbalanced panel and the heterogenous nature of firm-level data, we rely on using feasible generalised least squares (FGLS) to estimate the above relationship which effectively accounts for potential heteroskedasticity and autocorrelation in the data (As our dataset incorporates some time-invariant variables such as founder’s human capital and managerial ties, fixed-effects OLS estimation cannot be applied and FGLS is considered the most appropriate alternative in this case.) (Symeou, Zyglidopoulos & Gardberg, Reference Symeou, Zyglidopoulos and Gardberg2019).