Knowing when to leap: Transitioning between exploitative and explorative R&D

A common perspective is that consistent R&D investment facilitates innovation, while volatile spending implies myopic decision-making. However, the benefits to exploiting extant competencies eventually erode, so firms must disrupt their R&D function and explore for new competitive advantage. We suggest that high-performing firms recognize when extant competencies decline, and increase exploratory R&D to develop new competencies at the appropriate time. We find that changes in R&D expenditure away from the firm's historic trend, in either direction, are indicative of transitions between exploitative and exploratory R&D and are associated with increased firm performance. Increases in R&D expenditure above the trend are associated with an increased likelihood of highly-cited patents, suggesting that firms are making the leap between R&D-based exploitation and exploration.