‘Indigenous’ Innovation with Heterogeneous Risk and New Firm Survival in a Transitioning Chinese Economy

Abstract

This paper explores how heterogenous risk drives the firm innovation–survival relationship using a large sample of new entrepreneurial firms in China. Results show that innovation increases the probability of survival, although the impact on firm survival is conditioned by the timing of the innovation, the characteristics associated with the innovation strategy, along with the level of risk embodied in the innovation process. Cautious innovators are found to survive longer and contribute to a higher social welfare via gains in firm efficiency. In contrast, risky innovators are less likely to survive, are less efficient, and are only sometimes compensated for their risk in terms of higher profits. Results therefore show that other factors besides higher payoffs force some firms to engage in riskier innovation strategies.