Going, going, gone. Exit forms and the innovative capabilities of firms

Although innovation is essential to build a competitive advantage and survive in the long run, some firms choose to exit, through mergers and acquisitions (M&As), or radically change their business portfolio and identity. This paper examines how innovative capabilities influence the decision of a firm to exit, among business closure, M&A, and radical restructuring. Using an analysis of a large and rich panel of Dutch manufacturing firms, we find that product and process innovation are equally important to lower the probability to close down activities, and this effect is stronger when product and process innovations are pursed in combination. We also find that process innovation reduces the probability of exit by radical restructuring, while product innovation, when not supported by process innovation, especially increases the probability of exit by M&As. Our findings suggest that exit strategies are intimately bound to the nature and synergies of innovative efforts.

► We examine the effects of the innovative capabilities of firms on exit forms.
► Firms that innovate either in products or in processes are less likely to close down activities.
► Firms that innovate in processes are less likely to undergo radical restructuring.
► These effects are enhanced when product and process innovations are carried out in combination by the firm.
► Firms that innovate in products but lack complementary process innovations are more likely to exit by M&A.