Interdependence among productive activities: Implications for exploration and exploitation

The objective of this study is to explore how the level of interdependence and that of decomposability at the industry level moderate the contribution of exploration and exploitation to firms' long-run financial performance. We employ patent data to measure interdependence and decomposability and computer-assisted content analysis to derive firms' orientations toward exploration and exploitation. We also introduce statistical techniques to control for biases in estimates induced by potential sources of endogeneity. Based on our analysis, in industries that exhibit high levels of interdependence and low levels of decomposability, exploration becomes more necessary to improve firms' long-run financial performance. On the other hand, in industries that exhibit more limited levels of interdependence and high levels of decomposability, exploitation becomes more beneficial to firms' long-run financial performance. We hope our findings will stimulate future research on a number of distinct but related issues, including exploration, exploitation, interdependence, and decomposability, and thus contribute to improve our understanding of organizational success.