Employee‐based Innovation in Organizations: Overcoming Strategic Risks from Opportunism and Governance

• Published in: Strategic entrepreneurship journal 2017-12, Vol.11 (4), p.464-482
• Main Authors: Pandher, Gurupdesh S., Mutlu, Gulseren, Samnani, Al‐Karim
• Format: Article
• Language: English
• Subjects: Employees; employee‐based innovation; Game theory; governance risk; Innovations; knowledge‐based view; opportunism; soft innovations; Strategic management; transaction cost economics
• ISSN: 1932-4391; 1932-443X
• DOI: 10.1002/sej.1252

Research summary Employees performing everyday tasks frequently acquire valuable new ideas and knowledge. Our formal analysis studies how organizations can benefit from employee‐driven innovation by using incentives to overcome strategic risk from opportunism and governance. We use a game theory framework to analyze the strategic interactions involved and identify incentives under which valuable ideas will be revealed without appropriation (in equilibrium). Our analysis considers both the short run and the long run, where governance can be adjusted to maximize expected future innovation profits. Innovation value, frequency, governance quality, and employee contestation costs are shown to play a salient role in determining the innovation incentives and equilibrium. Overall, our analysis and results provide a number of insights on how organizations can overcome frictions from strategic innovation risks to more fully mobilize their innovation potential and knowledge‐based resources. Managerial summary Idea theft can occur in organizations when employees find it beneficial to present a valuable idea of another employee as theirs. If employees engaged in everyday tasks believe this will likely happen or that they will not be rewarded enough, they may not reveal them. We analyze the design of appropriate innovation rewards that will prevent stealing of innovative ideas and allow organizations to capture value from employee‐driven innovation. We show that governance quality, innovation value, and costs related to contestation play a salient role in determining appropriate innovation rewards and the organization's innovation capacity. “Flatter” organizations can deter idea theft more effectively and need to pay lower innovation rewards. In the long term, we show that all organizations can become more innovative by adjusting their governance quality and reducing employee contestation costs. Further, the ones with higher innovation potential and contestation costs will move toward higher quality governance and seek more entrepreneurial employees, as this raises long‐run innovation profits. Copyright © 2017 Strategic Management Society.