Innovation search after failure: The role of peers

It is unclear how peers affect a firm’s choice of particular innovation direction in either exploration or exploitation after failure. To answer this question, we examine how the failures of peers with different relative sizes serve as key evidence of decision effectiveness beliefs to guide firms’ innovation search directions after innovation failure. We propose that smaller peers with less failure in exploration (or exploitation) are supportive evidence of a firm’s beliefs about the effectiveness of exploration (or exploitation), thereby increasing future exploration (or exploitation) after innovation failure. Conversely, larger peers with more failure in exploration (or exploitation) are non-supportive evidence of the belief in the effectiveness of exploration (or exploitation), thus reducing future exploration (or exploitation) after failure. Analyses of a unique database on the U.S. medical device industry from 1996 to 2018 support our theoretical framework.