Individual Incentives as Drivers of Innovative Processes and Performance

Abstract

Applied economists and strategy scholars have examined a variety of firm-level factors that may explain the level and direction of firms' innovative effort and performance, including firms' profit incentives. Innovation at the firm level, however, should also depend heavily on the nature of the pecuniary and non-pecuniary incentives driving the efforts of those individuals that are responsible for innovative activities within firms. Drawing on research in economics and social psychology, I examine three questions:

What are the motives of individuals engaged in firm innovation? How do individuals' motives and incentives affect their innovative effort and performance? How do individuals' motives and incentives differ between entrepreneurial and established firms, and are any such differences associated with differences in innovative effort and performance?

My empirical analysis builds on the National Science Foundation's SESTAT data, which contain survey responses from over 10,000 scientists and engineers employed in U.S. firms. Among others, the data contain measures of individuals' extrinsic, intrinsic, and social motives (e.g., preferences for work benefits such as salary, intellectual challenge, and contribution to society), effort, and innovative performance. In chapter Two ("What makes them tick - Employee motives and firm innovation"), I develop a formal model of the relationships between individuals' motives and incentives, effort, and innovative performance. Econometric analyses using the SESTAT data suggest that individuals' motives have significant effects upon innovative effort, as well as on innovative performance, controlling for effort. Overall, intrinsic motives (in particular, intellectual challenge) appear to be more beneficial for innovation than extrinsic motives. In chapter Three ("Fire in the belly? Individuals' motives and innovative performance in startups and established firms"), I examine differences in motives, effort, and performance between startups and established firms. I find that individuals' extrinsic motives differ significantly between startups and established firms, while their intrinsic motives are surprisingly similar. Startup employees expend more effort and have higher patent application counts than individuals in established firms. Individuals' motives explain only a limited amount of these effort and performance differences across firm types, however, because the intrinsic motives that are most strongly associated with effort and performance differ little between startups and established firms.