How does frugal innovation help young firms in the US? The moderating roles of venture capital investment and debt financing

Abstract

This study examines the effects of frugal innovation on firm performance among young firms located in the U.S. Though frugal innovation is a concept that originated from innovation practices among emerging market firms, firms in the developed economies have absorbed a frugal mindset and are regularly exercising frugal innovation. We develop a framework for frugal innovation by building on entrepreneurial bricolage theory. One of our research findings shows that young firms in the U.S. find frugal innovation useful in gaining firm performance. In addition, interaction effects on firm performance are tested; those between frugal innovation and venture capital (VC) equity financing and frugal innovation and debt financing are found to be significant. Both moderators are found to weaken the positive effects on firm performance. These findings are interesting because we had initially hypothesized that the interaction effect on firm performance of frugal innovation and VC equity financing would be positive while the moderator that includes debt financing would be negative. This paper contributes to the innovation and entrepreneurship literature by empirically testing frugal innovation, a concept which has not been quantitatively studied thus far. In addition, the study establishes a link between frugal innovation and entrepreneurial bricolage.

Keywords

frugal innovation entrepreneurial bricolage venture capital equity financing debt financing entrepreneur education

Get full access to this article

View all access options for this article.

References

Agarwal

Brem

(2012) Frugal and reverse innovation-Literature overview and case study insights from a German MNC in India and China. In: 18th international ICE conference on engineering, technology and innovation, Munich, Germany, 18–20 June 2012.

Ahuja

Chan

(2014) Beyond traditional IT-enabled innovation: exploring frugal IT capabilities.

Aziz

Abbas

(2019) Effect of debt financing on firm performance: a study on non-financial sector of Pakistan. Open Journal of Economics and Commerce 2(1): 8–15.

Baker

Nelson

(2005) Creating something from nothing: resource construction through entrepreneurial bricolage. Administrative Science Quarterly 50(3): 329–366.

Barney

(1991) Firm resources and sustained competitive advantage. Journal of Management 17(1): 99–120.

Basu

Banerjee

Sweeny

(2013) Frugal innovation: core competencies to address global sustainability. Journal of Management for Global Sustainability 1(2): 63–82.

Becker

(1964) Human Capital Theory. Columbia, New York: Columbia University Press.

Becker

(1994) Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education. 3rd ed.. Chicago: The University of Chicago Press.

Bhatti

(2012) What is frugal, what is innovation? Towards a theory of frugal innovation. Available at SSRN: https://ssrn.com/abstract=2005910.

10.

Bhatti

Ventresca

(2012) the emerging market for frugal innovation: fad, fashion, or fit? Fashion, or fit. Available at SSRN: https://ssrn.com/abstract=2005983.

11.

Bhatti

Ventresca

(2013) How can ‘frugal innovation’ be conceptualized? Available at SSRN: https://ssrn.com/abstract=2203552.

12.

Brem

Ivens

(2013) Do frugal and reverse innovation foster sustainability? Introduction of a conceptual framework. Journal of Technology Management for Growing Economies 4(2): 31–50.

13.

Campello

(2006) Debt financing: does it boost or hurt firm performance in product markets? Journal of Financial Economics 82(1): 135–172.

14.

Carter

Brush

Greene

, et al. (2003) Women entrepreneurs who break through to equity financing: the influence of human, social and financial capital. Venture Capital: An International Journal of Entrepreneurial Finance 5(1): 1–28.

15.

Cassar

(2004) The financing of business start-ups. Journal of Business Venturing 19(2): 261–283.

16.

Cefis

Marsili

(2006) Survivor: The role of innovation in firms’ survival. Research Policy 35(5): 626–641.

17.

Chesbrough

(2006) Open Innovation: The New Imperative for Creating and Profiting from Technology. Boston: Harvard Business Press.

18.

Colombo

Grilli

(2010) On growth drivers of high-tech start-ups: Exploring the role of founders' human capital and venture capital. Journal of Business Venturing 25(6): 610–626.

19.

Davila

Foster

Gupta

(2003) Venture capital financing and the growth of startup firms. Journal of Business Venturing 18(6): 689–708.

20.

Economy (2015) Fewer Americans identify as middle class in recent years. Available at: http://news.gallup.com/poll/182918/fewer-americans-identify-middle-class-recent-years.aspx (accessed June 2021).

21.

Freeman

Carroll

Hannan

(1983) The liability of newness: age dependence in organizational death rates. American Sociological Review: 48: 692–710.

22.

Garcia

Calantone

(2002) A critical look at technological innovation typology and innovativeness terminology: a literature review. Journal of Product Innovation Management 19(2): 110–132.

23.

George

McGahan

Prabhu

(2012) Innovation for inclusive growth: Towards a theoretical framework and a research agenda. Journal of Management Studies 49(4): 661–683.

24.

Hall

Lerner

(2010) Handbook of the Economics of Innovation. UK: Elsevier, Vol. 1.

25.

Hsu

(2007) Experienced entrepreneurial founders, organizational capital, and venture capital funding. Research Policy 36(5): 722–741.

26.

Iavorskyi

(2013) The impact of capital structure on firm performance: evidence from Ukraine. Master Thesis, Kyiv School of Economics, Ukraine.

27.

Katila

Shane

(2005) When does lack of resources make new firms innovative? Academy of Management Journal 48(5): 814–829.

28.

Martin

McNally

Kay

(2013) Examining the formation of human capital in entrepreneurship: a meta-analysis of entrepreneurship education outcomes. Journal of Business Venturing 28(2): 211–224.

29.

Myers

Majluf

(1984) Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics 13(2): 187–221.

30.

Oghuvwu

Okuwhere

(2018) Entrepreneurial characteristics and firm performance. Accounting and Taxation Review 2(4): 75–85.

31.

Amazon Leadership Principle (2017) Our leadership principles aren't just a pretty inspirational wall-hanging. Available at: https://www.aboutamazon.co.uk/working-at-amazon/our-culture/our-leadership-principles (accessed June 2021).

32.

Pandey

Sahu

(2019) Debt financing, agency cost and firm performance: evidence from India. Vision: Journal of Business Perspective 23(3): 267–274.

33.

Pham

HST

Nguyen

(2020) Debt financing and firm performance: the moderating role of board independence. Journal of General Management 45(3): 141–151.

34.

Ployhart

Moliterno

(2011) Emergence of the human capital resource: a multilevel model. Academy of Management Review 36(1): 127–150.

35.

Radjou

Prabhu

(2015) Frugal innovation: how to do more with less. The Economist.

36.

Radjou

Prabhu

Ahuja

(2012) Jugaad Innovation: Think Frugal, Be Flexible, Generate Breakthrough Growth. New York: John Wiley & Sons.

37.

Robinson

Sexton

(1994) The effect of education and experience on self-employment success. Journal of Business Venturing 9(2): 141–156.

38.

Robb

Ballou

DesRoches

, et al. (2009) An overview of the Kauffman firm survey: results from the 2004-2007 data. Available at SSRN 1392292 .

39.

Rosenbusch

Brinckmann

Müller

(2013) Does acquiring venture capital pay off for the funded firms? A meta-analysis on the relationship between venture capital investment and funded firm financial performance. Journal of Business Venturing 28(3): 335–353.

40.

Rosli

Mahmood

(2013) Moderating effects of human resource management practices and entrepreneur training on innovation and small-medium firm performance. Journal of Management and Strategy 4(2): 60.

41.

Schäfer

Werwatz

Zimmermann

(2004) The determinants of debt and (private) equity financing: the case of young, innovative SMEs from Germany. Industry and Innovation 11(3): 225–248.

42.

Schilling

(2019) Strategic Management of Technological Innovation. New York: McGraw-Hill Education.

43.

Singh

Faircloth

(2005) The impact of corporate debt on long term investment and firm performance. Applied Economics 37(8): 875–883.

44.

Senyard

Baker

Steffens

, et al. (2014) Bricolage as a path to innovativeness for resource‐constrained new firms. Journal of Product Innovation Management 31(2): 211–230.

45.

Senyard

Baker

Steffens

(2010) Entrepreneurial bricolage and firm performance: moderating effects of firm change and innovativeness. In: Annual Meeting of the Academy of Management, No. 50237, 1–25.

46.

Sudek

(2006) Angel investment criteria. Journal of Small Business Strategy 17(2): 89–104.

47.

Teece

(1986) Profiting from technological innovation: implications for integration, collaboration, licensing and public policy. Research Policy 15(6): 285–305.

48.

Tiwari

Herstatt

(2012) Frugal innovation: a global networks' perspective. Unternehmung 66(3): 245–274.

49.

van Osnabrugge

(1998) The Financing of Entrepreneurial Firms in the UK: A Comparison of Business Angel and Venture Capitalist Investment Procedures. PhD Thesis, University of Oxford, United Kingdom.

50.

Vanacker

Collewaert

Paeleman

(2013) The relationship between slack resources and the performance of entrepreneurial firms: the role of venture capital and angel investors. Journal of Management Studies 50(6): 1070–1096.

51.

Rahman

Shi

(2019) Frugal innovation’s impact on young firm performance in a developed economy. Annual Meeting of the Academy of Management. New York: Academy of Management, 2019.

52.

Zeschky

Widenmayer

Gassmann

(2011) Frugal innovation in emerging markets. Research-Technology Management 54(4): 38–45.