The Governance of Long-Term Investing in Knowledge Creation - Novel Control Mechanisms for Reducing Managerial Myopia and Increasing Growth in Organizations

Aalto University, P.O. Box 11000, FI-00076 Aalto www.aalto. fi Author Antti Niemi Name of the doctoral dissertation The governance of long-term investing in knowledge creation: Novel control mechanisms for reducing managerial myopia and increasing growth in organizations Publisher School of Science Unit Department of Industrial Engineering and Management Series Aalto University publication series DOCTORAL DISSERTATIONS 150/2013 Field of research Strategic Management Manuscript submitted 11 June 2013 Date of the defence 15 November 2013 Permission to publish granted (date) 20 August 2013 Language English Monograph Article dissertation (summary + original articles) Abstract Investments in learning are central to the sustained growth and competiveness of corporations. However, a corporation’s ability to invest in learning is restrained by managerial preferences for low-risk and short-term investments. Such managerial myopia can be induced by excessive reliance on the short-term financial control of management that is based on the comparison of actual income relative to annual or shorter-term targets. Previous research on corporate governance and corporate internal controls has identified the balancing controls for reducing managerial myopia, but it has focused on top management. There is a lack of understanding of how managerial myopia can be curbed at lower organizational levels. This dissertation makes a contribution by filling the gap in the understanding of the mechanisms that reduce managerial myopia at lower organizational levels to increase investments in learning new knowledge that is likely to take a long time to generate income. This dissertation extends mechanisms such as strategic controls and boards of directors, which have been examined in previous research on corporate governance and corporate internal controls, to lower organizational levels. Agency theory, organizational control theory, and resource dependence theory are the key theories applied in this dissertation, following the tradition of previous research on corporate governance and corporate internal controls. This dissertation proposes the use of written ex ante reasoning and reviewers as possible controls against managerial myopia. In addition, the issues of attention, income decrease and the time it takes for an investment to generate income are proposed as potential influences on investments in long-term learning. The hypotheses were tested empirically using a regression analysis on a longitudinal sample of 2,147 research and development projects in a large industrial corporation. Most of the hypotheses received empirical support. This dissertation contributes to the extant literature by extending previous applications of agency theory to lower organizational levels. In addition, the findings of this dissertation contribute to the literature on managerial myopia and organizational learning. The findings have practical implications for managers and shareholders who consider investments that involve learning and are likely to require long periods of time to generate income.Investments in learning are central to the sustained growth and competiveness of corporations. However, a corporation’s ability to invest in learning is restrained by managerial preferences for low-risk and short-term investments. Such managerial myopia can be induced by excessive reliance on the short-term financial control of management that is based on the comparison of actual income relative to annual or shorter-term targets. Previous research on corporate governance and corporate internal controls has identified the balancing controls for reducing managerial myopia, but it has focused on top management. There is a lack of understanding of how managerial myopia can be curbed at lower organizational levels. This dissertation makes a contribution by filling the gap in the understanding of the mechanisms that reduce managerial myopia at lower organizational levels to increase investments in learning new knowledge that is likely to take a long time to generate income. This dissertation extends mechanisms such as strategic controls and boards of directors, which have been examined in previous research on corporate governance and corporate internal controls, to lower organizational levels. Agency theory, organizational control theory, and resource dependence theory are the key theories applied in this dissertation, following the tradition of previous research on corporate governance and corporate internal controls. This dissertation proposes the use of written ex ante reasoning and reviewers as possible controls against managerial myopia. In addition, the issues of attention, income decrease and the time it takes for an investment to generate income are proposed as potential influences on investments in long-term learning. The hypotheses were tested empirically using a regression analysis on a longitudinal sample of 2,147 research and development projects in a large industrial corporation. Most of the hypotheses received empirical support. This dissertation contributes to the extant literature by extending previous applications of agency theory to lower organizational levels. In addition, the findings of this dissertation contribute to the literature on managerial myopia and organizational learning. The findings have practical implications for managers and shareholders who consider investments that involve learning and are likely to require long periods of time to generate income.