The United States gross domestic expenditure on Research and Development (R&D) reached approximately $396 billion in 2013, which accounted for 2.8 % of gross domestic product (GDP) (OECD, 2015). Even though it is expensive to be innovative, organizations are more than willing to invest in innovation due to the fierce competition in the global and dynamic business world. More and more forward-thinking businesses embrace the notion of “innovate or die” (Rennekmap, 2015). This unofficial motto reflects the cruel but true fact that it is not merely preferred but required that companies be innovative to differentiate themselves from their peers in order to stay competitive. Thus, companies strive to understand the determinants of innovation and are in constant search of resources and competences needed to be innovative and successful.
Since its inception in 1992, the Balanced Scorecard (BSC) has been recognized as a key strategic management control system (Kaplan and Norton, 1992, 2001a, 2001b, 2001c). Using both financial and nonfinancial measures to evaluate firm performance in four different but related perspectives (learning and growth, internal business process, customer, and financial), the BSC has been identified as a value-creation framework (Kaplan & Norton, 2001, 2004; Bryant et al. 2004). The BSC transforms organizations’ vision into daily operations and enables the alignment of management strategy with the firm’s priorities. Therefore, it is believed that the BSC leads organizations to generate and sustain its competitive advantage.
Innovation, as a major source of competitive advantage, requires various resources and competences, including superior employee skills, propriety technology, and extensive customer knowledge. Consequently, companies are under pressure to strategically link the management control systems with their vision and objectives in order to achieve the desired outcome. In this dissertation, the BSC is suggested as the management control system that provides the right focus and support needed for innovation and its integration with firms’ strategies. This study investigates the effects of using the BSC on firm competences and innovation, and further examines the performance consequences of pursuing innovation.
Building on the theoretical foundation of the Resource Based View (RBV), the Knowledge Based View (KBV), the contingency theory, and the agency theory, this research develops a framework which proposes the crucial role of the BSC in promoting innovation. It is hypothesized that the relation of the BSC to innovation depends on whether the BSC can be a facilitator to competences development. The association lies in the BSC’s emphasis on three competences: employee, technology, and customer. More specifically, the connection between the BSC and innovation is explained by the paths from the BSC to the three firm competences, and firm competences are hypothesized to be positively associated with innovation. Finally, since public firms are motivated to perform well financially, I hypothesize that innovation for firms that use the BSC is beneficial to firms’ accounting performance and market performance.
Following prior studies, I use a sample from the American Society for Quality (ASQ) to identify firms that use the BSC as a strategic management control system (Bryant et al., 2004). The sample includes 230 public companies (1,773 firm-year observations) across different industries from 1995 to 2015. I identify firms that use the BSC by searching keywords such as “nonfinancial” and “strategic” in the Proxy Statements from the company filings database of the United States Securities and Exchange Commission (SEC). Additionally, I collect financial information from Compustat, market information from the Center for Research in Security Prices (CRSP), and patent information from the United States Patent and Trademark Office (USPTO). Due to the use of nested data in the study, I use multilevel regression to test the relationship between the use of the BSC and innovation, and the role of firm competence in this relation. In order to address the potential endogeneity issues in the proposed positive relationship between innovation for firms that use the BSC and firm performance, I utilize Two Stage Least Squares (2 SLS) to test the last set of hypotheses using panel data identified in this study (Heij et al. 2004).
The results provide empirical evidence supporting the positive relationship between the use of the BSC and innovation. Firms that use the BSC tend to be more innovative. The results confirm the mediating role of the overall firm competences as well as the three specific competence perspectives including employee, technology, and customer in the relation between the use of the BSC and innovation. This dissertation indicates the rewarding effects of pursuing innovation using the BSC in terms of accounting and market performance in the long run. The short term effects only exist in market performance but not accounting performance. This study provides implications for both researchers and practitioners. For researchers, it offers a theoretical framework which contributes the understanding between the use of the BSC and innovation. For managers, it provides reference for managers to follow with the objective of achieving better innovation. Moreover, it provides guidance as to how to use the strategic management control system to better organize and utilize firm resources.