The long March: the quest for valid text based indicators of exploration and exploitation

TLDR: In this paper, an inductive approach retrieving keywords from the body of text and based on the validity analyses provides more robust results than the original terminology and keywords proposed by March to construct indicators of firms? orientation towards exploration or exploitation.

Abstract: Since the seminal work of March (1991) outlined the importance of balancing exploration and exploitation in organizational learning, an increasing number of studies has analyzed the relationship between this balance and firm performance. While most studies have relied on survey or patent-based indicators to measure firms? exploration and exploitation activities, attention has recently shifted to the use of text based indicators and content analysis, as this holds the promise of generality and universal application. The limited number of studies applying content analysis have used the original terminology and keywords proposed by March to construct indicators of firms? orientation towards exploration or exploitation. In this paper we show 1) that March?s original terminology is unlikely to deliver valid and generally applicable indicators 2) how the construction of representative indicators should be based on a structured series of validity analyses 3) that an inductive approach retrieving keywords from the body of text and based on the validity analyses provides more robust results. Empirically, we analyze more than 100,000 R&D-related press articles (1996-2003) covering 151 R&D intensive firms based in Europe, Japan and the US. As part of our validity analyses, we confirm an inverted-U shaped relationship between firm performance and exploration orientation ? but only if exploration is measured using an inductive approach that departs substantially from March?s original list of keywords.