Incentivizing innovation: The role of knowledge exchange and distal search behavior

Prior research has produced conflicting views on whether incentives help or hinder innovation. This paper takes a more fine-grained view arguing that the innovation process consists of various interrelated behaviors where the primary role of incentives is not to motivate employees to work harder but rather to support behaviors that are considered effective for generating innovation outcomes. We point at two key innovation behaviors, knowledge exchange and distal search, and argue that they complement each other in driving innovation. Because of this complementarity, the question arises of how to design incentives that simultaneously motivate both behaviors effectively. We propose that adequately designed explicit incentives support knowledge exchange, while implicit career incentives focus the individual’s attention on future tasks and, by doing so, effectively support behavior that opens up distant sources of knowledge. Overall, our study provides a new theoretical argument for why explicit and implicit incentives are interdependent choices within innovation processes. We test our hypotheses combining survey data with patent data from 282 firms in the chemical and pharmaceutical industry.