The Relationship Between Innovation and Diversification in the Case of New Ventures: Unidirectional or Bidirectional?

The present study examines the relationship between innovation and product diversification as growth strategies for new ventures. Specifically, it considers whether the relationship between these growth dimensions is unidirectional, with one preceding or following the other, or bidirectional, with both dimensions developing simultaneously. To develop theoretical arguments, we draw upon the divergent assertions of two theoretical traditions: the resource-based view and sociocognitive theory (SCT). The results show strong evidence of simultaneity and endogeneity between innovation and diversification. This finding strengthens the interpretation provided by SCT, suggesting that new venture strategies are extensions of an entrepreneur's ability scripts. They point to the prominent role of an entrepreneur's self-efficacy and education-related knowledge. Implications are discussed.

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