Korean firms previously grew using fast-follower strategies that imitated the innovation activities of first movers. However, the shortening of the product life cycle and diversification of consumer values due to rapid technological advancement limited growth and development through fast-follower strategies. Many firms began focusing on open innovation activities to strengthen competitiveness and improve performance [1
]. In particular, many Korean firms focused on user innovation based on cooperative relations with consumers [3
]. Innovation activities that incorporate user participation are beneficial to understanding the needs of consumers, developing new products and services, and improving performance by reducing the time and cost required for the innovation process [1
]. However, prior studies that have analyzed the relationship between user innovation activities and firm performance have reported inconsistent findings. Some studies have suggested that user innovation activities have a positive impact on firm performance [6
], while others present an insignificant [10
] or negative impact [11
]. These conflicting findings from prior studies could be explained by another factor that mediates the relationship between user innovation activities and market performance. Therefore, the first goal of this study is to analyze the mediation effect of innovation performance between user innovation activities and market performance among Korean manufacturing firms.
In order for user innovation activities to succeed, firms require more than mere access to consumers [2
]. Firm’s absorptive capacity determines the extent to which externally acquired knowledge is converted into new products or services from which a firm can reap financial benefits [14
]. As the knowledge and information provided by consumers have high levels of tacitness and stickiness, firms need absorptive capacity to effectively acquire and utilize this information and knowledge for innovation [11
]. Absorptive capacity is the capacity required in the processes of receiving, converting, and utilizing externally acquired information into the organization to improve performance [14
]. It is required to identify and secure a source of the necessary external information and enables firms to use this information by transferring it to the internal knowledge base. However, there is little research into the impact of a firm’s absorptive capacity on improving performance by utilizing the knowledge and information acquired from consumers. Therefore, the second goal of this study is to analyze how absorptive capacity affects the relationship between user innovation activities and firms’ performance.
A CEO’s risk-taking tendency and short-to-long term characteristics in strategic choices, which may differ depending on their shareholding of the firm, can influence the firm’s innovation strategy and the level of absorptive capacity [21
]. The degree of absorptive capability, such as a firm’s Research and Development (R&D) investment, can vary depending on its governance structure (ownership structure) [23
]. Thus, the influence of user innovation activities on market performance may vary depending on the CEO’s shareholding and the firm’s level of absorptive capacity. However, previous studies have overlooked the role of CEO’s shareholding, which can have a significant impact on the relationship between absorptive capacity and innovation performance. It is an interesting and important research question because Korean manufacturing firms are characterized by higher CEO shareholding levels compared to Western firms. Therefore, the third goal of this study is to comprehensively analyze the impact of the relationship between user innovation activities and internal mechanisms, which may vary depending on the level of absorptive capacity and the CEO’s shareholdings, on the firm’s innovation and market performance.
In this study, we address these gaps in the existing literature by applying open innovation, firms’ absorptive capabilities, and governance structure perspectives from an integrated perspective.
We deal with three critical issues (1) whether, (2) how, and (3) under which conditions user innovation activities have a positive impact on the market performance of Korean manufacturing firms.
By extending our proposed mediation model, we examine how the effect of user innovation activities on market performance through innovation performance varies depending on the firm’s absorptive capacity and level of CEO’s shareholding in a unified moderated moderated mediation model.
This study provides practical insights for the effective use of corporate governance and firms’ internal and external resources to improve innovation and market performance among Korean manufacturing firms in a rapidly changing business environment. In addition, this study contributes to academic development in the areas of innovation strategies and corporate governance by presenting and verifying a comprehensive and interdisciplinary research model of the key factors at the individual and corporate levels that affect a firm’s strategies, innovation, and market performance.
Recent changes in the market environment, including diversified consumer needs, shortening product life cycles, and increasing uncertainty, have led firms to focus more on user innovation activities, which allow firms to rapidly acquire and apply market information and knowledge. However, prior studies on the impact of user innovation activities on corporate performance have reported mixed findings. In addition, only a very small number of studies have aimed to identify the effect of the process of user innovation activities on the market performance of firms. Therefore, in this study, we examined the impact of the user innovation activities of Korean manufacturing firms on market performance. In addition, we explored a mediating effect of innovation performance and the moderated mediation effect of absorptive capacity and the moderated mediating effect of CEO’s shareholding on these relationships. According to the results of our hierarchical multiple regression analysis, user innovation activities have a significant positive impact not only on innovation performance measured by the number of product patent applications but also on market performance measured by market share. These findings demonstrate the efforts of Korean manufacturing firms to develop new products and strengthen market competitiveness by using information and knowledge provided by consumers [3
The hierarchical multiple regression analysis, JN technique, and bootstrap significance testing show that the interaction effects of user innovation activities and absorptive capacity have differing effects on market performance and innovation performance. Specifically, the interaction effects of user innovation activities with absorptive capacity had a significant positive effect on innovation performance, but no significant impact on market performance. We presume that these results are related to the method we employed to measure absorptive capacity. As we explained in Section 4
, we measured absorptive capacity by R&D investment per capita. However, prior studies have demonstrated that increasing investment in R&D may weaken the investments in other functional areas such as production, marketing, distribution, services, and human resource management [31
]. In addition, if the firm’s sole source of innovation is users, then the scope of the firm’s activities for innovation may be limited, negatively affecting market performance [12
This study provides the following academic implications. First of all, the three-way interaction effect of user innovation activities, absorptive capacity, and CEO’s shareholding presents a positive effect on market performance through innovation performance as a mediator. This finding is consistent with the argument of the convergence of interest hypothesis in agency theory. A CEO’s shareholding percentage could reinforce the effect of absorptive capacity on open innovation activities, helping the firm recognize market changes faster than its competitors and enhancing innovation performance, thereby significantly improving market performance. Thus, CEO’s shareholding should be considered a particularly important approach to improve the performance of a firm’s open innovation activities in Korea.
Our findings also contribute to the academic development of innovation strategy and corporate governance areas by presenting and verifying a comprehensive and integrated research model of the factors at the individual and corporate levels that can affect strategic choices and performance. Some prior studies have suggested that entrepreneurship or leadership of managers could affect open innovation or absorptive capacity of a firm [22
]. However, there has been no research that has analyzed the effects of open innovation, absorptive capacity, and the corporate governance system in an integrated model. From this point of view, we believe this study adds new knowledge for open innovation by presenting empirical findings of significant three-way interaction effects among open innovation activities, absorptive capacity, and CEO’s shareholding on innovation and market performance [28
Researchers in the field of open innovation should conduct studies with a more comprehensive consideration of various factors inside and outside the firm. In particular, they should pay more attention to the firm’s characteristics and resources that can affect innovation activities and the absorptive capacity to acquire, assimilate, and utilize external information.
Increasing uncertainties in the business environment due to the Fourth Industrial Revolution and COVID-19 make it difficult for firms to innovate activities and increase performance [76
]. In this complex and rapid change of environment, this study provides valuable practical implications for Korean firms seeking to enhance their expertise and improve their performance by introducing a professional management system. Korean firms might be able to utilize the findings of this study to establish an open innovation system that effectively utilizes their limited internal and external resources and corporate governance mechanisms to improve their innovation and market performance [38
]. In a rapidly changing and highly uncertain environment, Korean firms should intensify and utilize an internal system, namely absorptive capacity, to quickly acquire more information and knowledge from consumers and use it in developing new products. They might be able to strengthen the positive impact of absorptive capacity on the relationship between open innovation activities and performance by intensifying CEO’s shareholding.
Despite its practical and academic contributions, this study has the following limitations.
First, we limited the research sample to firms in the manufacturing sector to control the impact of the distinct characteristics of the industrial sector on the results. Therefore, there is a limit to the generalizability of the research findings. Future research that includes more diverse industries, such as the service sector, will help overcome this limitation.
Second, absorptive capacity has been defined and used in various fields based on different theories. Thus, it can be measured by various proxies, such as level of human resources and knowledge usage. However, we measured absorptive capacity by R&D cost per capita from a financial perspective, which may have influenced the research findings. Further research to measure and analyze absorptive capacity from a more diverse perspective will help improve the objectivity and validity of the results of this study.
Finally, open innovation can be achieved not only through users but also through cooperation with suppliers, competitors, and other stakeholders [77
]. Furthermore, the impact of external information and knowledge acquired from various stakeholders can be a factor that affects the firm’s performance depending on the nature of the industry or the degree of change in the business environment. Therefore, future studies that compare and analyze firms that perform open innovation activities simultaneously based on cooperation with various stakeholders should provide more value by presenting the most appropriate open innovation strategy depending on a firm’s characteristics.