Exploration and exploitation within SMEs: connecting the CEO's cognitive style to product innovation performance.

Previous research on exploration and exploitation focuses on the firm and business unit level. Therefore, conceptual and empirically validated understanding about exploration and exploitation at the individual level of analysis is scarce. This paper addresses this gap in the literature by investigating CEO‟s innovation preference, delivering contributions to theory and empirical research on exploration and exploitation by developing and testing hypotheses on the relationships between a CEO‟s cognitive style, his or her innovation preference, allocation of the firm‟s R&D resources and innovation performance based on a sample of 254 SMEs. Our findings show that CEOs with a more analytical cognitive style tend to prefer exploitation of existing products and markets, whereas CEOs with a more intuitive cognitive style prefer exploration of new products and markets. In line with upper-echelon theory, our data also show that such individual preference for exploration or exploitation significantly influences the allocation of R&D resources within the firm, which in-turn impacts the firm‟s incremental and radical innovation performance. From a theoretical perspective, our findings point to the relevance of applying insights from cognitive psychology to better understand the innovation preferences of top managers. At the same time, we contribute to integrating insights from upper-echelon theory in research on new product innovation, illuminating how individual preferences, resource allocation decisions and innovation performance are linked to each other