Organizational complexity and innovation portfolio decisions: Evidence from a quasi-natural experiment

We examine how a firm's organizational complexity affects innovation portfolio decisions in response to a shock to innovation incentives. Using the 2013 medical device sales tax as a quasi-natural experiment, we find that firms with a complex organization structure, as proxied by organization size and multi-division structure, generate fewer radical innovations (introduction of new products) but more incremental innovations (improvements on existing products) after the tax. Multidivision firms also shift capital investment to their corporate divisions that are not affected by the tax, thereby decreasing their innovation output. Collectively, these responses cause a significant decline in the radical innovation output of the industry in aggregate. We contribute to the literature by advancing the understanding of how organization structure influences managers' innovation portfolio decisions in response to economic shocks.