On the adoption decision and the intensity of use of complementary innovations: The intra firm diffusion of management practices across UK establishments

This paper contributes to the literature on the intra-firm diffusion of innovations by investigating the factors that affect the firm’s decision to adopt and use sets of complementary innovations. We define complementary innovations those innovations whose joint use generates super additive gains, i.e. the gain from the joint adoption is higher than the sum of the gains derived from the adoption of each innovation in isolation. From a theoretical perspective, we present a simple decision model, whereby the firm decides ‘whether’ and ‘how much’ to invest in each of the innovations under investigation based upon the expected profit gain from each possible combination of adoption and use. The model shows how the extent of complementarity among the innovations can affect the firm’s profit gains and therefore the likelihood that the firm will adopt these innovations jointly, rather than individually. From an empirical perspective, we focus on four sets of management practices, namely operating (OMP), monitoring (MMP), targets (TMP) and incentives (IMP) management practices. We show that these sets of practices, although to a different extent, are complementary to each other. Then, we construct a synthetic indicator of the depth of their use. The resulting intra-firm index is built to reflect not only the number of practices adopted but also the depth of their individual use and the extent of their complementarity. The empirical testing of the decision model is carried out using the evidence from the adoption behaviour of a sample of 1,238 UK establishments present in the 2004 Workplace Employment Relations Survey (WERS). Our empirical results show that the intra-firm profitability based model is a good model in that it can explain more of the variability of joint adoption than models based upon the variability of adoption and use of individual practices. We also investigate whether a number of firm specific and market characteristics by affecting the size of the gains (which the joint adoption of innovations can generate) may drive the intensity of use of the four innovations. We find that establishment size, whether foreign owned, whether exposed to an international market and the degree of homogeneity of the final product are important determinants of the intensity of the joint adoption of the four innovations. Most importantly, our results point out that the factors that the economics of innovation literature has been showing to affect the intensity of use of a technological innovation do also affect the intensity of use of sets of innovative management practices. However, they can explain only a small part of the diversity of their joint adoption use by the firms in the sample.