The Real Options Perspective on Exploration, Exploitation, and Firm Performance: Test of a Mediation Model

Theoretical debate on how firms can balance exploration and exploitation activities to achieve better performance remains inconclusive, and very few empirical studies offer guidance on how to delineate contradictory theoretical debates. We adopted a real option perspective in viewing exploration as creating real options and exploitation as executing those options. In the face of uncertainty, holding real options can bring firms future opportunities but may not lead to superior performance. Firm performance can be enhanced only if firms execute these real options. Using 25 years of data on semiconductor firms in the United States, this study examines the influence of uncertainty on exploration and exploitation and the mediating effect of exploitation on the relationship between exploration and firm performance. This study adopts a novel lag structure model to explicitly consider the time-lag factor in measuring the effects of exploration on firm performance. This study finds that (1) uncertainty is positively related to exploration; (2) exploitation mediates the relationship between exploration and firm performance. The results support the real-options perspective in elaborating exploration, exploitation, and firm performance.