Exploitation, Exploration, and Firm Performance: the Case of Small Manufacturing Firms in Japan

The purpose of this study is to investigate the relationship between technological capabilities and firm performance. We divide technological capabilities into two types – exploitation, which refers to refinement, production and execution, and exploration, which refers to searching, flexibility, and innovation. Based on a sample of 302 small and medium-sized manufacturing firms in Japan, our analysis reveals that exploitation relates more positively to operational efficiency than exploration, and conversely, exploration relates more positively to strategic performance, such as technological innovation and new product development, than exploitation. Moreover, firms with superior exploitation capabilities tend to possess superior exploration skills. Our findings show that exploitation and exploration have different effects on firm performance, and that neither activity is independent or mutually exclusive, although exploration tends to be enhanced by exploitation.