The Relationship between Innovation and Risk Taking: The Role of Firm Performance

One perspective suggests that firms heavily involved in innovation may face increased risks. It is essential to know the suitable proxies in measuring innovation related to risk taking. Many studies use research-and-development intensity (RDI) and research-and-development spending (RDS) as proxies for innovation related to risk taking. However, little evidence shows that positive association with risk taking. This study addresses this gap by using RDI and RDS as metrics for measuring innovation and assessing innovation-related risks. This study incorporated performance as a potential factor affecting the interaction between these variables. It is essential to consider the risks associated with innovation and allocate the RDI and RDS effectively to maximize revenue. We used a dataset of 3955 firm-year observations obtained from 548 listed firms in the Indonesian stock exchange for 2012–2021. We found that RDI and RDS positively affect risk taking. The test results show that the interaction between innovation and firm performance negatively affects risk taking. Thus, firm performance may mitigate the risks associated with innovation. Therefore, firms must balance their innovation projects with improved performance to minimize risks and achieve long-term success.