Where Do Firms Search? Macroeconomic Conditions And The Direction Of Technological Exploration

Abstract

How do macroeconomic conditions shape firms’ innovation search behavior? This study argues that exploration — defined as search in distant knowledge domains — is not a unitary construct, and distinguishes between two forms: niche exploration, which involves entry into new technological domains, and science-based exploration, which crosses the epistemic and institutional boundaries between science and technology to build upon frontier scientific knowledge. Using USPTO patent data from 52 leading innovator firms across industries spanning 1995–2022, I show that firms emphasize niche exploration during economic contractions and science-based exploration during economic expansions. During contractions, as demand in established markets weakens and the opportunity cost of redirecting resources falls, firms enter nascent, peripheral technological niches to create growth options under heightened macroeconomic uncertainty. During expansions, when capital is abundant and inexpensive, aggregate demand is strong, and macroeconomic uncertainty is low, firms invest in frontier scientific knowledge to establish technological leadership through foundational breakthroughs. Additional analyses confirm these mechanisms. By demonstrating that distinct forms of distant search respond to macroeconomic conditions in opposite ways and through different mechanisms, this study advances research on search and contributes to the macro-strategy literature on how business cycles shape the direction — not merely the intensity — of technological exploration.